FRANKLIN TEMPLETON JAPAN FUND, 497, 1997-08-06

FRANKLIN TEMPLETON JAPAN FUND
497, 1997-08-06

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FRANKLIN TEMPLETON
JAPAN FUND

STATEMENT OF
ADDITIONAL INFORMATION LOGO
700 CENTRAL AVENUE, P.O. BOX 33030

AUGUST 1, 1997 ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
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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?.... 6
Investment Restrictions................. 10
Officers and Trustees................... 11
Investment Management and Other
Services.............................. 17
How Does the Fund Buy Securities for Its
Portfolio?............................ 18
How Do I Buy, Sell and Exchange
Shares?............................... 19
How Are Fund Shares Valued?............. 22
Additional Information on Distributions
and Taxes............................. 23
The Fund's Underwriter.................. 27
How Does the Fund Measure Performance?.. 28
Miscellaneous Information............... 31
Financial Statements.................... 32
Useful Terms and Definitions............ 32
Appendix................................ 34
</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."
- ---------------------------------------------------------

Franklin Templeton Japan Fund (the "Fund") is a diversified open-end management
investment company. The Fund's investment objective is long-term capital growth.
The Fund seeks to achieve its objective by investing primarily in securities of
companies domiciled in Japan and traded in the Japanese securities markets.

The Prospectus, dated August 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 describes the Fund's Class I shares. The Fund currently offers another
class of shares with a different sales charge and expense structure, which
affects performance. This class is described in a separate SAI and prospectus.
For more information, contact your investment representative or call 1-800/DIAL
BEN.

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

417 SAI 08/97

TL417 SAI

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. Investment Counsel 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 Investment Counsel 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 that are rated in any
rating category by S&P or Moody's or that are unrated by any rating agency. As
an operating policy, which may be changed by the Board without shareholder
approval, 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 Baa by Moody's are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. 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 BBB by S&P are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories. Bonds rated D by S&P are
the lowest rated class of bonds, and generally are in payment default. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.

Although they may offer higher yields than do higher rated securities, high
risk, lower quality debt securities (commonly referred to as "junk bonds") and
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 secu-

rities. 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
seeking recovery.

The Fund may invest in yen-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai bonds") and in dollar-denominated bonds sold in the U.S. by
non-U.S. issuers ("Yankee bonds"). As compared with bonds issued in their
countries of domicile, such bond issues normally carry a higher interest rate
but are less actively traded. The Fund will invest in Samurai or Yankee bond
issues only after taking into account consideration of quality and liquidity, as
well as yield. These bonds would be issued by governments which are members of
the Organization for Economic Cooperation and Development or have AAA ratings.

The Fund may accrue and report interest income on high yield bonds, such as zero
coupon bonds or pay-in-kind securities, even though it receives no cash interest
until the security's maturity or payment date. In order to qualify for
beneficial tax treatment afforded regulated investment companies, and generally
to be relieved of federal tax liabilities, the Fund must distribute
substantially all of its net income and gains to shareholders (see "Additional
Information on Distributions and Taxes") generally on an annual basis. The Fund
may have to dispose of portfolio securities under disadvantageous circumstances
to generate cash or leverage itself by borrowing cash in order to satisfy the
distribution requirement.

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 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. The Fund's investment in these structured
investments may be limited by its investment restrictions. See "Investment
Restrictions" below. 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.

Convertible Securities. The Fund may invest in convertible securities, including
convertible debt and convertible preferred stock. Convertible securities are
fixed-income securities which may be converted at a stated price within a
specific amount of time into a specified number of shares of common stock. These
securities are usually senior to common stock in a corporation's capital
structure, but usually are subordinated to non-convertible debt securities. In
general, the value of a convertible security is the higher of its investment
value (its value as a fixed-income security) and its conversion value (the value
of the underlying shares of common stock if the security is converted). The
investment value of a convertible security generally increases when interest
rates decline and generally decreases when interest rates rise. The conversion

<PAGE>

value of a convertible security is influenced by the value of the underlying
common stock.

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
or bond 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 index futures
contract specifies that no delivery of the actual securities 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 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 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, owning 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, Indices and Futures. The Fund may write covered put and
call options and purchase put and call options on securities, securities indices
and futures contracts that are traded on U.S. and foreign exchanges and in the
over-the-counter markets.

An option on a security or a futures contract is a contract that gives the
purchaser of the option, in return for the premium paid, the right to buy a
specified security or futures contract (in the case of a call option) or to sell
a specified security or futures contract (in the case of a put option) from or
to the writer of the option at a designated price during the term of the option.
An option on a securities index 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 or futures contract written by the Fund is "covered" if the
Fund owns the underlying security or futures contract 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 exchange of other securities held in its
portfolio. A call option on a security or futures contract is also covered if
the Fund holds a call on the same security or futures contract and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or high grade U.S. government securities in a
segregated account with its custodian. A put option on a security or futures
contract 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 or futures
contract 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 securities indices that it writes by owning
securities whose price changes, in the opinion of Investment Counsel, 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 securities 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 securities
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 its gross income in the event the option expires unexercised or is
closed out at a profit. If the value of a security, index or futures contract 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,
index or futures contract rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in its investments. By writing a put option, the Fund assumes the
risk of a decline in the underlying security, index or futures contract. To the
extent that the price changes of the portfolio securities being hedged correlate
with changes in the value of the underlying security, index or futures contract,
writing covered put options 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
accuracy of the correlation between the changes in value of the underlying
security, index or futures contract and the changes in value of the Fund's
security holdings being hedged.

The Fund may purchase call options on individual securities or futures contracts
to hedge against an increase in the price of securities or futures contracts
that it 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,
index or futures contract 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, it may experience losses in some cases as a result of such
inability. The value of over-the-counter options purchased by the Fund, as well
as the cover for options written by the Fund, are considered not readily
marketable and are subject to the Fund's limitation on investments in securities
that are not readily marketable. See "Investment Restrictions."

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.

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 its 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 its 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 in an amount

sufficient to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("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 its 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 the ability of Investment Counsel 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?
- ---------------------------------------------------------

The Fund's concentration of its investments in Japan means the Fund will be more
dependent on the investment considerations discussed below and may be more
volatile than a fund which is broadly diversified geographically. Additional
factors relating to Japan include the following:

In the past, Japan has experienced earthquakes and tidal waves of varying
degrees of severity, and the risks of such phenomena, and damage resulting
therefrom, continue to exist. Japan also has one of the world's highest
population densities. Approximately 45% of the total population of Japan is
concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya.

Since the end of World War II, Japan has experienced significant economic
development and among the free industrial nations of the world is second only to
the U.S. in terms of gross national product ("GNP"). During the years of high
economic growth in the 1960's and early 1970's, the expansion was based on the
development of heavy industries such as steel and shipbuilding. In the 1970's
Japan moved into assembly industries which employ high levels of technology and
consume relatively low quantities of resources, and since then has become a
major producer of electrical and electronic products and automobiles. Since the
mid-1980's Japan has become a major creditor nation, with extensive trade
surpluses. With the exception of periods associated with the oil crises of 1974
and 1978, Japan has generally experienced very low levels of inflation. There
is, of course, no guarantee these favorable trends will continue.

The government of Japan has called for a transformation of the economy away from
its high dependency on export-led growth towards greater stimulation of the
domestic economy. In addition, there has been a move toward more economic
liberalization and discounting in the consumer sector. These shifts have already
begun to take place and may cause disruption in the Japanese economy.

Japan's economy is a market economy in which industry and commerce are
predominantly privately owned and operated. However, the Japanese government is
involved in establishing and meeting objectives for developing the economy and
improving the standard of living of the Japanese people.

Japan has historically depended on oil for most of its energy requirements.
Almost all of its oil is imported, with the majority imported from the Middle
East. In the past, oil prices have had a major impact on the domestic economy,
but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of

industry, with emphasis shifting from basic industries to processing and
assembly-type industries, has contributed to the reduction of oil consumption.
However, there is no guarantee this favorable trend will continue.

Overseas trade is important to Japan's economy. Japan has few natural resources
and must export to pay for its imports of these basic requirements. Japan's
principal export markets are the U.S., Canada, the United Kingdom, Germany,
Australia, Korea, Taiwan and the People's Republic of China (including Hong
Kong). The principal sources of its imports are the U.S., South East Asia and
the Middle East. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors and the
large trade surpluses ensuing therefrom, Japan has had difficult relations with
its trading partners, particularly the U.S., where the trade imbalance is the
greatest. It is possible trade sanctions or other protectionist measures could
impact Japan adversely in both the short- and long-term.

Although under normal circumstances at least 80% of the Fund's assets will be
invested in equity securities of Japanese issuers, the Fund has the right to
purchase securities in any foreign country, developed or developing. You should
consider carefully the substantial risks involved in securities of companies and
governments of foreign nations, including Japan, 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.
The Tokyo Stock Exchange has a large volume of trading and Investment Counsel
believes that securities of companies traded in Japan are generally as liquid as
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.

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 products, 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 the Fund.

<PAGE>

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: (1)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (2) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (3) pervasiveness of corruption and crime in the Russian economic
system; (4) currency exchange rate volatility and the lack of available currency
hedging instruments; (5) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (6) 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; (7) 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; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) 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 issues deemed suitable by
Investment Counsel. 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
or withhold portions of interest and dividends at the source. There is the
possibility of cessation of trading on national exchanges, expropriation,
nationalization or confiscatory taxation, withholding and other foreign taxes on
income or other amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in

<PAGE>

foreign government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in foreign
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 may not be internationally traded. Certain of these
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 flexible
policy of the Fund, Investment Counsel 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.

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").
However, in the absence of willful misfeasance, bad faith or gross negligence on
the part of Investment Counsel, any losses resulting from the holding of
portfolio securities in foreign countries and/or with securities depositories
will be at the risk of the shareholders. No assurance can be given that the
Board's appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments will not occur.

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 futures and
options for hedging may involve risks because of imperfect correlations between
movements in the prices of the futures or 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 Investment Counsel's ability to
predict correctly movements in the direction of the market, as to which no
assurance can be given.

There are several risks associated with transactions in options on securities
indices. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when the Fund seeks to close out an
option position. If the Fund were unable to close out an option that it had
purchased on a securities index, it would have to exercise the option in order
to realize any profit or the option may expire worthless. If trading were
suspended in an option purchased by the Fund, it would not be able to close out
the option. If restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased. Except to the extent that a call option
on an index written by the Fund is covered by an option on the same index
purchased by the Fund, movements in the index may result in a loss to the Fund;
however, such losses may be mitigated by changes in the value of the Fund's
securities during the period the option was outstanding.

Additional risks may be involved with the Fund's special investment techniques,
including loans of portfolio securities and borrowing for investment purposes.
These risks are described under the heading "What Are the Fund's Potential
Risks?" in the Prospectus.

<PAGE>

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); invest in other open-end investment companies (except in
connection with a merger, consolidation, acquisition or reorganization);
invest in interests (other than publicly issued debentures or equity stock
interests) in oil, gas or other mineral exploration or development programs;
or purchase or sell commodity contracts (except futures contracts as
described in the Fund's Prospectus).

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

3. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short, except
that the Fund may make margin payments in connection with futures, options
and currency transactions.

4. Loan money, except that the Fund may (a) purchase a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness, (b) enter into repurchase agreements and (c) lend its
portfolio securities.

5. Borrow money, except that the Fund may borrow money from banks in an amount
not exceeding 33 1/3% of the value of its total assets (including the amount
borrowed).

6. Mortgage, pledge or hypothecate its assets (except as may be necessary in
connection with permitted borrowings) provided, however, this does not
prohibit escrow, collateral or margin arrangements in connection with its
use of options, futures contracts and options on futures contracts.

7. Invest more than 25% of its total assets in a single industry. For purposes
of this restriction, (a) a foreign government is considered to be an
industry, and (b) all supra-national entities, in the aggregate, are
considered to be an industry.

8. 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.)

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 2 or 7 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.

Additional Restrictions. The Fund has adopted the following additional
restrictions which are not fundamental and which may be changed without
shareholder approval, to the extent permitted by applicable law, regulation or
regulatory policy. Under these restrictions, the Fund MAY NOT:

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

2. Invest more than 5% of the value of its total assets in securities of
issuers which have been in continuous operation less than three years.

3. Invest more than 5% of its net assets in warrants whether or not listed on
the NYSE or American Stock Exchange, and more than 2% of its net assets in
warrants that are not listed on those exchanges. Warrants acquired in units
or attached to securities are not included in this restriction.

4. Purchase or sell real estate limited partnership interests.

5. Purchase or sell interests in oil, gas and mineral leases (other than
securities of companies that invest in or sponsor such programs).

6. Invest in any company for the purpose of exercising control or management.

7. Purchase more than 10% of a company's outstanding voting securities.

8. Invest more than 15% of the Fund's total assets in securities that are not
readily marketable (including repurchase agreements maturing in more than
seven days and over-the-counter options purchased by the Fund), including no
more than 10% of its total assets in restricted securities. Rule 144A
securities are not subject to the 10% limitation on restricted securities,
although the Fund will limit its investment in all restricted securities,
including 144A securities, to 15% of its total assets.

9. Invest more than 5% of the value of its total assets in securities of
issuers domiciled in Eastern Europe and in non-European members of the
Commonwealth of Independent States.

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 the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.

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, Age and Address with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
* MARTIN L. FLANAGAN Trustee and Vice Senior vice president, chief financial officer
777 Mariners Island Blvd. President and treasurer of Franklin Resources, Inc.;
San Mateo, California director and executive vice president of
Age 37 Templeton Worldwide, Inc.; and director,
executive vice president and chief operating
officer of Templeton Investment Counsel, Inc.;
senior vice president and treasurer of Franklin
Advisers, Inc.; treasurer of Franklin Advisory
Services, Inc.; treasurer and chief financial
officer of Franklin Investment Advisory
Services, Inc.; president of Franklin Templeton
Services, Inc.; senior vice president of
Franklin\Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case
may be, of 58 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 65 trustee of 55 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 130 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.
- ---------------------------------------------------------------------------------------------------
ANDREW H. HINES, JR. Trustee Consultant for the Triangle Consulting Group;
150 2nd Avenue N. executive-in-residence of Eckerd College
St. Petersburg, Florida (1991-present); formerly, chairman of the board
Age 74 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.
- ---------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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 45 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 16 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 64 Inc., Franklin Investment Advisory Services,
Inc., Franklin Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; director
of Franklin/Templeton Investor Services, Inc.,
Franklin Templeton Services, Inc. and General
Host Corporation (nursery and craft centers);
and officer and/or director or trustee, as the
case may be, of most of the other subsidiaries
of Franklin Resources, Inc. of 54 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
* CHARLES E. JOHNSON Trustee and Senior vice president and director of Franklin
777 Mariners Island Blvd. President Resources, Inc.; senior vice president of
San Mateo, California Franklin Templeton Distributors, Inc.;
Age 41 president and director of Templeton Worldwide,
Inc.; president, chief executive officer, chief
investment officer and director of Franklin
Institutional Services Corporation; chairman
and director of Templeton Investment Counsel,
Inc.; vice president of Franklin Advisers,
Inc.; officer and/or director, of some of the
other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the
case may be, of 37 of the investment companies
in the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
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 68 the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
GORDON S. MACKLIN Trustee Chairman of White River Corporation (financial
8212 Burning Tree Road services); director of Fund American
Bethesda, Maryland Enterprises Holdings, Inc., MCI Communications
Age 69 Corporation, CCC Information Services Group,
Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home
shopping) and Spacehab, Inc. (aerospace
services); formerly, chairman of Hambrecht and
Quist Group, director of H&Q Healthcare
Investors and president of the National
Association of Securities Dealers, Inc.; and
director or trustee of 50 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 nonprofit
Fort Lauderdale, Florida organizations; formerly, chairman and chief
Age 68 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.
- ---------------------------------------------------------------------------------------------------
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.; senior vice president
and director of Franklin Advisory Services,
Inc.; director of Franklin/Templeton Investor
Services, Inc.; and officer and/or director or
trustee, as the case may be, of most other
subsidiaries of Franklin Resources, Inc.; and
58 of the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
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 52 Templeton Distributors, Inc. and Franklin
Templeton Services, Inc.; executive vice
president of Franklin Advisers, Inc.; director
of Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the
case may be, of most of the other subsidiaries
of Franklin Resources, Inc. and 58 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and
Offices
Name, Age and Address with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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 Services, Inc. and
Age 48 Franklin Templeton Distributors, Inc.; vice
president of Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; vice
president, chief legal officer and chief
operating officer of Franklin Investment
Advisory Services Inc.; and officer of 58 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 37 Inc.; formerly, investment administrator with
RoyWest Trust Corporation (Bahamas) Limited
(1984-1985); and officer of 23 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
WILLIAM T. HOWARD, JR. Vice President Senior vice president of Templeton Investment
500 East Broward Blvd. Counsel, Inc.; formerly, portfolio manager and
Fort Lauderdale, Florida analyst, Tennessee Consolidated Retirement
Age 39 System (1986-1993).
- ---------------------------------------------------------------------------------------------------
JOHN R. KAY Vice President Vice president and treasurer of Templeton
500 East Broward Blvd. Worldwide, Inc.; assistant vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 57 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.
- ---------------------------------------------------------------------------------------------------
ELIZABETH M. KNOBLOCK Vice President- General counsel, secretary and a senior vice
500 East Broward Blvd. Compliance president of Templeton Investment Counsel,
Fort Lauderdale, Florida Inc.; formerly, vice president and associate
Age 42 general counsel of Kidder Peabody & Co. Inc.
(1989-1990), assistant general counsel of
Gruntal & Co., Inc. (1988), vice president and
associate general counsel of Shearson Lehman
Hutton Inc. (1988), vice president and
assistant general counsel of E.F. Hutton & Co.
Inc. (1986-1988), and special counsel of the
Division of Investment Management of the U.S.
Securities and Exchange Commission (1984-1986);
and officer of 23 of the investment companies
in the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
JAMES R. BAIO Treasurer Certified public accountant; treasurer of
500 East Broward Blvd. Franklin Mutual Advisers, Inc.; senior vice
Fort Lauderdale, Florida president of Templeton Worldwide, Inc.,
Age 43 Templeton Global Investors, Inc. and Templeton
Funds Trust Company; formerly, senior tax
manager of Ernst & Young (certified public
accountants) (1977-1989); and treasurer of 24
of the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

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

* Nicholas F. Brady, Martin L. Flanagan, Charles B. Johnson and Charles E.
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 Martin L. Flanagan and Charles E. Johnson are interested persons due to
their employment affiliations 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 Investment Counsel. Nonaffiliated members of the Board and Mr.
Brady are currently paid an annual retainer and/or fees for attendance at Board
and committee meetings. Currently, the Fund pays the nonaffiliated Board members
and Mr. Brady an annual retainer of $100, a fee of $0 per Board meeting, and its
portion of a flat fee of $2,000 for each audit committee meeting and/or
nominating and compensation committee meeting attended. As shown above, the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may receive
fees from these funds for their services. The following table provides the total
fees paid to nonaffiliated Board members and Mr. Brady by the Fund and by other
funds in the Franklin Templeton Group of Funds.

<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE FUND(1) GROUP OF FUNDS(2) WHICH EACH SERVES(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton...................... $ 100 $343,592 53
Nicholas F. Brady..................... 100 119,275 23
S. Joseph Fortunato................... 100 360,412 55
John Wm. Galbraith.................... 113 102,475 22
Andrew H. Hines, Jr................... 113 130,525 24
Edith E. Holiday(4)................... 50 15,450 16
Betty P. Krahmer...................... 100 119,275 23
Gordon S. Macklin..................... 100 335,542 50
Fred R. Millsaps...................... 113 130,525 24
</TABLE>

(1) For the fiscal year ended March 31, 1997.
(2) For the calendar year ended December 31, 1996.

(3) 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 59 registered investment companies, with approximately 170 U.S. based
funds or series.

(4) Ms. Holiday was appointed to the Board on December 3, 1996.

Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation, including
pension or retirement benefits, directly or indirectly from the 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.

<PAGE>

As of July 2, 1997, the officers and Board members, as a group, owned of record
and beneficially the following shares of the Fund: approximately 47 Class I
shares and 35 Advisor Class shares, or less than 1% of the total outstanding
Class I and Advisor Class shares of the Fund. 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. The Fund's investment manager is
Investment Counsel. Investment Counsel 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. Investment Counsel's activities are subject
to the review and supervision of the Board to whom Investment Counsel renders
periodic reports of the Fund's investment activities. Investment Counsel and its
officers, directors and employees are covered by fidelity insurance for the
protection of the Fund.

Investment Counsel and its affiliates act as investment manager to numerous
other investment companies and accounts. Investment Counsel 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 Investment Counsel on behalf of
the Fund. Similarly, with respect to the Fund, Investment Counsel is not
obligated to recommend, buy or sell, or to refrain from recommending, buying or
selling any security that Investment Counsel 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. Investment Counsel 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 Investment Counsel 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."

Management Fees. Under its management agreement, the Fund pays Investment
Counsel a monthly fee equal to an annual rate of 0.75% of its average daily net
assets. The fee is computed at the close of business on the last business day of
each month. Each class of the Fund pays its proportionate share of the
management fee.

For the fiscal years ended March 31, 1997 and 1996, and for the period from July
28, 1994 (commencement of operations) to March 31, 1995, management fees, before
any advance waiver, totaled $49,723, $29,228 and $4,738, respectively. Under an
agreement by Investment Counsel to waive its fees, the Fund paid no ($0)
management fees for the same periods. After July 31, 1998, this agreement may
end at any time upon notice to the Board.

Management Agreement. The management agreement is in effect until August 1,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
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 Investment Counsel on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.

Administrative Services. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the Fund. Prior to that date,
Templeton Global Investors, Inc. provided the same services to 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 its administration agreement, the Fund pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
For the fiscal years ended March 31, 1997 and 1996, and for the period from July
28, 1994 (commencement of operations) to March 31, 1995, administration fees,
before any advance waiver, totaled $9,942, $5,840 and $941, respectively. Under
an agreement by the administrators to waive their fees, the Fund paid no ($0)
administration fees for the same periods.

<PAGE>

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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.

Custodian. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York, 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of 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, New York, 10017,
are the Fund's independent auditors. During the fiscal year ended March 31,
1997, 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 March 31, 1997, and review of the Fund's filings with the
SEC.

HOW DOES THE FUND BUY SECURITIES

FOR ITS PORTFOLIO?

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

Investment Counsel selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.

When placing a portfolio transaction, Investment Counsel seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Investment Counsel and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of the
persons responsible for placement and review of the transactions. These opinions
are based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. Investment Counsel 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
Investment Counsel, 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.

Investment Counsel may pay certain brokers commissions that are higher than
those another broker may charge, if Investment Counsel determines in good faith
that the amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Investment Counsel's overall responsibilities to
client accounts over which it exercises investment discretion. The services that
brokers may provide to Investment Counsel include, among others, supplying
information about particular companies, markets, countries, or local, regional,
national or transnational economies, statistical data, quotations and other
securities pricing information, and other information that provides lawful and
appropriate assistance to Investment Counsel in carrying out its investment
advisory responsibilities. These services may not always directly benefit the
Fund. They must, however, be of value to Investment Counsel 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 Investment Counsel receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Investment Counsel to supplement its
own research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Investment Counsel 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, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.

Brokerage commissions for transactions in securities listed on the Tokyo Stock
Exchange and other Japanese securities exchanges are fixed and are calculated
based on the following table. The follow-

ing percentage points shall be applied to the purchase and sales proceeds to
each trade in stocks, warrants and subscription rights*. Other fixed rates apply
to transactions in bond (convertible and non-convertible) and bonds with
warrants.

<TABLE>
<CAPTION>
AMOUNT OF PURCHASE/SALES PROCEEDS COST AS A PERCENTAGE OF TRADE
- ---------------------------------------------- -----------------------------------------------
<S> <C>
One million Y or less 1.150%
Over Y 1 million - Y 5 million 0.900% + Y 2,500
Over Y 5 million - Y 10 million 0.700% + Y 12,500
Over Y 10 million - Y 30 million 0.575% + Y 25,000
Over Y 30 million - Y 50 million 0.375% + Y 85,000
Over Y 50 million - Y 100 million 0.225% + Y 160,000
Over Y 100 million - Y 300 million 0.200% + Y 185,000
Over Y 300 million - Y 500 million 0.125% + Y 410,000
Over Y 500 million - Y 1 billion 0.100% + Y 535,000
Over Y 1 billion Stocks: negotiable (minimum Y 1,535,000)
Others: 0.075% + Y 785,000
</TABLE>

* Minimum amount of brokerage commission required is 2,500 Y for every trade.

Under the current regulations of the Tokyo Stock Exchange and the Japanese
Ministry of Finance, member and non-member firms of Japanese exchanges are
required to charge full commissions to all customers other than banks and
certain financial institutions, but members and licensed non-member firms may
confirm transactions to banks and financial institution affiliates located
outside Japan with institutional discounts on brokerage commissions. The Fund
shall avail itself of institutional discounts, if the transactions are executed
through such banks and financial institutions. Currently, the Fund is entitled
to receive such discount and the amount of brokerage commission is 80% of the
full commission. There can be no assurance that the Fund will continue to
realize the benefit of discounts from fixed commissions.

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 management
fee payable to Investment Counsel 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 Investment Counsel 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
Investment Counsel, 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 March 31, 1997 and 1996, and for the period from
July 28, 1994 (commencement of operations) to March 31, 1995, the Fund paid
brokerage commissions totaling $17,297, $52,000 and $6,000, respectively.

As of March 31, 1997, 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 Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the 1933 Act. 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. Financial institutions or their affiliated
brokers may receive an agency transaction fee in the percentages indicated in
the table under "How Do I Buy Shares? - Quantity Discounts" in the Prospectus.

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.

Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.

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

<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ----------------------------------------------
<S> <C>
Under $30,000......................... 3.0%
$30,000 but less than $50,000......... 2.5%
$50,000 but less than $100,000........ 2.0%
$100,000 but less than $200,000....... 1.5%
$200,000 but less than $400,000....... 1.0%
$400,000 or more...................... 0%
</TABLE>

Other Payments to Securities Dealers. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.

Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.

These breakpoints are reset every 12 months for purposes of additional
purchases.

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

Letter of Intent. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjust-

<PAGE>

ment does not apply to certain retirement plans. If you execute a Letter before
a change in the sales charge structure of the Fund, you may complete the Letter
at the lower of the new sales charge structure or the sales charge structure in
effect at the time the Letter was filed.

As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the Securities Dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to you.

If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.

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

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

ADDITIONAL INFORMATION ON SELLING SHARES

Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be

<PAGE>

made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If the
25th falls on a weekend or holiday, we will process the redemption on the prior
business day.

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. 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.

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 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, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.

For the purpose of determining the aggregate net assets of 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

<PAGE>

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 Investment Counsel.

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

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 Fund's Net Asset Value is not calculated. Thus, the calculation of the
Fund's Net Asset Value does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.

Generally, trading in 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 the Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.

Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
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, once in December and once
following the end of the Fund's fiscal year. The Fund may adjust the timing of
these distributions for operational or other reasons.

TAXES

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

To so qualify, the Fund must, among other things: (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and gains
from the sale or

<PAGE>

other disposition of foreign currencies, or other income (including gains from
options, futures contracts and forward contracts) derived with respect to the
Fund's business of investing in stocks, securities or currencies; (b) derive
less than 30% of its gross income from the sale or other disposition of the
following assets held for less than three months: (i) stock and securities, (ii)
options, futures and forward contracts (other than options, futures and forward
contracts on foreign currencies), and (iii) foreign currencies (and options,
futures and forward contracts on foreign currencies) which are not directly
related to the Fund's principal business of investing in stocks and securities
(or options and futures with respect to stock or securities); (c) diversify its
holdings so that, at the end of each quarter, (i) at least 50% of the value of
the Fund's total assets is represented by cash and cash items, U.S. government
securities, securities of other regulated investment companies, and other
securities, with such other securities limited in respect of any one issuer to
an amount not greater in value than 5% of the Fund's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Fund's total assets is invested in the
securities (other than U.S. government securities or securities of other
regulated investment companies) of any one issuer or of any two or more issuers
that the Fund controls and that are determined to be engaged in the same
business or similar or related businesses; 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) each taxable year.

The Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no regulations have been issued.

The status of the Fund as a regulated investment company does not involve
government supervision of management or of its investment practices or policies.
As a regulated investment company, the Fund generally will be relieved of
liability for U.S. federal income tax on that portion of its net investment
income and net realized capital gains which it distributes to its shareholders.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement also are subject to a nondeductible 4% excise tax. To
prevent application of the excise tax, the Fund intends to make distributions in
accordance with the calendar year distribution requirement. Dividends of net
investment income and net short-term capital gains are taxable to you as
ordinary income. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends are taxable to you as long-term capital gains, regardless
of the length of time you have held the Fund's shares. Generally dividends and
distributions are taxable to you, whether received in cash or reinvested in
shares of the Fund. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to you or, in some cases, as capital gain. You will be notified annually
as to the federal tax status of dividends and distributions you receive and any
tax withheld thereon.

Distributions by the Fund reduce the Net Asset Value of the Fund's shares.
Should a distribution reduce the Net Asset Value below your cost basis, the
distribution nevertheless would be taxable to you 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, you 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 you.

Certain of the debt securities acquired by the Fund may be treated as debt
securities that were 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, original issue discount that accrues on a debt
security in a 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.

Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original 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 generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security.

<PAGE>

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.

The Fund may invest in stocks of foreign companies that are classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
company 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. Under the PFIC rules, an "excess distribution" received with respect to
PFIC stock is treated as having been realized ratably over the period during
which the Fund held the PFIC stock. The Fund itself will be subject to tax on
the portion, if any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (and an interest factor will be added to
the tax, as if the tax had actually been payable in such prior taxable years)
even though the Fund distributes the corresponding income to shareholders.
Excess distributions include any gain from the sale of PFIC stock as well as
certain distributions from a PFIC. All excess distributions are taxable as
ordinary income.

The Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, 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 any distributions are received
from the PFIC. If this election is 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 stock, as well as subject the Fund itself to tax
on certain income from PFIC stock, 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 stock.

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, you will be
required to include in gross income (in addition to taxable dividends actually
received) your pro rata share of the foreign taxes paid by the Fund, and will be
entitled either to deduct (as an itemized deduction) your pro rata share of
foreign income and similar taxes in computing your taxable income or to use it
as a foreign tax credit against your U.S. federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed if you do not
itemize deductions, in such case, you may be eligible to claim the foreign tax
credit (see below). You 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 your U.S. tax attributable to your 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. You may be unable to claim a credit for the full
amount of your 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 income

<PAGE>

taxes it pays generally will reduce investment company taxable income and the
distributions by the Fund will be treated as U.S. source income.

Certain options, futures and foreign currency 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 on certain other dates as prescribed under the
Code) 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 U.S. 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 the 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 and foreign currency forward contracts.

Under the Code, gains or losses attributable to fluctuations in foreign currency
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 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 and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its shareholders as
ordinary income. For example, fluctuations in exchange rates may increase the
amount of income that the Fund must distribute in order to qualify for treatment
as a regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other net investment income during a taxable year, the Fund 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 or exchange of your shares, you will realize a taxable gain or
loss depending upon your basis in the shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in your hands, and
generally will be long-term if your holding period for the shares is more than
one year and generally otherwise will be short-term. Any loss realized on a sale
or exchange will be disallowed to the extent that the shares disposed of are
replaced (including replacement through the reinvesting of dividends and capital
gain distributions in the Fund) within a period of 61 days beginning 30 days
before and ending 30 days after the 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 you on the sale of the Fund's shares which you have
held for six months or less will be treated for federal income

<PAGE>

tax purposes as a long-term capital loss to the extent of any distributions of
long-term capital gains you received with respect to such shares.

In some cases, you will not be permitted to take sales charges into account for
purposes of determining the amount of gain or loss realized on the disposition
of your shares. This prohibition generally applies where (1) you incur a sales
charge in acquiring the stock of a regulated investment company, (2) the stock
is disposed of before the 91st day after the date on which it was acquired, and
(3) you subsequently acquire shares of the same or another regulated investment
company and the otherwise applicable sales charge is reduced or eliminated under
a "reinvestment right" received upon the initial purchase of shares of stock. In
that case, the gain or loss recognized will be determined by excluding from the
tax basis of the shares exchanged all or a portion of the sales charge incurred
in acquiring those 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 a sales charge initially. Sales charges
affected by this rule are treated as if they were incurred with respect to the
stock acquired under the reinvestment right. This provision may be applied to
successive acquisitions of stock.

The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to you if (1) you fail to furnish the Fund with your correct
taxpayer identification number or social security number and to make such
certifications as the Fund may require, (2) the IRS notifies you or the Fund
that you have failed to report properly certain interest and dividend income to
the IRS and to respond to notices to that effect, or (3) when required to do so,
you fail to certify that you are not subject to backup withholding. Any amounts
withheld may be credited against your federal income tax liability.

Ordinary dividends and taxable capital gain distributions declared in October,
November, or December with a record date in such month and paid during the
following January will be treated as having been paid by the Fund and received
by shareholders on December 31 of the calendar year in which declared, rather
than the calendar year in which the dividends are actually received.

Distributions also may be subject to state, local and foreign taxes. U.S. tax
rules applicable to foreign investors may differ significantly from those
outlined above. This discussion does not purport to deal with all of the tax
consequences applicable to shareholders. You are advised to consult your own tax
advisers for details with respect to the particular tax consequences of an
investment in the Fund.

THE FUND'S UNDERWRITER

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

Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for shares of the Fund. The
underwriting agreement will continue in effect for successive annual periods 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.

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended March 31, 1997 and 1996, and for the
period from July 28, 1994 (commencement of operations) to March 31, 1995, were
$122,189, $34,066 and $149,606, respectively. After allowances to dealers,
Distributors retained $25,369, $25,733 and $5,220 in net underwriting discounts
and commissions and received no monies in connection with redemptions or
repurchases of shares, for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan, as discussed below. Except as noted,
Distributors received no other compensation from the Fund for acting as
underwriter.

THE RULE 12B-1 PLAN

The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act for its Class I shares. Under the plan, the Fund may pay
up to a maximum of 0.35% per year of its average daily net assets, payable
quarterly, for

expenses incurred in the promotion and distribution of its Class I shares.

In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made pursuant
to the plan, exceed the amount permitted to be paid under the rules of the NASD.

The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1.

To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.

The plan has been approved in accordance with the provisions of Rule 12b-1. The
plan is renewable annually by a vote of the Board, including a majority vote of
the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plan and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Investment Counsel or by vote of a majority of the
outstanding shares of Class I. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.

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

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

For the fiscal year ended March 31, 1997, the total amount paid by the Fund
pursuant to the plan was $23,146, which was used for the following purposes:

<TABLE>
<CAPTION>
DOLLAR
AMOUNT
- -----------------------------------------------
<S> <C>
Advertising........................... $ 118
Printing and mailing of prospectuses
other than to current
shareholders........................ 7,276
Payments to underwriters.............. 1,467
Payments to broker-dealers............ 14,285
Other................................. 0
</TABLE>

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.
Average annual total return and 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 follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.

TOTAL RETURN

Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over the one-year and from inception
periods that would equate an initial hypothetical $1,000 investment to its
ending redeemable

<PAGE>

value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each one-year and from inception
periods and the deduction of all applicable charges and fees. If a change is
made to the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge currently in effect.

When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
Fund's average annual total return for the one-year period ended March 31, 1997,
and the period since inception (July 28, 1994) to March 31, 1997, was -31.13%
and -11.62%, 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-year and from
inception periods at the end of the
one-year and from inception periods
</TABLE>

Cumulative Total Return. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the Fund's actual return for a specified period rather than on its average
return over the one-year and from inception periods. The Fund's cumulative total
return for the one-year period ended March 31, 1997, and the period since
inception (July 28, 1994) to March 31, 1997, was -31.13% and -28.14%,
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

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

Sales literature referring to the use of 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
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.

COMPARISONS

To help you better evaluate how an investment in 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. These
comparisons may include, but are not limited to, the following examples:

(i) unmanaged indices so that you 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 inde-

<PAGE>

pendent research firm that 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- "Always maintain a long-term perspective."

- "Invest for maximum total real return."

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

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

- "Buy low."

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

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

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

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

- "Aggressively monitor your investments."

- "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."

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

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 Fund's performance 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 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.

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 49 years and
now services more than 2.7 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. 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 nine years.

As of July 2, 1997, the principal shareholders 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, 102,619 7%
Fenner & Smith, Inc.
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246
ADVISOR CLASS
Franklin Templeton Trust 332 7%
Company - Custodian for
the IRA of Ulla W.
Tarstrup
301 La Casa Avenue
San Mateo, CA 94403-5016
Franklin Templeton Trust 744 17%
Company - Custodian for
the IRA of Chu-Sen
Cheng
271 Pelican CT.
Foster City, CA
94404-1412
Franklin Resources, Inc. 2,472 56%
Corporate Treasury
1850 Gateway Dr., 6th
Floor
San Mateo, CA 94404
</TABLE>

From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in central-

<PAGE>

ized securities depositories may exceed 5% of the total shares outstanding.

In the event of disputes involving multiple claims of ownership or authority to
control your account, 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, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.

Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (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 March 31, 1997, including the auditors'
report, are incorporated herein by reference.

USEFUL TERMS AND DEFINITIONS

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

1933 Act - Securities Act of 1933, as amended

1940 Act - Investment Company Act of 1940, as amended

Board - The Board of Trustees of the Fund

CD - Certificate of deposit

Class I and Advisor Class - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. They differ, however, primarily in their sales charge and
expense structures. Certain funds in the Franklin Templeton Funds also offer a
share class designated "Class II."

Code - Internal Revenue Code of 1986, as amended

Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter

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

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

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

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

Investment Counsel - Templeton Investment Counsel, Inc., the Fund's investment
manager

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

IRS - Internal Revenue Service

Letter - Letter of Intent

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

NASD - National Association of Securities Dealers, Inc.

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

NYSE - New York Stock Exchange

Offering Price - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 5.75%.

Prospectus - The prospectus for the Fund's Class I shares dated August 1, 1997,
as may be amended from time to time

Resources - Franklin Resources, Inc.

SAI - Statement of Additional Information

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S&P - Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc.

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.

U.S. - United States

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

<PAGE>

APPENDIX

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 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

<PAGE>

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.

Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

COMMERCIAL PAPER RATINGS

Moody's

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

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

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

S&P

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

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

A-2: Capacity for timely payment on issues with this designation is strong.
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.