FRANKLIN STRATEGIC MORTGAGE PORTFOLIO, 485APOS, 1995-11-30

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
485APOS, 1995-11-30

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As filed with the Securities and Exchange Commission on November 30, 1995.
File Nos.
33-53414
811-7288

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.

Post-Effective Amendment No. 4 (X)

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 7 (X)

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
(Exact Name of Registrant as Specified in Charter)

777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code:(415) 312-2000

HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)

Approximate Date of Proposed Public Offering:

It is proposed that this filing will become effective (check appropriate box)

[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ X] on February 1, 1996, pursuant to paragraph (a)(ii) of Rule 485

If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment

Exhibit Index Page

Declaration Pursuant to Rule 24f-2. The Registrant has registered an
indefinite number or amount of securities under the Securities Act of
1933 pursuant to Rule 24(f)(2) under the Investment Company Act of
1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year
was filed on November 17, 1995.

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
CROSS REFERENCE SHEET

FORM N-1A

Part A: Information Required in Prospectus

Location in N-1A
Item No. Item Registration Statement

1. Cover Page Cover Page

2. Synopsis "Expense Table"

3. Condensed Financial "Financial Highlights - How Has
Information the Fund Performed?"; "How Does
the Fund Measure Performance?"

4. General Description "What Is the Franklin Strategic
Mortgage Portfolio?"; "How Does
the Fund Invest Its Assets?"

5. Management of the Fund "Who Manages the Fund?"

5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders

6. Capital Stock and Other "What Distributions Might I
Securities Receive from the Fund?" and "How
Taxation Affects You and the Fund"

7. Purchase of Securities "How do I Buy Shares?"; "What If
Being Offered My Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?" and "How Do I Get
More Information Regarding My
Investment?"

8. Redemption or Repurchase "How Do I Sell Shares?"; "What If
My Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?"; "How Do I Get
More Information Regarding My
Investment?"

9. Pending Legal Proceedings Not Applicable

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
CROSS REFERENCE SHEET
FORM N-1A

Part B: Information Required in
Statement of Additional Information

N-1A Location in
Item No. Item Registration Statement

10. Cover Page Cover Page

11. Table of Contents Contents

12. General Information and Cover Page
History

13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"

14. Management of the Fund "Officers and Trustees"

15. Control Persons and "Officers and Trustees"
Principal Holders of
Securities

16. Investment Advisory and "Investment Advisory and Other
Other Services Services", "General Information"

17. Brokerage Allocation "How Does The Fund Purchase
Securities for its Portfolio?"

18. Capital Stock and Other See "General Information";
Securities

19. Purchase, Redemption and "How Do I Buy and Sell Shares?";
Pricing of Securities "How Are the Fund Shares Valued?"
Being Offered

20. Tax Status "General Information" and
"Additional Information Regarding
Taxation

21. Underwriters "The Fund's Underwriter"

22. Calculation of Performance See "Performance" under "General
Data Information"

23. Financial Statements "Financal Statements

FRANKLIN
STRATEGIC MORTGAGE
PORTFOLIO

PROSPECTUS FEBRUARY 1, 1996

777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN

The Franklin Strategic Mortgage Portfolio (the "Fund") is an open-end,
diversified management investment company, commonly called a "mutual fund." The
investment objective of the Fund is to obtain a high level of total return
relative to the performance of the general mortgage securities market. The Fund
seeks to achieve this objective by investing primarily in a portfolio of
mortgage securities created from pools of mortgages which are issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The
mortgage securities in which the Fund will invest are issued or guaranteed by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). In addition to these mortgage securities, the Fund may invest up to
35% of its total assets in adjustable rate mortgage securities ("ARMs"),
collateralized mortgage obligations ("CMOs") and stripped mortgage-backed
securities ("SMBS"). The Fund is designed for individuals as well as certain
institutional investors. There can, of course, be no assurance that the Fund's
objective will be achieved.

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

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

A Statement of Additional Information (the "SAI") concerning the Fund, dated
February 1, 1996, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to you. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Fund or the Fund's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors"), at the address or telephone number shown
above.

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

THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.

CONTENTS PAGE

Expense Table

Financial Highlights - How has the Fund Performed?

What Is the Franklin Strategic Mortgage Portfolio?

How Does the Fund Invest Its Assets?

What Are the Fund's Potential Risks?

Who Manages the Fund?

What Distributions Might I Receive from the Fund?

How Taxation Affects You and the Fund

How Do I Buy Shares?

What Programs and Privileges Are Available to Me as a Shareholder?

What If My Investment Outlook Changes? - Exchange Privilege

How Do I Sell Shares?

Telephone Transactions

How Are Fund Shares Valued?

How Do I Get More Information About My Investments?

How Does the Fund Measure Performance?

General Information

Registering Your Account

Important Notice Regarding
Taxpayer IRS Certifications

EXPENSE TABLE

The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of the Fund, before fee waivers and expense, reductions for the fiscal
year ended September 30, 1995.

SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.25%
Exchange Fee (per transaction) $5.00*

*$5.00 fee is imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.40%**
Other Expenses:
Registration fees 0.29%
Professional fees 0.23%
Other 0.32%
-----
TOTAL OTHER EXPENSES 0.84%
- -------------------- -----
TOTAL FUND OPERATING EXPENSES 1.24%**
- ----------------------------- =======

** The investment manager has agreed in advance, to waive all of its management
fee and to make certain payments to reduce expenses of the Fund. With this
reduction, the Fund paid no management fees or operating expenses.

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

EXAMPLE

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

ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$55 $80 $108 $186

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE FEE
WAIVERS AND EXPENSE REDUCTIONS, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only indirectly by you
as a result of your investment in the Fund. See "Who Manages the Fund?" for a
description of the Fund's expenses. In addition, federal securities regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%.

FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED?

Set forth below is a table containing the financial highlights for a share of
the Fund from February 1, 1993 (the effective date of registration), through
September 30, 1993, and for fiscal years ended September 30, 1994 and 1995. The
information has been audited by Coopers & Lybrand L.L.P., independent auditors,
whose audit report appears in the financial statements in the Fund's Annual
Report to Shareholders dated September 30, 1995. See the discussion "Reports to
Shareholders" under "General Information."

Net Distri- Distri-
Net Asset Net Realized & butions butions Net Asset Net Assets Ratio of Ration of
Value Invest-Unrealized Total From From Net From Total Value at at End Expenses to Income Portfolio
Period Beginning ment Gain(loss)on Investment Investment Realized Distri- End of Total Period Average Net to AverageTurnover
Ended of Period Income Securities Operations Income Capital Gains butions Period Return+in (000's)Assets*** Net Assets Rate++

+Total return measures the change in value of an investment over the period
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends and capital gains at net asset value and is not
annualized.

++The portfolio turnover rate for this period excludes purchases and sales of
mortgage dollar roll transactions.

+++The portfolio turnover rate for this period has been restated to exclude
purchases and sales of mortgage dollar roll transactions.

*For the period February 1, 1993 (effective date) to September 30, 1993.

**Annualized

***During the periods indicated, the investment manager agreed in advance to
waive its management fees and to make certain payments to reduce expenses of the
Fund. Had such action not been taken, the ratio of operating expenses to average
net assets would have been 1.22% (annualized), 1.28% and 1.24% for 1993, 1994,
and 1995 respectively.

WHAT IS THE FRANKLIN
STRATEGIC MORTGAGE PORTFOLIO?

The Fund is a diversified, open-end management investment company, commonly
called a "mutual fund." The Fund is a Delaware business trust, organized on
September 23, 1992, and registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act").

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

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

HOW DOES THE FUND INVEST IT'S ASSETS?

The investment objective of the Fund is to obtain a high level of total return
relative to the performance of the general mortgage securities market. The
objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. The Fund seeks to achieve a high level of total return
through a combination of high income and capital appreciation by investing
primarily (at least 65% of its total assets) in a portfolio of mortgage
securities created from pools of mortgages which are issued or guaranteed by the
U.S. government, its agencies or instrumentalities. The mortgage securities in
which the Fund may invest are issued or guaranteed by GNMA, FNMA and FHLMC. In
addition to these mortgage securities, the Fund may invest up to 35% of its
total assets in other securities including ARMs, CMOs and SMBS, which may
include privately-issued mortgage securities. In attempting to achieve a high
level of total return, the Fund seeks higher interest return than may generally
be available from fixed-rate mortgage securities by investing up to 35% of its
assets in higher income producing mortgage securities such as ARMs, CMOs & SMBS.
The Fund may also invest in futures contracts and options on futures contracts
and may engage in other transactions described under the subcaption "Other
Investment Policies of the Fund."

THE CHARACTERISTICS OF THE MORTGAGE
SECURITIES IN WHICH THE FUND INVESTS

A mortgage security is an interest in a pool of mortgage loans. Most mortgage
securities are pass-through securities, which means that they provide investors
with payments consisting of both principal and interest as mortgages in the
underlying pool are paid off by the borrowers. The primary issuers or guarantors
of mortgage securities are GNMA, FNMA and FHLMC. These mortgage securities are
called pass-through certificates ("Certificates") because a pro rata share of
both regular interest and principal payments, as well as unscheduled early
prepayments on the underlying mortgage pool, are passed through monthly to the
holder of the Certificate (i.e., the Fund). The Fund invests in both "modified"
and "straight" pass-through mortgage-backed securities. Principal and interest
are guaranteed for "modified pass-through" type certificates, as opposed to
"straight pass-through" certificates for which such guarantee is not available.
CMOs and SMBS are not pass-through securities.

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

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

At least 65% of the Fund's total assets will be invested in securities rated AAA
or Aaa by Standard & Poor's Corporation ("S&P") or Moody's Investors Service
("Moody's"), respectively, or, if unrated, will be deemed to be of comparable
quality by the Fund's investment manager. As to the remaining 35% of the Fund's
assets, the portfolio securities will be rated at least AA or Aa by S&P or
Moody's, respectively, or, if unrated, will be deemed to be of comparable
quality by the Fund's investment manager. In the event the rating of an issue is
changed by the ratings service or the security goes into default, such event
will be considered by the Fund in its evaluation of the overall investment
merits of that security, but will not require immediate disposal by the Fund.

Mortgage securities generally have an average life less than their stated
maturity. Because of variations in prepayment rights, it is not possible to
accurately predict the life of a particular mortgage-related investment. The
occurrence of mortgage prepayment is affected by factors including the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions. Accordingly, the life of
an individual mortgage security is likely to be substantially shorter than the
stated maturity of the mortgages in the underlying pool.

Yields on mortgage-related securities are typically quoted based on the maturity
of the underlying instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ from the assumed average
life yield. If mortgage interest rates decrease, the value of the Fund's
securities generally will increase; however, it is anticipated that the average
life of the mortgages in the pool will decrease as borrowers refinance and
prepay mortgages in order to take advantage of lower rates. The proceeds to the
Fund from such prepayments will have to be invested at the then prevailing lower
interest rates. On the other hand, if interest rates increase, the value of the
Fund's securities generally will decrease, while it is anticipated that
borrowers will not refinance and therefore the average life of the mortgages in
the pool will be longer.

Adjustable Rate Mortgage Securities. An ARM, like a traditional mortgage
security, is an interest in a pool of mortgage loans. The ARMs in which the Fund
invests may be issued or guaranteed by one of the federal agencies or by private
issuers. The adjustable interest rate feature of the mortgages underlying the
ARMs in which the Fund invests generally will act as a buffer to reduce sharp
changes in the market value of the ARMs and thus in the Fund's net asset value
in response to normal interest rate fluctuations. As the interest rates on the
mortgages underlying the Fund's ARMs investments are reset periodically, yields
of the securities will gradually align themselves to reflect changes in market
rates and should cause the net asset value of the Fund to fluctuate less
dramatically than it would if the Fund invested all of its assets in long-term,
fixed-rate debt securities. During periods of rising interest rates, however,
changes in the coupon rate lag behind changes in the market rate. During periods
of extreme fluctuations in interest rates, the resulting fluctuation of ARM
rates could affect the net asset value of the Fund in proportion to the Fund's
investment in ARMs. Since most ARMs in the Fund's portfolio will generally have
annual reset limits or "caps" of 100 to 200 basis points, fluctuation in
interest rates above these levels could cause such mortgage securities to "cap
out" and to behave more like long-term, fixed-rate debt securities.

Unlike fixed-rate mortgages, which generally decline in value during periods of
rising interest rates, adjustable rate mortgage securities allow the Fund to
participate in increases in interest rates through periodic adjustments in the
coupons of the underlying mortgages, resulting in both higher current yields and
lower price fluctuations. Furthermore, if prepayments of principal are made on
the underlying mortgages during periods of rising interest rates (e.g., due to
home sales or foreclosures), the Fund generally will be able to reinvest such
amounts in securities with a higher current rate of return. The Fund, however,
will not benefit from increases in interest rates to the extent that interest
rates rise to the point where they cause the current coupon of adjustable rate
mortgages held as investments by the Fund to exceed the maximum allowable
periodic or lifetime reset limits (or "cap rates") for a particular mortgage.

During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Fund. This aspect of ARMs
may impede the ability of the Fund to achieve a high total return. Further,
because of this feature, the value of ARMs is unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments. As with
other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages due to refinancings and the proceeds from
such prepayments must be reinvested at lower prevailing interest rates.

One additional difference between ARMs and fixed-rate mortgages is that for
certain types of ARM securities, the rate of amortization of principal, as well
as interest payments, can and does change in accordance with movements in a
particular, pre-specified, published interest rate index. For example, ARMs can
have negative amortization, which can extend the average life of the securities.
The amount of interest due to an ARM security holder is calculated by adding a
specified additional amount, the "margin," to the index, subject to limitations
or "caps" on the maximum and minimum interest that is charged to the mortgagor
during the life of the mortgage or to maximum and minimum changes to that
interest rate during a given period.

COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may also invest in CMOs. A CMO is
a mortgage-backed security collateralized by a pool of mortgages or mortgage
securities that separates mortgage pools into short-, medium- and long-term
components. Each component pays a fixed rate or a variable rate (reset
periodically at a specified increment over an index) of interest at regular
intervals. These components enable an investor such as the Fund to more
accurately predict the pace at which principal is returned. CMOs are issued by
government agencies, single-purpose, stand-alone finance subsidiaries or trusts
established by financial institutions or other similar institutions. The Fund
will invest in privately issued CMOs and CMOs issued or guaranteed by U.S.
government agencies, which will be:

(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government; or

(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and the guarantee is collateralized 100%
by U.S. government securities. The guarantee is provided by a special purpose
entity without assets other than the mortgages and the government securities.

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

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

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

RESETS. The interest rates paid on the ARMs and CMOs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index, although instruments with longer resets
such as three years and five years are also permissible investments. There are
several categories of indices, including those based on U.S. Treasury
securities, those derived from a calculated measure, such as a cost of funds
index, and those based on a moving average of mortgage rates and actual market
rates.

CAPS AND FLOORS. The underlying mortgages which collateralize the ARMs and CMOs
in which the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change up
or down (1) per reset or adjustment interval and (2) over the life of the loan.
Some residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization.

STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may also invest in SMBS, which are
derivative multiclass mortgage securities, to achieve a higher yield than may be
available from fixed-rate mortgage securities. The SMBS in which the Fund may
invest will not be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government, although such securities have more
liquidity than privately issued SMBS. SMBS have greater market volatility than
other types of mortgage securities in which the Fund invests.

SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity of an IO and PO class is
extremely sensitive not only to changes in prevailing interest rates but also to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets. A rapid rate of principal payments may have a material adverse
effect on the IO's yield to maturity and a slower than anticipated principal
payment would have a material adverse effect on the PO's yield to maturity. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund may fail to fully recoup its initial investment in an IO
even if the securities are rated in the highest rating categories, AAA or Aaa,
by S&P or Moody's, respectively. As noted above, the Fund may invest up to 35%
in SMBS.

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

RISKS OF MORTGAGE SECURITIES

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

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

OTHER INVESTMENT POLICIES OF THE FUND

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

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

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may enter into
contracts for the purchase or sale for future delivery of debt securities
("Futures Contracts") and may purchase or write options to buy or sell Futures
Contracts ("Options on Futures Contracts") traded on U.S. and foreign exchanges.
These investment techniques are designed only to hedge against anticipated
future changes in interest rates which otherwise might either adversely affect
the value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of Futures Contracts or Options on Futures Contracts or may realize a
loss. A further discussion of the use, risks and costs of Futures Contracts and
Options on Futures Contracts is included in the SAI.

Futures Contracts and Options on Futures Contracts may only be used for hedging
purposes, not for speculation. In addition to complying with this requirement,
the Fund will not purchase or sell Futures Contracts and Options on Futures
Contracts if immediately thereafter the amount of initial margin deposits on all
the futures positions of the Fund and premiums paid on Options on Futures
Contracts would exceed 5% of the market value of the total assets of the Fund.

The Fund's ability to invest in Futures Contracts and Options on Futures
Contracts may be limited by the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification of the Fund as a regulated
investment company, and is also subject to special tax rules that may affect the
amount, timing and character of distributions to shareholders. More information
about this is included in the tax section in the SAI.

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

BORROWING. The Fund may not borrow money or mortgage or pledge any of its
assets, except that it may borrow from banks for temporary or emergency purposes
up to 20% of its total assets and pledge its assets in connection therewith and
except to the extent that an uncovered mortgage dollar roll may be considered to
be a borrowing. The Fund may not, however, purchase any portfolio securities
while borrowings representing more than 5% of its total assets are outstanding.

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

INVERSE FLOATERS. The Fund may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, usually at an accelerated speed, to
short-term interest rates or interest rate indices. As with other
mortgage-backed securities, interest rate declines may result in accelerated
prepayment of mortgages and the proceeds from such prepayments must be
reinvested at lower prevailing interest rates. During periods of extreme
fluctuations in interest rates, the resulting fluctuation could affect the net
asset value of the Fund in proportion to the Fund's investment in inverse
floaters. An accelerated decline in interest rates creates a higher degree of
volatility and risk. Transactions in options, futures and options on futures are
generally considered "derivative securities." The Fund's investment in options,
futures and options on futures will be for portfolio hedging purposes in an
effort to stabilize principal fluctuations to achieve the Fund's investment
objective and not for speculation.

OTHER PERMITTED INVESTMENTS. Other investments permitted by the Fund consist of
obligations of the United States, notes, bonds, and discount instruments of U.S.
government agencies or instrumentalities such as Federal Home Loan Banks, FNMA,
GNMA, the Student Loan Marketing Association, the Resolution Funding
Corporation, and the Federal Farm Credit Bank, time and savings deposits
(including fixed or adjustable rate certificates of deposit) in commercial or
savings banks or in institutions whose accounts are insured by the FDIC, and
other securities which are consistent with the Fund's investment objective. The
Fund's investments in savings deposits are generally deemed to be illiquid and
will, together with any other illiquid investments, not exceed 10% of the Fund's
total net assets. The Fund's investments in time deposits will not exceed 10% of
its total assets.

ILLIQUID INVESTMENTS. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund.

TEMPORARY DEFENSIVE POSITIONS. For temporary defensive purposes only, when the
investment manager believes that market conditions would cause serious erosion
of portfolio value, the Fund may invest its assets without limit in U.S.
government securities, certificates of deposit of banks having total assets in
excess of $5 billion, and repurchase agreements. Under such circumstances, the
Fund is not pursuing its investment objective but is attempting to preserve the
Fund's assets and the shareholder's principal.

INVESTMENT RESTRICTIONS

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

The Fund's portfolio turnover rate may exceed 100% per year. Because a higher
turnover rate increases transactions costs and may increase taxable capital
gains, the investment manager will consider the potential benefits of investing
in mortgage dollar rolls against these considerations.

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

The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
you own will increase. If the securities owned by the Fund decrease in value,
the value of the your shares will also decline. In this way, you participate in
any change in the value of the securities owned by the Fund. In addition to the
factors which affect the value of individual securities, as described in the
preceding sections, you may anticipate that the value of Fund shares will
fluctuate with movements in the broader equity and bond markets. In particular,
changes in interest rates will affect the value of the Fund's portfolio and thus
its share price. Increased rates of interest which frequently accompany higher
inflation and/or a growing economy are likely to have a negative effect on the
value of Fund shares. History reflects both increases and decreases in the
prevailing rate of interest and these may reoccur unpredictably in the future.

WHO MANAGES THE FUND?

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

Franklin Institutional Services Corporation ("FISCO" or "Manager") serves as the
Fund's investment manager. FISCO is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). The Manager offers
investment management services to institutional investors.

The team responsible for the day-to-day management of the Fund's portfolio is
Roger Bayston and Jack Lemein since inception of the Fund and Victoria Lee since
September 1993.

Roger Bayston
Portfolio Manager
Franklin Advisors, Inc.
Franklin Institutional Services Corporation

Mr. Bayston, is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with Advisors or an affiliate since earning his MBA in 1991 and was an
Assistant Treasurer for Bankers Trust Company from 1986 to 1989.

Jack Lemein
Senior Vice President
and Portfolio Manager
Franklin Advisors, Inc.
Franklin Institutional Services Corporation

Mr. Lemein holds a Bachelor of Science degree in Finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisors or
an affiliate since 1984. He is a member of several securities industry
associations.

Victoria Lee
Portfolio Manager
Franklin Institutional Services Corporation

Ms. Lee, Portfolio Manager of FISCO, holds a Master's degree in Business
Administration from the University of Southern California and a Bachelor of
Science degree from Cornell University. Ms. Lee has been with Advisors or an
affiliate since earning her MBA degree in 1993. Prior thereto, she was a
mortgage analyst with Bear Stearns.

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

During the fiscal year ended September 30, 1995, management fees, before any
advance waiver, totaled 0.40% of the average daily net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
1.24% of the average daily net assets of the Fund. Pursuant
to an agreement by Advisers to waive its fees, the Fund paid management fees
totaling 0.0% of the average daily net assets of the Fund and operating expenses
totaling 0.0%.

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

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

WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?

You may receive two types of distributions from the Fund:

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

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

DISTRIBUTION DATE

Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends daily and
pay them monthly on or about the last business day of that month. Daily
allocation of net investment income will begin on the day after the Fund
receives your money or settlement of a wire order trade and will continue to
accrue until the business day following receipt of your redemption request or
the settlement of a wire order trade. The amount of income dividend payments by
the Fund is dependent upon the amount of net income received by the Fund from
its portfolio holdings, is not guaranteed and is subject to the discretion of
the Board. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF
RETURN ON AN INVESTMENT IN ITS SHARES.

DISTRIBUTION OPTIONS

You may choose to receive your distributions from the Fund in any of these ways:

1. PURCHASE ADDITIONAL SHARES OF THE FUND - You may purchase additional shares
of the Fund (without a sales charge) by reinvesting capital gain distributions,
or both dividend and capital gain distributions. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.

2. PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.

3. RECEIVE DISTRIBUTIONS IN CASH - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"

TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE FUND. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the reinvestment
date for the Fund to process the new option.

HOW TAXATION AFFECTS YOU AND THE FUND

The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.

The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By distributing all of its income and meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.

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

It is not expected that distributions paid by the Fund will qualify for the
corporate dividends-received deduction.

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

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

Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the Fund from direct obligations of the
U.S. government. Investments in mortgage-backed securities (including GNMA, FNMA
and FHLMC securities) and repurchase agreements collateralized by U.S.
government securities do not qualify as direct federal obligations in most
states.

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

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

HOW DO I BUY SHARES?

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

PURCHASE PRICE OF FUND SHARES

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

Set forth below is a table showing front-end sales charges and dealer
concessions.

TOTAL SALES CHARGE
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
----------------- ----- -------- ------
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%

There is no sales charge on purchases of $1,000,000 or more.

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. If 90% or
more of the sales commission is allowed, such securities dealer may be deemed to
be an underwriter under the Securities Act of 1933, as amended.

The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments in one or more of the funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds. Included for these aggregation purposes are (a)
the mutual funds in the Franklin Group of Funds except Franklin Valuemark Funds
and Franklin Government Securities Trust (the "Franklin Funds"), (b) other
investment products underwritten by Distributors or its affiliates and (c) the
U.S. registered mutual funds in the Templeton Group of Funds except Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds and
Templeton Funds are collectively referred to as the "Franklin Templeton Funds.")
Sales charge reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.

OTHER PAYMENTS TO SECURITIES DEALERS. Either Distributors or one of its
affiliates may make payments, out of its own resources, of up to 1% of the
amount purchased to securities dealers who initiate and are responsible for
purchases made at net asset value by certain trust companies and trust
departments of banks, certain designated retirement plans (excluding IRA and IRA
rollovers), and certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, and up to 0.75% of the amount
purchased to securities dealers who initiate and are responsible for purchases
made at net asset value by non-designated retirement plans. See "Description of
Special Net Asset Value Purchases" below and "How Do I Buy and Sell Shares?" in
the SAI.

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

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

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

QUANTITY DISCOUNTS IN SALES CHARGES

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

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

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

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

YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER
OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%) of the
amount of the total intended purchase will be reserved in shares of the Fund,
registered in the your name, to assure that the full applicable sales charge
will be paid if the intended purchase is not completed. The reserved shares will
be included in the total shares owned as reflected on periodic statements.
Income and capital gain distributions on the reserved shares will be paid as you
have directed. You will not be able to dispose of the reserved shares until the
Letter has been completed or the higher sales charge paid. This policy of
reserving shares does not apply to certain benefit plans described under
"Description of Special Net Asset Value Purchases." For more information, see
"How Do I Buy and Sell Shares? in the SAI.

The value of Class II shares you own may be included in determining a reduced
sales charge to be paid on shares of the Fund pursuant to the Letter of Intent
and Rights of Accumulation programs.

GROUP PURCHASES

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

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

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

PURCHASES AT NET ASSET VALUE

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

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of the Fund or another of
the Class I Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. IF A
DIFFERENT CLASS OF SHARES IS PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE
PAID AT THE TIME OF PURCHASE OF THE NEW SHARES. Under this privilege, you may
reinvest an amount not exceeding the redemption proceeds. While credit will be
given for any contingent deferred sales charge paid on the shares redeemed and
subsequently repurchased, a new contingency period will begin. Matured shares
will be reinvested at net asset value and will not be subject to a new
contingent deferred sales charge. Shares of the Fund redeemed in connection with
an exchange into another fund (see "What If My Investment Outlook Changes? -
Exchange Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 365 days after the redemption. The 365 days, however, do not begin to run
on redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge you a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a reinvestment is
included in the tax section of this Prospectus and under "Additional Information
Regarding Taxation" in the SAI.

Shares of the Fund may be purchased at net asset value by persons who have
received dividends and capital gain distributions from investments in the Fund
or another Franklin Templeton Fund within 365 days of the payment date of such
distribution. To exercise this privilege, a written request to reinvest the
distribution must accompany the purchase order. Additional information may be
obtained from Shareholder Services at 1-800/632-2301. See "Distribution Options"
under "What Distributions Might I Receive from the Fund."

Shares of the Fund may be purchased at net asset value by investors who have,
within the past 60 days, redeemed an investment in a mutual fund which is not
part of the Franklin Templeton Funds and which was subject to a front-end sales
charge or a contingent deferred sales charge and which has investment objectives
similar to those of the Fund.

Shares of the Fund may be purchased at net asset value by broker-dealers who
have entered into a supplemental agreement with Distributors, or by registered
investment advisors affiliated with such broker-dealers, on behalf of their
clients who are participating in a comprehensive fee program (sometimes known as
a wrap fee program).

Shares of the Fund may be purchased at net asset value by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Templeton Funds (including former participants of the Franklin Templeton Profit
Sharing 401(k) plan), to the extent of such distribution. In order to exercise
this privilege a written order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust Company"), the Fund or
the Fund's Shareholder Services Agent within 365 days after the plan
distribution.

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

HOW DO I BUY SHARES IN CONNECTION WITH
TAX-DEFERRED RETIREMENT PLANS

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

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

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

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

GENERAL

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

WHAT PROGRAMS AND PRIVILEGES ARE
AVAILABLE TO ME AS A SHAREHOLDER?

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

SHARE CERTIFICATES

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

CONFIRMATIONS

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

AUTOMATIC INVESTMENT PLAN

The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.

SYSTEMATIC WITHDRAWAL PLAN

The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.

If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:

1. PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.

2. RECEIVE PAYMENTS IN CASH - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.

There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.

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. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. 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.

While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases.

You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate 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.

ELECTRONIC FUND TRANSFERS

You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.

INSTITUTIONAL ACCOUNTS

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

WHAT IF MY INVESTMENT OUTLOOK CHANGES?
EXCHANGE PRIVILEGE

The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums.

No exchanges between different classes of shares will be allowed. Shareholders
may choose to redeem shares of the Fund and purchase Class II shares of another
Franklin Templeton Fund but such purchase will be subject to that fund's Class
II front-end and contingent deferred sales charges. Although there are no
exchanges between different classes of shares, Class II shareholders of a
Franklin Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.

Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods, applicable
sales charge structure or distribution plan expenses.

You may exchange shares in any of the following ways:

EXCHANGES BY MAIL

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

EXCHANGES BY TELEPHONE

YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
THE FUND BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES.

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

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

EXCHANGES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset value of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange.

If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the net asset value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund in accordance with the
procedures set forth above. Because the exchange is considered a redemption and
purchase of shares, you may realize a gain or loss for federal income tax
purposes. Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an exchange is
included in the tax section in this Prospectus and under "Additional Information
Regarding Taxation" in the SAI.

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

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

RETIREMENT PLAN ACCOUNTS

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

TIMING ACCOUNTS

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

RESTRICTIONS ON EXCHANGES

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

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

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

The Fund and Distributors, as indicated under "How Do I Buy Shares?," reserve
the right to refuse any order for the purchase of shares.

HOW DO I SELL SHARES?

You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:

REDEMPTIONS BY MAIL:

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

TO BE CONSIDERED IN PROPER FORM, SIGNATURES MUST BE GUARANTEED IF THE REDEMPTION
REQUEST INVOLVES ANY OF THE FOLLOWING:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

REDEMPTIONS BY TELEPHONE

If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions by writing to the Fund or
Investor Services at the address shown on the cover or by calling
1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES
TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."

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

REDEEMING SHARES THROUGH SECURITIES DEALERS

The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after the your dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives your written
request in proper form. The documents described under "Redemptions By Mail"
above, as well as a signed letter of instruction are required regardless of
whether you redeem shares directly or submit such shares to a securities dealer
for repurchase. Your letter should reference the Fund, the account number, the
fact that the repurchase was ordered by a dealer and the dealer's name. Details
of the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of your redemption will be sent will
begin when the Fund receives all documents required to complete ("settle") the
repurchase in proper form. Your dealer may charge a fee for handling the order.
See "How Do I Buy and Sell Shares?" in the SAI for more information on the
redemption of shares.

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

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

RETIREMENT PLAN ACCOUNTS

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

Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Internal Revenue Code.

OTHER INFORMATION

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

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

For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.

TELEPHONE TRANSACTIONS

By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) request
the issuance of certificates, to be sent to the address of record only and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - Redemptions by Telephone" you will be able to redeem shares of the Fund.

VERIFICATION PROCEDURES

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

RESTRICTED ACCOUNTS

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

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

GENERAL

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

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

HOW ARE FUND SHARES VALUED?

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

The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.

HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?

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

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

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

The Fund code, which will be needed to access system information, is 57. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.

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

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

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

HOW DOES THE FUND MEASURE PERFORMANCE?

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

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

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

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

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

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

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

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

ORGANIZATION AND VOTING RIGHTS

The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Additional series or
classes may be added in the future by the Board.

Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.

The Fund does not intend to hold annual shareholders meetings. The Fund may,
however, hold a special shareholders meeting for such purposes as changing
fundamental investment restrictions, approving a new management agreement or any
other matters which are required to be acted on by shareholders under the 1940
Act. A meeting may also be called by the trustees in their discretion or by
shareholders holding at least ten percent of the outstanding shares of the Fund.
Shareholders will receive assistance in communicating with other shareholders in
connection with the election or removal of trustees such as that provided in
Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the your prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares" in the SAI.

ADDITIONAL INFORMATION FOR INSTITUTIONAL INVESTORs

Since the investments permitted by the Fund's policies are primarily in mortgage
securities issued or guaranteed by the U.S. government or its agencies and
instrumentalities, the shares of the Fund may be eligible for investment by
federally chartered credit unions, federally chartered savings and loan
associations and national banks. The Fund may be a permissible investment for
certain state chartered institutions as well, including state and local
government authorities and agencies. Any financial institution considering an
investment in the Fund should refer to the applicable laws and regulations
governing their operations in order to determine if this Fund is a permissible
investment.

REGISTERING YOUR ACCOUNT

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

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

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

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

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

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

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

IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS

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

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

FRANKLIN
STRATEGIC MORTGAGE
PORTFOLIO

STATEMENT OF
ADDITIONAL INFORMATION

777 MARINERS ISLAND BLVD.,
P.O. BOX 7777
SAN MATEO, CA 94403-7777
1-800/DIAL BEN

FEBRUARY 1, 1996

CONTENTS PAGE

How Does the Fund Invest Its Assets?

What Are the Fund's Potential Risks?

Investment Restrictions

Officers and Trustees

Investment Advisory
and Other Services

How Does the Fund Purchase Securities for Its Portfolio?

How Do I Buy and Sell Shares?

How Are Fund Shares Valued?

Additional Information Regarding Taxation

The Fund's Underwriter

General Information

Financial Statements

Franklin Strategic Mortgage Portfolio (the "Fund") is an open-end, diversified
management investment company. The investment objective of the Fund is to obtain
a high level of total return, relative to the performance of the general
mortgage securities market. The Fund seeks to achieve this objective by
investing primarily in a portfolio of mortgage securities created from pools of
mortgages which are issued or guaranteed by the U.S.
government, its agencies or instrumentalities.

The investment objective of the Fund is a fundamental policy and may not be
changed without approval of shareholders.

A Prospectus for the Fund, dated February 1, 1996, as may be amended from time
to time, provides the basic information an investor should know before investing
in the Fund and may be obtained without charge from the Fund or from its
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors") at
the address or telephone number shown above.

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

The Fund anticipates that its annual portfolio turnover rate generally will not
exceed 100% but this rate should not be construed as a limiting factor. The
portfolio turnover for the fiscal years ended September 30, 1993 and 1994 was
104.33% and 86.38%.

HOW DOES THE FUND INVEST ITS ASSETS?

In addition to the policies stated in the Prospectus, the following restrictions
(except as noted) have been adopted as fundamental policies for the Fund, which
means that they may not be changed without the approval of a majority of the
outstanding shares of the Fund. The Fund MAY NOT:

1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in an amount up to 20% of total asset value. The Fund will not
purchase additional portfolio securities while borrowings in excess of 5% of
total assets are outstanding.

2. Buy any securities on "margin" or sell any securities "short," except for
any delayed delivery or when-issued securities as described in the Prospectus.

3. Lend any funds or other assets, except by the purchase of bonds, debentures,
notes or other debt securities as described in its Prospectus; and except that
securities of the Fund may be loaned to qualified broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of the Fund's total assets
at the time of the most recent loan. Also, the entry into repurchase agreements
is not considered a loan for purposes of this restriction.

4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.

5. Invest more than 5% of the value of its total assets in the securities of
any one issuer, but this limitation does not apply to investments in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.

6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer.

7. Purchase from or sell to the officers and trustees of the Fund, or to any
firm of which any officer or trustee is a member, as principal, any securities,
but may deal with such persons or firms as brokers and pay a customary brokerage
commission; or retain securities of any issuer if, to the knowledge of the Fund,
one or more of its officers, trustees or the administrator own beneficially more
than one-half of 1% of the securities of such issuer, and all such officers and
trustees together own beneficially more than 5% of such securities.

8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor. (This limitation does not apply to issuers of collateralized
mortgage obligations.)

9. Acquire, lease or hold real estate. (Does not preclude investments in
securities collateralized by real estate or interests therein.)

10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development program, except the Fund may enter into commodities
contracts for hedging purposes.

11. Invest in companies for the purpose of exercising control or management.

12. Purchase securities of other investment companies, except to the extent
permitted by the Investment Company Act of 1940 (the "1940 Act") or other
applicable state law, and except in connection with a merger, consolidation,
acquisition or reorganization. To the extent permitted by exemptions which may
be granted under the 1940 Act, the Fund may invest in shares of one or more
money market funds managed by Franklin Advisers, Inc. or its affiliates.

13. Issue senior securities as defined in the 1940 Act, except that this
restriction will not prevent the Fund from entering into repurchase agreements
or making borrowings, mortgages and pledges as permitted by restriction #1
above.

In order to change any of the foregoing restrictions, which are fundamental
policies, approval must be obtained by the shareholders of the Fund. Such
approval requires the affirmative vote of the lesser of (i) 67% or more of the
voting securities present at a meeting if the holders of more than 50% of voting
securities are represented at that meeting or (ii) more than 50% of the
outstanding voting securities of the Fund. If a percentage restriction contained
herein is adhered to at the time of investment, a later increase or decrease in
the percentage resulting from a change in the value of portfolio securities or
the amount of the Fund's net assets will not be considered a violation of any of
the foregoing restrictions.

OTHER POLICIES

As stated in the Prospectus, for temporary defensive purposes only, there are no
restrictions or limitations on investments in obligations of the United States
or of corporations chartered by Congress as federal government
instrumentalities. The assets of the Fund may be retained in cash including cash
equivalents which are Treasury bills, commercial paper and short-term bank
obligations such as certificates of deposit, bankers' acceptances and repurchase
agreements. It is intended however, that only so much of the assets of the Fund
be retained in cash as is deemed desirable or expedient under then-existing
market conditions. The Fund may invest up to 10% of its net assets in illiquid
securities, a term which means securities that cannot be disposed of within
seven days in the normal course of business at approximately the amount at which
the Fund has valued the securities and includes, among other things, securities
with legal or contractual restrictions on resale (although the Fund may invest
in such securities to the extent permitted under the federal securities laws),
repurchase agreements of more than seven days duration, over-the-counter options
and the assets used to cover such options, and other securities which are not
readily marketable.

In addition, it is the Fund's present policy (which may be changed without the
approval of the Fund's shareholders) not to invest in warrants.

The Fund may not invest directly in real estate, or in interests issued by real
estate limited partnerships (although the Fund may invest in real estate
investment trusts), or lease or acquire any interests, including interests
issued by limited partnerships (other than publicly traded equity securities),
in oil, gas, or other mineral leases, exploration or development programs.

Several of the investment companies managed by Franklin Advisers, Inc., a
wholly-owned subsidiary of Franklin Resources, Inc.("Resources") and an
affiliate of the Fund's investment manager, are major purchasers of government
securities and will seek to negotiate attractive prices for such securities and
to pass on any savings derived from such negotiations to their shareholders in
the form of higher current yields. The Fund may also participate in and benefit
from such negotiated prices. It is recognized that in some cases this procedure
could possibly have a detrimental effect on the price or volume of the security
so far as the Fund is concerned.

RESETS. Commonly utilized indices include the one-year, three-year and five-year
constant maturity Treasury rates, the three-month Treasury bill rate, the
six-month Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Funds Index, tend to lag behind changes in
market rate levels and tend to be somewhat less volatile. LIBOR represents
actual market rates.

INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of the
Fund's portfolio from interest rate fluctuations, the Fund may enter into
various hedging transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to shorten the
effective duration of its portfolio investments. The Fund intends to use these
transactions as a hedge and not as a speculative investment. The Fund will not
sell interest rate caps or floors that it does not own. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchase, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.

A specific type of interest rate swap in which the Fund may invest is a mortgage
swap. In a mortgage swap cash flows based on a group of GNMA mortgage pools are
exchanged for cash flows based on a floating interest rate. A mortgage swap is
affected by changes in interest rates which in turn affect the prepayment rate
of underlying mortgages upon which the mortgage swap index is based.

The Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. If a
swap agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. In as much as these hedging transactions are entered
into for good faith hedging purposes, the investment manager and the Fund
believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. An amount of
cash or liquid securities having an aggregate net asset value at least equal to
the net amount of the excess, if any, of the Fund's obligations over its
entitlement with respect to each interest rate swap will be maintained in a
segregated account by the Fund's custodian, to avoid any potential leveraging of
the Fund. The Fund will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of the
other party thereto is considered creditworthy by the investment manager. If the
other party's creditworthiness declines, the value of a swap agreement would be
likely to decline, potentially resulting in losses. If there is a default by the
other party to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with markets for other similar instruments which are traded in the
interbank market.

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

At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.

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

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

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

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

RISK FACTORS AND CONSIDERATIONS
REGARDING FUTURES AND OPTIONS ON FUTURES

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

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

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

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

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

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

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

OFFICERS AND TRUSTEES

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

Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111

Trustee

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

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

Trustee

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

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

Vice President and Trustee

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

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

Trustee

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

David W. Garbellano (81)
111 New Montgomery St., #402
San Francisco, CA 94105

Trustee

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

*Charles B. Johnson (63)
777 Mariners Island Blvd.
San Mateo, CA 94404

Chairman of the Board and Trustee

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

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

President and Trustee

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

Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014

Trustee

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

Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President- Financial Reporting
and Accounting Standards

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

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

Vice President

Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin/Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Templeton Group of Funds.

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

Vice President

Senior Vice President/National Sales Manager, Franklin/Templeton Distributors,
Inc.; and officer of 37 of the investment companies in the Franklin Group of
Funds.

Diomedes Loo-Tam (56)
777 Mariners Island Blvd.
San Mateo, CA 94404

Treasurer and Principal
Accounting Officer

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

Deborah R. Gatzek (47)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Secretary

Senior Vice President - Legal, Franklin Resources, Inc. and Franklin/Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and officer of 32
of the investment companies in the Franklin Group of Funds.

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

NUMBER OF BOARDS IN
THE FRANKLIN
TOTAL FEES RECEIVED TEMPLETON GROUP OF
FROM THE FRANKLIN FUNDS ON WHICH EACH
TEMPLETON GROUP OF SERVES**
FUNDS*
NAME
Frank H. Abbott, III $176,870 31
Harris J. Ashton 318,125 56
S. Joseph Fortunato 334,265 58
David Garbellano 153,300 30
Frank W.T. LaHaye 150,817 26

* For the calendar year ended December 31, 1994.
** The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 162
U.S. based funds or series.

No officer or director received any compensation directly from the Fund. Certain
officers or directors who are shareholders of Franklin Resources, Inc. may be
deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.

As of November 7, 1995, the directors and officers, as a group, owned of record
and beneficially approximately 84 shares, or less than 1% of the total
outstanding shares of the Fund. Many of the Fund's directors also own shares in
various of the other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers.

INVESTMENT ADVISORY AND OTHER SERVICES

The investment manager of the Fund is Franklin Institutional Services
Corporation ("Manager"). The Manager is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources")a publicly-owned holding company whose shares are
listed on the New York Stock Exchange ("Exchange"). Resources owns several other
subsidiaries which are involved in investment management and shareholder
services.

Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's activities are subject
to the review and supervision of the Board to whom the Manager renders periodic
reports of the Fund's investment activities. Under the terms of the management
agreement, the Manager provides office space and office furnishings, facilities
and equipment required for managing the business affairs of the Fund; maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services; and provides certain telephone and other mechanical services. The
Manager is covered by fidelity insurance on its officers, directors and
employees for the protection of the Fund. See the Statement of Operations in the
financial statements included in the Fund's Annual Report to Shareholders dated
September 30, 1995.

Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed at the close of business on the last business day of each month
equal to an annual rate of 40/100 of 1% for the first $250 million of its net
assets; plus 38/100 of 1% of its net assets in excess of $250 million up to and
including $500 million; and 36/100 of 1% of its net assets in excess of $500
million. The fee is computed and paid monthly based on the average daily net
assets of the Fund during the month.

The manager has agreed in advance to waive all of its management fees and make
certain payments to reduce expenses. This arrangement may be terminated by the
Manager at any time upon notice to the Board. The management agreement specifies
that the management fee will be reduced to the extent necessary to comply with
the most stringent limits on the expenses which may be borne by the Fund as
prescribed by any state in which the Fund's shares are offered for sale. The
most stringent current limit requires the Manager to reduce or eliminate its fee
to the extent that aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as litigation
costs) would otherwise exceed in any fiscal year 2.5% of the first $30 million
of average net assets of the Fund, 2.0% of the next $70 million of average net
assets of the Fund and 1.5% of average net assets of the Fund in excess of $100
million. Expense reductions have not been necessary based on state requirements.
For the three fiscal years ending on September 30, 1993, September 30, 1994, and
September 30, 1995 the management fees, before any advance waiver, were $13,924
and $21,038, and $22,219 respectively, however the manager waived all fees for
the same periods.

The management agreement is in effect until February 29, 1996. Thereafter, it
may continue in effect for successive annual periods providing such 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 Fund's trustees who are not parties to
the management agreement or interested persons of any such party (other than as
trustees of the Fund), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by the Manager on 30 days' written notice and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.

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

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

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

HOW DOES THE FUND PURCHASE
SECURITIES FOR IT'S PORTFOLIO?

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

When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Manager, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. The Fund seeks to obtain
prompt execution of orders at the most favorable net price.

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

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

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

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

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

During the three fiscal years ending on September 30, 1995 the Fund paid no
brokerage commissions. As of September 30, 1995, the Fund did not own securities
of its regular broker-dealers.

HOW DO I BUY AND SELL SHARES?

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

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

Shares are eligible to receive dividends beginning on the first business day
following settlement of the purchase transaction, through the date on which the
Fund writes a check or sends a wire on redemption transactions.

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

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

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

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

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

SIZE OF PURCHASE - IN U.S. DOLLARS SALES CHARGE
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%

PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS

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

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

LETTER OF INTENT

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

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

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

REDEMPTIONS IN KIND

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

REDEMPTIONS BY THE FUND

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

HOW ARE FUND SHARES VALUED?

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

For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices.

Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask price. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Portfolio
securities underlying actively traded call options are valued at their market
price as determined above. The current market value of any option held by the
Fund is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is believed to fairly
reflect the contract's market value. Other securities for which market
quotations are readily available are valued at the current market price, which
may be obtained from a pricing service, based on a variety of factors, including
recent trades, institutional size trading in similar types of securities
(considering yield, risk and maturity) and/or developments related to specific
issues. Securities and other assets for which market prices are not readily
available are valued at fair value as determined following procedures approved
by the Board. With the approval of [directors], the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above described
functions.

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

REINVESTMENT DATE

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

REPORTS TO SHAREHOLDERS

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

SPECIAL SERVICES

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

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

ADDITIONAL INFORMATION REGARDING TAXATION

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

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

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

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

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

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

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

Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the Fund from direct obligations of the
U.S. government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. government securities do not generally qualify
for tax-free treatment. The Fund will provide shareholders with the percentage
of any dividends paid which may qualify for such tax-free treatment at the end
of each calendar year. Shareholders should then consult with their own tax
advisors with respect to the application of their state and local laws to these
distributions and on the application of other state and local laws to
distributions and redemption proceeds received from the Fund.

The Fund's investment in futures contracts and options on futures contracts are
subject to many complex and special tax rules. The tax treatment of these
instruments is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indices, options on securities indices, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.

Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and timing of income distributed to shareholders by the Fund.

When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.

As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income").

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

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

THE FUND'S UNDERWRITER

Pursuant to an underwriting agreement in effect until April 30, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. The underwriting agreement will continue in effect for
successive annual periods provided that its continuance is specifically approved
at least annually by a vote of the 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 Fund's trustees who are not parties to the underwriting
agreement or interested persons of any such party (other than as trustees of the
Fund), cast in person at a meeting called for that purpose. The 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 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 September 30, 1993, 1994, and 1995 were
$50, $920, and $2,988 respectively. After allowances to dealers, Distributors
retained $5, $108,and $202 in net underwriting commissions for the respective
years. Distributors received no other compensation from the Fund for acting as
underwriter.

GENERAL INFORMATION

PERFORMANCE

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

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

TOTAL RETURN

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

In considering the quotations of total return by the Fund, investors should
remember 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 an investor's investment in the Funds. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in the Fund. The average annual
compounded rate of return for the Fund for a one year period ending September
30, 1995, was 8.43% and for the period from inception (February 1, 1993) to
September 30, 1995, was 13.29%.

These figures were calculated according to the SEC formula:

P(1+T)n = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

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

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rate of return for the Fund for a one-year
period ending September 30, 1995 was 8.43% and for the period from inception
(February 1, 1993) to September 30, 1995 was 4.80%.

YIELD

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

Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield for the Fund for the 30-day period ended on the date of the financial
statements included herein was 7.16%.

These figures were obtained using the following SEC formula:

<PAGE>

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

a = dividends and interest earned during the period

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

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

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

CURRENT DISTRIBUTION RATE

Yield which is calculated according to a formula prescribed by the SEC is not
indicative of the amounts which were or will be paid to the Fund's shareholders.
Amounts paid to shareholders are reflected in the quoted "current distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by the Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of time.
For the fiscal year ended September 30, 1995 the distribution rate for the Fund
was 7.16%.

VOLATILITY

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

OTHER PERFORMANCE QUOTATIONS

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

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

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

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

COMPARISONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OTHER FEATURES AND BENEFITS

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

MISCELLANEOUS INFORMATION

The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $130
billion in assets under management for more than 3.9 million U.S. based mutual
fund shareholders and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offers to the public 114 U.S. based mutual funds. The
Fund may identify itself by its NASDAQ or CUSIP number.

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

As of November 3, 1995, the principal shareholders of the Fund, beneficial or
of record, their addresses and the amount of their share ownership were as
follows:

Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404-1584

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

OWNERSHIP AND AUTHORITY DISPUTES

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

ADDITIONAL INFORMATION
FOR INSTITUTIONAL INVESTORS

Since the investments permitted by the Fund's policies are primarily in mortgage
securities issued or guaranteed by the U.S. government or its agencies and
instrumentalities, the shares of the Fund may be eligible for investment by
federally chartered credit unions, federally chartered savings and loan
associations and national banks. The Fund may be a permissible investment for
certain state-chartered institutions as well, including state and local
government authorities and agencies. Any financial institution considering an
investment in the Fund should refer to the applicable laws and regulations
governing their operations in order to determine if this Fund is a permissible
investment.

FINANCIAL STATEMENTS

The audited financial statements contained in the Annual Report to Shareholders
of the Fund dated September 30, 1995, including the auditors' report, are
incorporated herein by reference.

APPENDIX

DESCRIPTION OF MOODY'S INVESTORS
SERVICE'S CORPORATE BOND RATINGS:

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

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

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:

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

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

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FORM N-1A

PART C

Other Information

Item 24 Financial Statements and Exhibits

(a) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated September 30,
1995 as filed with the SEC electronically on form type N-30D on
November 29, 1995

(i) Report of Independent Auditors, dated November 3, 1995.

(ii) Statement of Investments in Securities and Net Assets, September
30, 1995.

(iii) Statement of Assets and Liabilities - September 30, 1995.

(iv) Statement of Operations - for the year ended September 30, 1995.

(v) Statements of Changes in Net Assets - for the years ended
September 30, 1995 and 1994.

(vi) Notes to Financial Statements

(b) Exhibits:

The following exhibits, are attached herewith, except for exhibits
8(i) and 14(i), which are incorporated by reference herein.

(1) copies of the charter as now in effect;

(i) Certificate of Trust of Franklin Strategic Mortgage
Portfolio dated September 23, 1992

(ii) Agreement and Declaration of Trust of Franklin
Strategic Mortgage Portfolio dated September 23, 1992

(2) copies of the existing By-Laws or instruments corresponding
thereto;

(i) By-Laws of Franklin Strategic Mortgage
Portfolio

(ii) Amendment to By-Laws of Franklin Strategic Mortgage
Portfolio effective April 19, 1994

(3) copies of any voting trust agreement with respect to more
than five percent of any class of equity securities of the
Registrant;

Not Applicable

(4) specimens or copies of each security issued by the
Registrant, including copies of all constituent
instruments, defining the rights of the holders of such
securities, and copies of each security being registered;

Not Applicable

(5) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;

(i) Management Agreement between Registrant and Franklin
Institutional Services Corporation dated February
1, 1993

(ii) Amendment to Management Agreement between Registrant
and Franklin Institutional Services Corporation
dated August 1, 1995

(6) copies of each underwriting or distribution contract
between the Registrant and a principal underwriter, and
specimens or copies of all agreements between principal
underwriters and dealers;

(i) Distribution Agreement between Registrant and
Franklin Distributors, Inc. dated February 1, 1993

(ii) Amended and Restated Distribution Agreement
between Registrant and Franklin/Templeton
Distributors, Inc. dated April 23, 1995

(iii) Forms of Dealer Agreements between
Franklin/Templeton Distributors, Inc.
and securities dealers

(7) copies of all bonus, profit sharing, pension or other
similar contracts or arrangements wholly or partly for
the benefit of Trustees or officers of the Registrant in
their capacity as such; any such plan that is not set
forth in a formal document, furnish a reasonably
detailed description thereof;

Not Applicable

(8) copies of all custodian agreements and depository
contracts under Section 17(f) of the Investment Company
Act of 1940 (the "1940 Act"), with respect to securities
and similar investments of the Registrant, including the
schedule of renumeration;

(iii) Copy of Custodian Agreements between Registrant and
Citibank Delaware:
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master
Agreement
3. Short Form Bank Agreement - Deposits and
Disbursements of Funds
Registrant: Franklin Premier Return Fund
Filing: Post Effective Amendment No. 54 to Registration
Statement of Registrant on Form N-1A
File No. 2-12647
Filing Date: February 27, 1995

(ii) Custodian Agreement bewteen Registrant and Bank of
America NT & SA dated February 1, 1993

(iii) Amendment to Custodian Agreement between Registrant
and Bank of America NT & SA dated April 12, 1995

(9) copies of all other material contracts not made in the
ordinary course of business which are to be performed in
whole or in part at or after the date of filing the
Registration Statement;

Not Applicable

(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will
when sold be legally issued, fully paid and nonassessable;

(i) Opinion and Consent of Counsel dated January 8, 1993

(11) copies of any other opinions, appraisals or rulings and
consents to the use thereof relied on in the preparation
of this registration statement and required by Section 7
of the 1933 Act;

(i) Consent of Independent Auditors

(12) all financial statements omitted from Item 23;

Not Applicable

(13) copies of any agreements or understandings made in
consideration for providing the initial capital between
or among the Registrant, the underwriter, adviser,
promoter or initial stockholders and written assurances
from promoters or initial stockholders that their
purchases were made for investment purposes without any
present intention of redeeming or reselling;

(i) Letter of Understanding dated January 25, 1993.

(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant
offers its securities, any instructions thereto and any
other documents making up the model plan. Such form(s)
should disclose the costs and fees charged in connection
therewith;

(i) Copy of model retirement plan
Registrant: AGE High Income Fund, Inc.
Filing: Post Effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989

(15) copies of any plan entered into by Registrant pursuant to
Rule 12b-1 under the 1940 Act, which describes all
material aspects of the financing of distribution of
Registrant's shares, and any agreements with any person
relating to implementation of such plan.

Not Applicable

(16) schedule for computation of each performance quotation
provided in the registration statement in response to Item
22 (which need not be audited).

Not Applicable

(17) Power of Attorney

(i) Power of Attorney dated August 15, 1995

(ii) Certificate of Secretary dated August 15, 1995

(27) (i) Financial Data Schedule for Franklin Strategic Mortgage
Portfolio

Item 25 Persons Controlled by or under Common Control with Registrant

NONE

Item 26 Number of Holders of Securities

As of September 30, 1995 the number of record holders of the only class of
securities of the Registrant was as follows:

Number of
Title of Class Record Holders

Shares of Beneficial 8
Interest

Item 27 Indemnification

See Article III, Section 7 and Article VII, Section 2 of the Agreement
and Declaration of Trust (Exhibit No. 1(ii)) and Article VI of the
By-Laws (Exhibit No. 2(i)) of Registrant.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such Trustee, officer or controlling person in
connection with securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court or appropriate jurisdiction
the question whether such indemnification is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.

Item 28 Business and Other Connections of Investment Adviser

(i) The officers and trustees of the Registrant's investment manager
also serve as officers and/or directors for (1) the adviser's
corporate parent, Franklin Resources, Inc., and/or (2) other
investment companies in the Franklin Group of Funds. In
addition, Mr. Charles B. Johnson is a director of General Host
Corporation. For additional information, please see Part B and
Schedules A and D of Form ADV of the Funds' Investment Manager
(SEC File 801-26292), incorporated herein by reference, which
sets forth the officers and directors of the Investment Manager
and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers
and directors during the past two years.

Item 29 Principal Underwriters

a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of Franklin Gold Fund,
Franklin Premier Return Fund, Franklin Equity Fund, AGE High
Income Fund, Inc., Franklin Custodian Funds, Inc., Franklin Money
Fund, Franklin California Tax-Free Income Fund, Inc., Franklin
Federal Money Fund, Franklin Tax-Exempt Money Fund, Franklin New
York Tax-Free Income Fund, Inc., Franklin Federal Tax-Free Income
Fund, Franklin Tax-Free Trust, Franklin California Tax-Free
Trust, Franklin New York Tax-Free Trust, Franklin Investors
Securities Trust, Institutional Fiduciary Trust, Franklin Value
Investors Trust, Franklin Tax-Advantaged International Bond Fund,
Franklin Tax-Advantaged U.S. Government Securities Fund, Franklin
Tax-Advantaged High Yield Securities Fund, Franklin Municipal
Securities Trust, Franklin Managed Trust, Franklin Strategic
Series, Franklin International Trust, Franklin Real Estate
Securities Trust, Franklin Templeton Global Trust, Franklin
Templeton Money Fund Trust, Franklin Templeton Japan Fund,
Templeton American Trust, Inc., Templeton Capital Accumulator
Fund, Inc., Templeton Developing Markets Trust, Templeton Funds,
Inc., Templeton Global Investment Trust, Templeton Global
Opportunities Trust, Templeton Growth Fund, Inc., Templeton
Income Trust, Templeton Institutional Funds, Inc., Templeton Real
Estate Securities Fund, Templeton Smaller Companies Growth Fund,
Inc., and Templeton Variable Products Series Fund

(b) The information required by this Item 29 with respect to each
director and officer of FTDI is incorporated by reference to Part
B of this N-1A and Schedule A of Form BD filed by FTDI with the
Securities and Exchange Commission pursuant to the Securities Act
of 1934 (SEC File No. 8-5889).

Item 30 Location of Accounts and Records

The accounts, books or other documents required to be maintained by Section
31 (a) of the 1940 Act are kept by the Fund or its shareholder services
agent, Franklin/Templeton Investors Services, Inc., both of whose address is
777 Mariners Island Blvd., San Mateo, CA 94404.

Item 31 Management Services

There are no management-related service contracts not discussed in Part A or
Part B.

Item 32 Undertakings

(a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal
of any trustee or trustees when requested in writing to do so by the
record holders of not less than 10 per cent of the Registrant's
outstanding shares to assist its shareholders in the communicating
with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940.

(b) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each person
to whom a prospectus is delivered a copy of the annual report upon
request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 30th
day of November, 1995.

Franklin Strategic Mortgage Portfolio
(Registrant)
By: Rupert H. Johnson, Jr.*
Rupert H. Johnson, Jr.
President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:

Rupert H. Johnson, Jr.* Principal Executive Officer and
Rupert H. Johnson, Jr. Trustee
Dated: November 30, 1995

Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: November 30, 1995

Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: November 30, 1995

Charles B. Johnson* Trustee
Charles B. Johnson Dated: November 30, 1995

Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: November 30, 1995

Harris J. Ashton* Trustee
Harris J. Ashton Dated: November 30, 1995

Harmon E. Burns* Trustee
Harmon E. Burns Dated: November 30, 1995

S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: November 30, 1995

David W. Garbellano* Trustee
David W. Garbellano Dated: November 30, 1995

Frank W.T. LaHaye* Trustee
Frank W. T. LaHaye Dated: November 30, 1995

*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Power of Attorney
filed herewith)

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

REGISTRATION STATEMENT
EXHIBITS INDEX

EXHIBIT NO. DESCRIPTION LOCATION

EX-99.B1(ii) Certificate of Trust of Franklin Attached
Strategic Mortgage Portfolio dated
September 23, 1992

EX-99.B1(ii) Agreement and Declaration of Trust Attached
of Franklin Strategic Mortgage
Portfolio dated September 23, 1992

EX-99.B2(i) By-Laws of Franklin Strategic Attached
Mortgage Portfolio

EX-99.B2(ii) Amendment to By-Laws of Franklin Attached
Strategic Mortgage Portfolio
effective April 19, 1994

EX-99.B5(i) Management Agreement between Attached
Registrant and Franklin
Institutional Services Corporation
dated February 1, 1993

EX-99.B5(ii) Amendment to Management Agreement Attached
between Registrant and Franklin
Institutional Services Corporation
dated August 1, 1995

EX-99.B6(i) Distribution Agreement between Attached
Registrant and Franklin
Distributors, Inc., dated February
1, 1993

EX-99.B6(ii) Amended and Restated Distribution Attached
Agreement between Registrant and
Franklin/Templeton Distributors,
Inc., dated April 23, 1995

EX-99.B6(iii) Forms of Dealer Agreements between Attached
Franklin/Templeton Distributors, Inc.
and securities dealers

EX-99.B8(i) Form of Custodian Agreements *
between Registrant and Citibank
Delaware

EX-99.B8(ii) Custodian Agreement between Attached
Registrant and Bank of America NT &
SA dated February 1, 1993

EX-99.B8(iii) Amendment to Custodian Agreement Attached
between Registrant and Bank of
America NT & SA dated April 12, 1995

EX-99.B10(i) Opinion and Consent of Counsel Attached
dated January 8, 1993

EX-99.B11(i) Consent of Independent Auditors Attached

EX-99.B13(i) Letter of Understanding dated Attached
January 25, 1993

EX-99.14(i) Copy of Model Retirement Plan *

EX-99.B17(i) Power of Attorney for Attached
dated August 15, 1995

EX-99.B17(ii) Certificate of Secretary Attached
dated August 15, 1995

EX-27.(i) Financial Data Schedule for Attached
Franklin Strategic Mortgage
Portfolio

*Incorporated by reference

CERTIFICATE OF TRUST

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

a Delaware Business Trust

THIS Certificate of Trust of the FRANKLIN STRATEGIC MORTGAGE
PORTFOLIO (the "Trust"), dated as of this 23rd day of September, 1992, is being
duly executed and filed, in order to form a business trust pursuant to the
Delaware Business Trust Act (the "Act"), Del. Code Ann. tit. 12,
ss.ss.3801-3819.

1. NAME. The name of the business trust formed hereby is
"Franklin Strategic Mortgage Portfolio."

2. REGISTERED OFFICE AND REGISTERED AGENT. The Trust will become,
prior to the issuance of beneficial interests, a registered investment company
under the Investment Company Act of 1940, as amended. Therefore, in accordance
with section 3807(b) of the Act, the Trust has and shall maintain in the State
of Delaware a registered office and a registered agent for service of process.

(A) REGISTERED OFFICE. The registered office of the
Trust in Delaware is The Corporation Trust Company, 1209 Orange
Street, Wilmington, Delaware 19801.

(B) REGISTERED AGENT. The registered agent for service of
process on the Trust in Delaware is The Corporation Trust Company.

3. LIMITATION ON LIABILITY. Pursuant to section 3804 of the Act, in
the event that the Trust's governing instrument, as defined in section 3801(f)
of the Act, creates one or more series as provided in section 3806(b)(2) of the
Act, the debts, liabilities, obligations and expenses incurred, contracted for
or otherwise existing with respect to a particular series of the Trust shall be
enforceable against the assets of such series only, and not against the assets
of the Trust generally.

IN WITNESS WHEREOF, the Trustees named below do hereby
execute this Certificate of Trust as of the date first-above written.

/s/ Franklin H. Abbott, III /s/ Charles B. Johnson
Frank H. Abbott, III Charles B. Johnson
1045 Sansome Street 777 Mariners Island Blvd.
San Francisco, CA 94111 San Mateo, CA 94404

/s/ Harris J. Ashton /s/ Rupert H. Johnson, Jr.
Harris J. Ashton Rupert H. Johnson, Jr.
Metro Center, One Station Place 777 Mariners Island Blvd.
Stamford, CT 06904 San Mateo, CA 94404

/s/ S. Joseph Fortunato /s/ David W. Garbellano
S. Joseph Fortunato David W. Garbellano
Park Avenue at Morris County 111 New Montgomery St. #402
P.O. Box 1945 San Francisco, CA 94105
Morristown, NJ 07962-1945

/s/ Frank W. T. LaHaye /s/ Henry L. Jamieson
Frank W. T. LaHaye Henry L. Jamieson
20833 Stevens Creek Blvd. 777 Mariners Island Blvd.
Suite 102 San Mateo, CA 94404
Cupertino, CA 95014

Effective as of
September 23, 1992

AGREEMENT AND DECLARATION OF TRUST

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

a Delaware Business Trust

Principal Place of Business:

777 Mariners Island Boulevard
San Mateo, California 94404

TABLE OF CONTENTS

ARTICLE I
Name and Definitions
Section 1. Name
Section 2. Definitions
(a) Trust
(b) Trust Property
(c) Trustees
(d) Shares
(e) Shareholder
(f) Person
(g) 1940 Act
(h) Commission and Principal
Underwriter
(i) Declaration of Trust
(j) By-Laws
(k) Interested Person
(l) Investment Manager
(m) Series

ARTICLE II
Purpose of Trust

ARTICLE III
Shares
Section 1. Division of Beneficial Interest
Section 2. Ownership of Shares
Section 3. Investments in the Trust
Section 4. Status of Shares and Limitation of
Personal Liability
Section 5. Power of Board of Trustees to Change
Provisions Relating to Shares
Section 6. Establishment and Designation of
Shares
(a) Assets Held with Respect to a Particular Series
(b) Liabilities Held with Respect to a Particular
Series
(c) Dividends, Distributions, Redemptions, and
Repurchases
(d) Voting
(e) Equality
(f) Fractions
(g) Exchange Privilege
(h) Combination of Series
(i) Elimination of Series
Section 7. Indemnification of Shareholders

ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure
Section 2. Effect of Death, Resignation, etc. of a Trustee
Section 3. Powers
Section 4. Payment of Expenses by the Trust
Section 5. Payment of Expenses by Shareholders
Section 6. Ownership of Assets of the Trust
Section 7. Service Contracts

ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers
Section 2. Voting Power and Meetings
Section 3. Quorum and Required Vote
Section 4. Action by Written Consent
Section 5. Record Dates
Section 6. Additional Provisions

ARTICLE VI
Net Asset Value, Distributions, and Redemptions
Section 1. Determination of Net Asset Value,
Net Income, and Distributions
Section 2. Redemptions and Repurchases
Section 3. Redemptions at the Option of the Trust

ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation
Section 2. Indemnification and Limitation of Liability
Section 3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety
Section 4. Insurance

ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing
with Trustees
Section 2. Termination of Trust or Series
Section 3. Merger and Consolidation
Section 4. Amendments
Section 5. Filing of Copies, References, Headings
Section 6. Applicable Law
Section 7. Provisions in Conflict with Law or
Regulations
Section 8. Business Trust Only
Section 9. Use of the name "Franklin"

AGREEMENT AND DECLARATION OF TRUST

Franklin Strategic Mortgage Portfolio

WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and entered
into as of the date set forth below by the Trustees named hereunder for the
purpose of forming a Delaware business trust in accordance with the provisions
hereinafter set forth,

NOW, THEREFORE, the Trustees hereby direct that a Certificate of
Trust be filed with the Office of the Secretary of State of the State of
Delaware and do hereby declare that the Trustees will hold IN TRUST all cash,
securities and other assets which the Trust now possesses or may hereafter
acquire from time to time in any manner and manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders of
Shares in this Trust.

I. Name and Definitions

1. Name. This trust shall be known as "Franklin Strategic
Mortgage Portfolio" and the Trustees shall conduct the business of the Trust
under that name or any other name as they may from time to time determine.

2. Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:

(a) The "Trust" refers to the Delaware business trust
established by this Agreement and Declaration of Trust, as amended from time to
time;

(b) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust, including without limitation the rights referenced in Article
VIII, Section 9 hereof;

(c) "Trustees" refers to the persons who have signed this Agreement
and Declaration of Trust, so long as they continue in office in accordance with
the terms hereof, and all other persons who may from time to time be duly
elected or appointed to serve on the Board of Trustees in accordance with the
provisions hereof, and reference herein to a Trustee or the Trustees shall
refer to such person or persons in their capacity as trustees hereunder;

(d) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;

(e) "Shareholder" means a record owner of outstanding Shares;

(f) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;

(g) The "1940 Act" refers to the Investment Company Act of
1940 and the Rules and Regulations thereunder, all as amended from time to
time;

(h) The terms "Commission" and "Principal Underwriter" shall have
the respective meanings given them in Section 2(a)(7) and Section (2)(a)(29) of
the 1940 Act;

(i) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;

(j) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time and incorporated herein by reference;

(k) The term "Interested Person" has the meaning given it in
Section 2(a)(19) of the 1940 Act;

(l) "Investment Manager" or "Manager" means a party
furnishing services to the Trust pursuant to any contract described in
Article IV, Section 7(a) hereof;

(m) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III and shall
mean an entity such as that described in Section 18(f)(2) of the 1940 Act, and
subject to Rule 18f-2 thereunder.

II. Purpose of Trus t

The purpose of the Trust is to conduct, operate and carry on the
business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities.

III. Shares

1. Division of Beneficial Interest. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, with a
par value of $ .01 per Share. The Trustees may authorize the division of Shares
into separate Series and the division of Series into separate classes of Shares.
The different Series shall be established and designated, and the variations in
the relative rights and preferences as between the different Series shall be
fixed and determined, by the Trustees. If only one or no Series (or classes)
shall be established, the Shares shall have the rights and preferences provided
for herein and in Article III, Section 6 hereof to the extent relevant and not
otherwise provided for herein, and all references to Series (and classes) shall
be construed (as the context may require) to refer to the Trust.

Subject to the provisions of Section 6 of this Article III, each
Share shall have voting rights as provided in Article V hereof, and holders of
the Shares of any Series shall be entitled to receive dividends, when, if and as
declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Shares shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions upon termination of
the Trust or of such Series made pursuant to Article VIII, Section 4 hereof. All
dividends and distributions shall be made ratably among all Shareholders of a
particular (class of a) Series from the assets held with respect to such Series
according to the number of Shares of such (class of such) Series held of record
by such Shareholder on the record date for any dividend or distribution or on
the date of termination, as the case may be. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust or any Series. The Trustees may from time to time
divide or combine the Shares of any particular Series into a greater or lesser
number of Shares of that Series without thereby materially changing the
proportionate beneficial interest of the Shares of that Series in the assets
held with respect to that Series or materially affecting the rights of Shares of
any other Series.

2. Ownership of Shares. The ownership of Shares shall be recorded on
the books of the Trust or a transfer or similar agent for the Trust, which books
shall be maintained separately for the Shares of each Series (or class). No
certificates certifying the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the transfer of Shares of each
Series (or class) and similar matters. The record books of the Trust as kept by
the Trust or any transfer or similar agent, as the case may be, shall be
conclusive as to who are the Shareholders of each Series (or class) and as to
the number of Shares of each Series (or class) held from time to time by each.

3. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize. Each investment
shall be credited to the individual Shareholder's account in the form of full
and fractional Shares of the Trust, in such Series (or class) as the purchaser
shall select, at the net asset value per Share next determined for such Series
(or class) after receipt of the investment; provided, however, that the Trustees
may, in their sole discretion, impose a sales charge upon investments in the
Trust.

4. Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the existence of the
Trust shall not operate to terminate the Trust, nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders as partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust shall have any power to bind personally any
Shareholders, nor, except as specifically provided herein, to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.

5. Power of Board of Trustees to Change Provisions Relating to
Shares. Notwithstanding any other provisions of this Declaration of Trust and
without limiting the power of the Board of Trustees to amend the Declaration of
Trust as provided elsewhere herein, the Board of Trustees shall have the power
to amend this Declaration of Trust, at any time and from time to time, in such
manner as the Board of Trustees may determine in their sole discretion, without
the need for Shareholder action, so as to add to, delete, replace or otherwise
modify any provisions relating to the Shares contained in this Declaration of
Trust, provided that before adopting any such amendment without Shareholder
approval the Board of Trustees shall determine that it is consistent with the
fair and equitable treatment of all Shareholders or that Shareholder approval is
not otherwise required by the 1940 Act or other applicable law. If Shares have
been issued, Shareholder approval shall be required to adopt any amendments to
this Declaration of Trust which would adversely affect to a material degree the
rights and preferences of the Shares of any Series (or class) or to increase or
decrease the par value of the Shares of any Series (or class).

Subject to the foregoing Paragraph, the Board of Trustees may amend
the Declaration of Trust to amend any of the provisions set forth in paragraphs
(a) through (i) of Section 6 of this Article III.

6. Establishment and Designation of Shares. The establishment and
designation of any Series (or class) of Shares shall be effective upon the
resolution by a majority of the then Trustees, adopting a resolution which sets
forth such establishment and designation and the relative rights and preferences
of such Series (or class). Each such resolution shall be incorporated herein by
reference upon adoption.

Shares of each Series (or class) established pursuant to this
Section 6, unless otherwise provided in the resolution establishing such Series,
shall have the following relative rights and preferences:

(a) Assets Held with Respect to a Particular Series. All
consideration received by the Trust for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably be held with respect to that Series for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the books of
account of the Trust. Such consideration, assets, income, earnings, profits and
proceeds thereof, from whatever source derived, including, without limitation,
any proceeds derived from the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment of such proceeds, in
whatever form the same may be, are herein referred to as "assets held with
respect to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not readily
identifiable as assets held with respect to any particular Series (collectively
"General Assets"), the Trustees shall allocate such General Assets to, between
or among any one or more of the Series in such manner and on such basis as the
Trustees, in their sole discretion, deem fair and equitable, and any General
Asset so allocated to a particular Series shall be held with respect to that
Series. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all Series for all purposes.

(b) Liabilities Held with Respect to a Particular Series. The assets
of the Trust held with respect to each particular Series shall be charged
against the liabilities of the Trust held with respect to that Series and all
expenses, costs, charges and reserves attributable to that Series, and any
general liabilities of the Trust which are not readily identifiable as being
held with respect to any particular Series shall be allocated and charged by the
Trustees to and among any one or more of the Series in such manner and on such
basis as the Trustees in their sole discretion deem fair and equitable. The
liabilities, expenses, costs, charges, and reserves so charged to a Series are
herein referred to as "liabilities held with respect to" that Series. Each
allocation of liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the holders of all Series for all purposes.
All Persons who have extended credit which has been allocated to a particular
Series, or who have a claim or contract which has been allocated to any
particular Series, shall look, and shall be required by contract to look
exclusively, to the assets of that particular Series for payment of such credit,
claim, or contract. In the absence of an express contractual agreement so
limiting the claims of such creditors, claimants and contract providers, each
creditor, claimant and contract provider will be deemed nevertheless to have
impliedly agreed to such limitation unless an express provision to the contrary
has been incorporated in the written contract or other document establishing the
claimant relationship.

(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution including, without
limitation, any distribution paid upon termination of the Trust or of any Series
(or class) with respect to, nor any redemption or repurchase of, the Shares of
any Series (or class) shall be effected by the Trust other than from the assets
held with respect to such Series, nor, except as specifically provided in
Section 7 of this Article III, shall any Shareholder of any particular Series
otherwise have any right or claim against the assets held with respect to any
other Series except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.

(d) Voting. All Shares of the Trust entitled to vote on a matter
shall vote separately by Series (and, if applicable, by class): that is, the
Shareholders of each Series (or class) shall have the right to approve or
disapprove matters affecting the Trust and each respective Series (or class) as
if the Series (or classes) were separate companies. There are, however, two
exceptions to voting by separate Series (or classes). First, if the 1940 Act
requires all Shares of the Trust to be voted in the aggregate without
differentiation between the separate Series (or classes), then all the Trust's
Shares shall be entitled to vote on a one-vote-per-Share basis. Second, if any
matter affects only the interests of some but not all Series (or classes), then
only the Shareholders of such affected Series (or classes) shall be entitled to
vote on the matter.

(e) Equality. All the Shares of each particular Series shall
represent an equal proportionate undivided interest in the assets held with
respect to that Series (subject to the liabilities held with respect to that
Series and such rights and preferences as may have been established and
designated with respect to classes of Shares within such Series), and each Share
of any particular Series shall be equal to each other Share of that Series.

(f) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.

(g) Exchange Privilege. The Trustees shall have the authority to
provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.

(h) Combination of Series. The Trustees shall have the authority,
without the approval of the Shareholders of any Series unless otherwise required
by applicable law, to combine the assets and liabilities held with respect to
any two or more Series into assets and liabilities held with respect to a single
Series.

(i) Elimination of Series. At any time that there are no Shares
outstanding of any particular Series (or class) previously established and
designated, the Trustees may by resolution of a majority of the then Trustees
abolish that Series (or class) and rescind the establishment and designation
thereof.

7. Indemnification of Shareholders. If any Shareholder or former
Shareholder shall be exposed to liability by reason of a claim or demand
relating to his or her being or having been a Shareholder, and not because of
his or her acts or omissions, the Shareholder or former Shareholder (or his or
her heirs, executors, administrators, or other legal representatives or in the
case of a corporation or other entity, its corporate or other general successor)
shall be entitled to be held harmless from and indemnified out of the assets of
the Trust against all loss and expense arising from such claim or demand.

IV. The Board of Trustees

1. Number, Election and Tenure. The number of Trustees constituting
the Board of Trustees shall be fixed from time to time by a written instrument
signed, or by resolution approved at a duly constituted meeting, by a majority
of the Board of Trustees, provided, however, that the number of Trustees shall
in no event be less than one (1) nor more than fifteen (15). The Board of
Trustees, by action of a majority of the then Trustees at a duly constituted
meeting, may fill vacancies in the Board of Trustees or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he or she dies, resigns, is declared bankrupt or incompetent by a
court of appropriate jurisdiction, or is removed, or, if sooner, until the next
meeting of Shareholders called for the purpose of electing Trustees and until
the election and qualification of his or her successor. Any Trustee may resign
at any time by written instrument signed by him and delivered to any officer of
the Trust or to a meeting of the Trustees. Such resignation shall be effective
upon receipt unless specified to be effective at some other time. Except to the
extent expressly provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any compensation for
any period following his or her resignation or removal, or any right to damages
on account of such removal. The Shareholders may fix the number of Trustees and
elect Trustees at any meeting of Shareholders called by the Trustees for that
purpose. Any Trustee may be removed at any meeting of Shareholders by a vote of
two-thirds of the outstanding Shares of the Trust. A meeting of Shareholders for
the purpose of electing or removing one or more Trustees may be called (i) by
the Trustees upon their own vote, or (ii) upon the demand of Shareholders owning
10% or more of the Shares of the Trust in the aggregate.

2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination, resignation, retirement, removal, or incapacity of one or more
Trustees, or all of them, shall not operate to annul the Trust or to revoke any
existing agency created pursuant to the terms of this Declaration of Trust.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is
filled as provided in Article IV, Section 1, the Trustees in office, regardless
of their number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by this Declaration of Trust.
As conclusive evidence of such vacancy, a written instrument certifying the
existence of such vacancy may be executed by an officer of the Trust or by a
majority of the Board of Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to fill vacancies, the Trust's
Investment Manager(s) are empowered to appoint new Trustees subject to the
provisions of Section 16(a) of the 1940 Act.

3. Powers. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Board of Trustees, and such
Board shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in securities transactions of all
kinds on behalf of the Trust. Trustees in all instances shall act as principals,
and are and shall be free from the control of the Shareholders. The Trustees
shall have full power and authority to do any and all acts and to make and
execute any and all contracts and instruments that they may consider necessary
or appropriate in connection with the administration of the Trust. Without
limiting the foregoing, the Trustees may: adopt By-Laws not inconsistent with
this Declaration of Trust providing for the regulation and management of the
affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; fill vacancies in or
remove from their number, and may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; appoint from their own
number and establish and terminate one or more committees consisting of two or
more Trustees which may exercise the powers and authority of the Board of
Trustees to the extent that the Trustees determine; employ one or more
custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities or with a Federal Reserve
Bank, retain a transfer agent or a shareholder servicing agent, or both; provide
for the issuance and distribution of Shares by the Trust directly or through one
or more Principal Underwriters or otherwise; redeem, repurchase and transfer
Shares pursuant to applicable law; set record dates for the determination of
Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series;
establish from time to time, in accordance with the provisions of Article III,
Section 6 hereof, any Series (or class) of Shares, each such Series (or class)
to operate as a separate and distinct investment medium and with separately
defined investment objectives and policies and distinct investment purpose; and
in general delegate such authority as they consider desirable to any officer of
the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian, transfer or shareholder servicing agent, or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees. Unless otherwise specified or required by law,
any action by the Board of Trustees shall be deemed effective if approved or
taken by a majority of the Trustees then in office. Any action required or
permitted to be taken at any meeting of the Board of Trustees, or any committee
thereof, may be taken without a meeting if all members of the Board of Trustees
or committee (as the case may be) consent thereto in writing, and the writing or
writings are filed with the minutes of the proceedings of the Board of Trustees,
or committee.

Without limiting the foregoing, the Trust shall have power and
authority:

(a) To invest and reinvest cash, to hold cash uninvested, and to
subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold,
pledge, sell, assign, transfer, exchange, distribute, write options on, lend or
otherwise deal in or dispose of contracts for the future acquisition or delivery
of fixed income or other securities, and securities of every nature and kind,
including, without limitation, all types of bonds, debentures, stocks, preferred
stocks, negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;

(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease,
or write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust or any Series, subject to any
requirements of the 1940 Act;

(c) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such person or persons as the Trustees
shall deem proper, granting to such person or persons such power and discretion
with relation to securities or property as the Trustees shall deem proper;

(d) To exercise powers and right of subscription or
otherwise which in any manner arise out of ownership of securities;

(e) To hold any security or property in a form not indicating that
it is trust property, whether in bearer, unregistered or other negotiable form,
or in its own name or in the name of a custodian or subcustodian or a nominee or
nominees or otherwise or to authorize the custodian or a subcustodian or a
nominee or nominees to deposit the same in a securities depository, subject in
each case to proper safeguards according to the usual practice of investment
companies or any rules or regulations applicable thereto;

(f) To consent to, or participate in, any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;

(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;

(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including but not
limited to claims for taxes;

(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;

(j) To borrow funds or other property in the name of the
Trust exclusively for Trust purposes;

(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;

(l) To purchase and pay for entirely out of Trust Property such
insurance as the Trustees may deem necessary or appropriate for the conduct of
the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, investment adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability; and

(m) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.

The Trust shall not be limited to investing in obligations maturing
before the possible termination of the Trust or one or more of its Series. The
Trust shall not in any way be bound or limited by any present or future law or
custom in regard to investment by fiduciaries. The Trust shall not be required
to obtain any court order to deal with any assets of the Trust or take any other
action hereunder.

4. Payment of Expenses by the Trust. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust or Series
(or class), or partly out of the principal and partly out of income, and to
charge or allocate the same to, between or among such one or more of the Series
(or class) that may be established or designated pursuant to Article III,
Section 6, as they deem fair, all expenses, fees, charges, taxes and liabilities
incurred or arising in connection with the Trust or Series (or class), or in
connection with the management thereof, including, but not limited to, the
Trustees' compensation and such expenses and charges for the services of the
Trust's officers, employees, investment adviser or manager, principal
underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.

5. Payment of Expenses by Shareholders. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series, to pay directly, in advance or arrears,
for charges of the Trust's custodian or transfer, Shareholder servicing or
similar agent, an amount fixed from time to time by the Trustees, by setting off
such charges due from such Shareholder from declared but unpaid dividends owed
such Shareholder and/or by reducing the number of shares in the account of such
Shareholder by that number of full and/or fractional Shares which represents the
outstanding amount of such charges due from such Shareholder.

6. Ownership of Assets of the Trust. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trust, except that
the Trustees shall have power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.

7. Service Contracts.

(a) Subject to such requirements and restrictions as may be set
forth in the By-Laws, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust or for any Series with any corporation,
trust, association or other organization; and any such contract may contain such
other terms as the Trustees may determine, including without limitation,
authority for the Investment Manager or administrator to determine from time to
time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.

(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter for
the Shares of one or more of the Series (or classes) or other securities to be
issued by the Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms as the Trustees may determine.

(c) The Trustees are also empowered, at any time and from time to
time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth in the By-Laws or stipulated by resolution of the Trustees.

(d) The Trustees are further empowered, at any time and from time to
time, to contract with any entity to provide such other services to the Trust or
one or more of the Series, as the Trustees determine to be in the best interests
of the Trust and the applicable Series.

(e) The fact that:

(i) any of the Shareholders, Trustees, or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
Manager, adviser, Principal Underwriter, distributor, or affiliate
or agent of or for any corporation, trust, association, or other
organization, or for any parent or affiliate of any organization
with which an advisory, management or administration contract, or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may have
been or may hereafter be made, or that any such organization, or any
parent or affiliate thereof, is a Shareholder or has an interest in
the Trust, or that

(ii) any corporation, trust, association or other organization
with which an advisory, management or administration contract or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may have
been or may hereafter be made also has an advisory, management or
administration contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trust, associations,
or other organizations, or has other business or interests,

shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.

8. Voting Powers. Subject to the provisions of Article III, Section 6(d), the
Shareholders shall have power to vote only (i) for the election or removal of
Trustees as provided in Article IV, Section 1, and (ii) with respect to such
additional matters relating to the Trust as may be required by this Declaration
of Trust, the By-Laws or any registration of the Trust with the Commission (or
any successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger.

10. Voting Power and Meetings. Meetings of the Shareholders may be called by the
Trustees for the purpose of electing Trustees as provided in Article IV, Section
1 and for such other purposes as may be prescribed by law, by this Declaration
of Trust or by the By-Laws. Meetings of the Shareholders may also be called by
the Trustees from time to time for the purpose of taking action upon any other
matter deemed by the Trustees to be necessary or desirable. A meeting of
Shareholders may be held at any place designated by the Trustees. Written notice
of any meeting of Shareholders shall be given or caused to be given by the
Trustees by mailing such notice at least seven (7) days before such meeting,
postage prepaid, stating the time and place of the meeting, to each Shareholder
at the Shareholder's address as it appears on the records of the Trust. Whenever
notice of a meeting is required to be given to a Shareholder under this
Declaration of Trust or the By-Laws, a written waiver thereof, executed before
or after the meeting by such Shareholder or his or her attorney thereunto
authorized and filed with the records of the meeting, shall be deemed equivalent
to such notice.

11. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more Series (or classes) is to vote as
a single class separate from any other Shares, forty percent (40%) of the Shares
of each such Series (or classes) entitled to vote shall constitute a quorum at a
Shareholder's meeting of that Series. Any meeting of Shareholders may be
adjourned from time to time by a majority of the votes properly cast upon the
question of adjourning a meeting to another date and time, whether or not a
quorum is present, and the meeting may be held as adjourned within a reasonable
time after the date set for the original meeting without further notice. Subject
to the provisions of Article III, Section 6(d), when a quorum is present at any
meeting, a majority of the Shares voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by applicable law.

12. Action by Written Consent. Any action taken by Shareholders may
be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series (or class) entitled to vote separately on the matter
consent to the action in writing and such written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.

13. Record Dates. For the purpose of determining the Shareholders of
any Series (or class) who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than ninety (90) days before the date of any meeting of
Shareholders, as the record date for determining the Shareholders of such Series
(or class) having the right to notice of and to vote at such meeting and any
adjournment thereof, and in such case only Shareholders of record on such record
date shall have such right, notwithstanding any transfer of shares on the books
of the Trust after the record date. For the purpose of determining the
Shareholders of any Series (or class) who are entitled to receive payment of any
dividend or of any other distribution, the Trustees may from time to time fix a
date, which shall be before the date for the payment of such dividend or such
other payment, as the record date for determining the Shareholders of such
Series (or class) having the right to receive such dividend or distribution.
Without fixing a record date the Trustees may for voting and/or distribution
purposes close the register or transfer books for one or more Series for all or
any part of the period between a record date and a meeting of Shareholders or
the payment of a distribution. Nothing in this Section shall be construed as
precluding the Trustees from setting different record dates for different Series
(or classes).

14. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.

V. Net Asset Value, Distributions,
and Redemptions

1. Determination of Net Asset Value, Net Income, and Distributions.
Subject to Article III, Section 6 hereof, the Trustees, in their absolute
discretion, may prescribe and shall set forth in the By-laws or in a duly
adopted vote of the Trustees such bases and time for determining the per Share
or net asset value of the Shares of any Series or net income attributable to the
Shares of any Series, or the declaration and payment of dividends and
distributions on the Shares of any Series, as they may deem necessary or
desirable.

2. Redemptions and Repurchases. The Trust shall purchase such Shares
as are offered by any Shareholder for redemption, upon the presentation of a
proper instrument of transfer together with a request directed to the Trust or a
Person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, in accordance with the By-Laws and applicable law. Payment for said
Shares shall be made by the Trust to the Shareholder within seven days after the
date on which the request is made in proper form. The obligation set forth in
this Section 2 is subject to the provision that in the event that any time the
New York Stock Exchange (the "Exchange") is closed for other than weekends or
holidays, or if permitted by the Rules of the Commission during periods when
trading on the Exchange is restricted or during any emergency which makes it
impracticable for the Trust to dispose of the investments of the applicable
Series or to determine fairly the value of the net assets held with respect to
such Series or during any other period permitted by order of the Commission for
the protection of investors, such obligations may be suspended or postponed by
the Trustees.

The redemption price may in any case or cases be paid wholly or
partly in kind if the Trustees determine that such payment is advisable in the
interest of the remaining Shareholders of the Series for which the Shares are
being redeemed. Subject to the foregoing, the fair value, selection and quantity
of securities or other property so paid or delivered as all or part of the
redemption price may be determined by or under authority of the Trustees. In no
case shall the Trust be liable for any delay of any corporation or other Person
in transferring securities selected for delivery as all or part of any payment
in kind.

3. Redemptions at the Option of the Trust. The Trust shall have the
right at its option and at any time to redeem Shares of any Shareholder at the
net asset value thereof as described in Section 1 of this Article VI: (i) if at
such time such Shareholder owns Shares of any Series having an aggregate net
asset value of less than an amount determined from time to time by the Trustees
prior to the acquisition of said Shares; or (ii) to the extent that such
Shareholder owns Shares of a particular Series equal to or in excess of a
percentage of the outstanding Shares of that Series determined from time to time
by the Trustees; or (iii) to the extent that such Shareholder owns Shares equal
to or in excess of a percentage, determined from time to time by the Trustees,
of the outstanding Shares of the Trust or of any Series.

VI. Compensation and Limitation of
Liability of Trustees

1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or
other services and payment for the same by the Trust.

2. Indemnification and Limitation of Liability. The Trustees shall
not be responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, Manager or Principal Underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee,
and the Trust out of its assets shall indemnify and hold harmless each and every
Trustee from and against any and all claims and demands whatsoever arising out
of or related to each Trustee's performance of his or her duties as a Trustee of
the Trust; provided that nothing herein contained shall indemnify, hold harmless
or protect any Trustee from or against any liability to the Trust or any
Shareholder to which he or she would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.

Every note, bond, contract, instrument, certificate or undertaking
and every other act or thing whatsoever issued, executed or done by or on behalf
of the Trust or the Trustees or any of them in connection with the Trust shall
be conclusively deemed to have been issued, executed or done only in or with
respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.

3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable to the Trust and to
any Shareholder solely for his or her own wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice nor
for failing to follow such advice. The Trustees shall not be required to give
any bond as such, nor any surety if a bond is required.

4. Insurance. The Trustees shall be entitled and empowered to the
fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee or officer in connection with any claim, action, suit or
proceeding in which he or she becomes involved by virtue of his or her capacity
or former capacity with the Trust, whether or not the Trust would have the power
to indemnify him or her against such liability under the provisions of this
Article.

VII. Miscellaneous

1. Liability of Third Persons Dealing with Trustees. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.

2. Termination of Trust or Series. Unless terminated as provided
herein, the Trust shall continue without limitation of time. The Trust may be
terminated at any time by vote of a majority of the Shares of each Series
entitled to vote, voting separately by Series, or by the Trustees by written
notice to the Shareholders. Any Series may be terminated at any time by vote of
a majority of the Shares of that Series or by the Trustees by written notice to
the Shareholders of that Series.

Upon termination of the Trust (or any Series, as the case may be),
after paying or otherwise providing for all charges, taxes, expenses and
liabilities held, severally, with respect to each Series (or the applicable
Series, as the case may be), whether due or accrued or anticipated as may be
determined by the Trustees, the Trust shall, in accordance with such procedures
as the Trustees consider appropriate, reduce the remaining assets held,
severally, with respect to each Series (or the applicable Series, as the case
may be), to distributable form in cash or shares or other securities, or any
combination thereof, and distribute the proceeds held with respect to each
Series (or the applicable Series, as the case may be), to the Shareholders of
that Series, as a Series, ratably according to the number of Shares of that
Series held by the several Shareholders on the date of termination.

3. Merger and Consolidation. The Trustees may cause (i) the Trust or
one or more of its Series to the extent consistent with applicable law to be
merged into or consolidated with another Trust or company, (ii) the Shares of
the Trust or any Series to be converted into beneficial interests in another
business trust (or series thereof) created pursuant to this Section 3 of Article
VIII, or (iii) the Shares to be exchanged under or pursuant to any state or
federal statute to the extent permitted by law. Such merger or consolidation,
Share conversion or Share exchange must be authorized by vote of a majority of
the outstanding Shares of the Trust, as a whole, or any affected Series, as may
be applicable; provided that in all respects not governed by statute or
applicable law, the Trustees shall have power to prescribe the procedure
necessary or appropriate to accomplish a sale of assets, merger or consolidation
including the power to create one or more separate business trusts to which all
or any part of the assets, liabilities, profits or losses of the Trust may be
transferred and to provide for the conversion of Shares of the Trust or any
Series into beneficial interests in such separate business trust or trusts (or
series thereof).

4. Amendments. This Declaration of Trust may be restated and/or
amended at any time by an instrument in writing signed by a majority of the then
Trustees and, if required, by approval of such amendment by Shareholders in
accordance with Article V, Section 3 hereof. Any such restatement and/or
amendment hereto shall be effective immediately upon execution and approval. The
Certificate of Trust of the Trust may be restated and/or amended by a similar
procedure, and any such restatement and/or amendment shall be effective
immediately upon filing with the Office of the Secretary of State of the State
of Delaware or upon such future date as may be stated therein.

5. Filing of Copies, References, Headings. The original or a copy of
this instrument and of each restatement and/or amendment hereto shall be kept at
the office of the Trust where it may be inspected by any Shareholder. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such restatements and/or amendments have been made and as
to any matters in connection with the Trust hereunder; and, with the same effect
as if it were the original, may rely on a copy certified by an officer of the
Trust to be a copy of this instrument or of any such restatements and/or
amendments. In this instrument and in any such restatements and/or amendment,
references to this instrument, and all expressions like "herein," "hereof" and
"hereunder," shall be deemed to refer to this instrument as amended or affected
by any such restatements and/or amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. Whenever the
singular number is used herein, the same shall include the plural; and the
neuter, masculine and feminine genders shall include each other, as applicable.
This instrument may be executed in any number of counterparts each of which
shall be deemed an original.

6. Applicable Law. This Agreement and Declaration of Trust is
created under and is to be governed by and construed and administered according
to the laws of the State of Delaware and the Delaware Business Trust Act, as
amended from time to time (the "Act"). The Trust shall be a Delaware business
trust pursuant to such Act, and without limiting the provisions hereof, the
Trust may exercise all powers which are ordinarily exercised by such a business
trust.

7. Provisions in Conflict with Law or Regulations.

(a) The provisions of the Declaration of Trust are severable, and if
the Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of the Declaration of Trust; provided, however, that such determination
shall not affect any of the remaining provisions of the Declaration of Trust or
render invalid or improper any action taken or omitted prior to such
determination.

(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.

8. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Business Trust Act, as amended
from time to time (the "Act"), and thereby to create only the relationship of
trustee and beneficial owners within the meaning of such Act between the
Trustees and each Shareholder. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment, or any form of legal relationship other than a business
trust pursuant to such Act. Nothing in this Declaration of Trust shall be
construed to make the Shareholders, either by themselves or with the Trustees,
partners or members of a joint stock association.

9. Use of the name "Franklin". The name "Franklin" and all rights to
the use of the name "Franklin" belongs to Franklin Resources, Inc. ("Franklin"),
the sponsor of the Trust. Franklin has consented to the use by the Trust of the
identifying word "Franklin" and has granted to the Trust a non-exclusive license
to use the name "Franklin" as part of the name of the Trust and the name of any
Series of Shares. In the event Franklin or an affiliate of Franklin is not
appointed as Manager and/or Principal Underwriter or ceases to be the Manager
and/or Principal Underwriter of the Trust or of any Series using such names, the
non-exclusive license granted herein may be revoked by Franklin and the Trust
shall cease using the name "Franklin" as part of its name or the name of any
Series of Shares, unless otherwise consented to by Franklin or any successor to
its interests in such names.

[The remainder of this page has been
left blank intentionally.]

IN WITNESS WHEREOF, the Trustees named below do hereby make and
enter into this Declaration of Trust as of the 23rd day of September, 1992.

/s/ Frank H. Abbott, III /s/ Charles B. Johnson
Frank H. Abbott, III Charles B. Johnson
1045 Sansome Street 777 Mariners Island Blvd.
San Francisco, CA 94111 San Mateo, CA 94404

/s/ Harris J. Ashton /s/ Rupert H. Johnson, Jr.
Harris J. Ashton Rupert H. Johnson, Jr.
Metro Center, One Station Place 777 Mariners Island Blvd.
Stamford, CT 06904 San Mateo, CA 94404

/s/ Frank W. T. LaHaye /s/ Henry L. Jamieson
Frank W. T. LaHaye Henry L. Jamieson
20833 Stevens Creek Blvd. 777 Mariners Island Blvd.
Suite 102 San Mateo, CA 94404
Cupertino, CA 95014

THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 777 Mariners Island
Boulevard, San Mateo, California 94404

BY-LAWS

for the regulation, except as
otherwise provided by statute or
the Agreement and Declaration of Trust of

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
a Delaware Business Trust

<PAGE>

TABLE OF CONTENTS

BY-LAWS
Franklin Strategic Mortgage Portfolio

ARTICLE I OFFICES

1. PRINCIPAL OFFICE
2. DELAWARE OFFICE
3. OTHER OFFICES

ARTICLE II MEETINGS OF SHAREHOLDERS

1. PLACE OF MEETINGS
2. CALL OF MEETING
3. NOTICE OF SHAREHOLDERS' MEETING
4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
5. ADJOURNED MEETING; NOTICE
6. VOTING
7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS
8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS
10. PROXIES
11. INSPECTORS OF ELECTION

ARTICLE III TRUSTEES

1. POWERS
2. NUMBER OF TRUSTEES
3. VACANCIES
4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE
5. REGULAR MEETINGS
6. SPECIAL MEETINGS
7. QUORUM
8. WAIVER OF NOTICE
9. ADJOURNMENT
10. NOTICE OF ADJOURNMENT
11. ACTION WITHOUT A MEETING
12. FEES AND COMPENSATION OF TRUSTEES
13. DELEGATION OF POWER TO OTHER TRUSTEES

ARTICLE IV COMMITTEES

1. COMMITTEES OF TRUSTEES
2. MEETINGS AND ACTION OF COMMITTEES

ARTICLE V OFFICERS

1. OFFICERS
2. ELECTION OF OFFICERS
3. SUBORDINATE OFFICERS
4. REMOVAL AND RESIGNATION OF OFFICERS
5. VACANCIES IN OFFICES
6. CHAIRMAN OF THE BOARD
7. PRESIDENT
8. VICE PRESIDENTS
9. SECRETARY
10. TREASURER

ARTICLE VI INDEMNIFICATION OF TRUSTEES, OFFICERS,
EMPLOYEES AND OTHER AGENTS

1. AGENTS, PROCEEDINGS AND EXPENSES
2. ACTIONS OTHER THAN BY TRUST
3. ACTIONS BY THE TRUST
4. EXCLUSION OF INDEMNIFICATION
5. SUCCESSFUL DEFENSE BY AGENT
6. REQUIRED APPROVAL
7. ADVANCE OF EXPENSES
8. OTHER CONTRACTUAL RIGHTS
9. LIMITATIONS
10. INSURANCE
11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN

ARTICLE VII RECORDS AND REPORTS

1. MAINTENANCE AND INSPECTION OF SHARE REGISTER
2. MAINTENANCE AND INSPECTION OF BY-LAWS
3. MAINTENANCE AND INSPECTION OF OTHER RECORDS
4. INSPECTION BY TRUSTEES
5. FINANCIAL STATEMENTS

ARTICLE VIII GENERAL MATTERS

1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS
2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED
3. CERTIFICATES FOR SHARES
4. LOST CERTIFICATES
5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST
6. FISCAL YEAR
ARTICLE IX AMENDMENTS

1. AMENDMENT BY SHAREHOLDERS
2. AMENDMENT BY TRUSTEES
3. INCORPORATION BY REFERENCE INTO AGREEMENT AND DECLARATION OF TRUST
OF THE TRUST

<PAGE>

ARTICLE I
OFFICES

Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and,
from time to time, may change the location of the principal executive office of
Franklin Strategic Mortgage Portfolio (the "Trust") at any place within or
outside the State of Delaware.

Section 2. DELAWARE OFFICE. The Board of Trustees shall establish a
registered office in the State of Delaware and shall appoint as the Trust's
registered agent for service of process in the State of Delaware an individual
resident of the State of Delaware or a Delaware corporation or a foreign
corporation authorized to transact business in the State of Delaware; in each
case the business office of such registered agent for service of process shall
be identical with the registered Delaware office of the Trust.

Section 3. OTHER OFFICES. The Board of Trustees may at any time
establish branch or subordinate offices at any place or places where the Trust
intends to do business.

ARTICLE II
MEETINGS OF SHAREHOLDERS

Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be
held at any place designated by the Board of Trustees. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the Trust.

Section 2. CALL OF MEETING. A meeting of the shareholders may be
called at any time by the Board of Trustees or by the Chairman of the Board or
by the President.

Section 3. NOTICE OF SHAREHOLDERS I MEETING. All notices of meetings
of shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than seven (7) nor more than seventy-five (75) days
before the date of the meeting. The notice shall specify (i) the place, date and
hour of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which Trustees are to be elected also
shall include the name of any nominee or nominees whom at the time of the notice
are intended to be presented for election.

If action is proposed to be taken at any meeting for approval of (i)
a contract or transaction in which a Trustee has a direct or indirect financial
interest, (ii) an amendment of the Agreement and Declaration of Trust of the
Trust, (iii) a reorganization of the Trust, or (iv) a voluntary dissolution of
the Trust, the notice shall also state the general nature of that proposal.

Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of
any meeting of shareholders shall be given either personally or by first-class
mail or telegraphic or other written communication, charges prepaid, addressed
to the shareholder at the address of that shareholder appearing on the books of
the Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.

If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust by the
United States Postal Service marked to indicate that the Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if these shall be available to the shareholder on written demand of the
shareholder at the principal executive office of the Trust for a period of one
year from the date of the giving of the notice.

An affidavit of the mailing or other means of giving any notice of
any shareholder's meeting shall be executed by the Secretary, Assistant
Secretary or any transfer agent of the Trust giving the notice and shall be
filed and maintained in the minute book of the Trust.

Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting,
whether or not a quorum is present, may be adjourned from time to time by the
vote of the majority of the shares represented at that meeting, either in person
or by proxy.

When any meeting of the shareholders is adjourned to another time or
place, notice need not be given of the adjourned meeting at which the
adjournment is taken, unless a new record date of the adjourned meeting is fixed
or unless the adjournment is for more than sixty (60) days from the date set for
the original meeting, in which case the Board of Trustees shall set a new record
date. Notice of any such adjourned meeting shall be given to each shareholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 3 and 4 of this Article II. At any adjourned meeting, the
Trust may transact any business which might have been transacted at the original
meeting.

Section 6. VOTING. The shareholders entitled to vote at any meeting
of shareholders shall be determined in accordance with the provisions of the
Agreement and Declaration of Trust of the Trust, as in effect at such time. The
shareholders' vote may be by voice vote or by ballot, provided, however, that
any election for Trustees must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of Trustees, any
shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to the total shares that the shareholder is
entitled to vote on such proposal.

Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of shareholders.

Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.

Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action which may be taken at any meeting of shareholders may be taken
without a meeting and without prior notice if a consent in writing setting forth
the action so taken is signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take that action at a meeting at which all shares entitled to vote on that
action were present and voted. All such consents shall be filed with the
Secretary of the Trust and shall be maintained in the Trust's records. Any
shareholder giving a written consent or the shareholder's proxy holders or a
transferee of the shares or a personal representative of the shareholder or
their respective proxy holders may revoke the consent by a writing received by
the Secretary of the Trust before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.

If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a Trustee has a
direct or indirect financial interest, (ii) indemnification of agents of the
Trust, and (iii) a reorganization of the Trust, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.

Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to action without a meeting, the
Board of Trustees may fix in advance a record date which shall not be more than
ninety (90) days nor less than seven (7) days before the date of any such
meeting as provided in the Agreement and Declaration of Trust of the Trust.

If the Board of Trustees does not so fix a record date:

(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at
the close of business on the business day next preceding the
day on which notice is given or if notice is waived, at the
close of business on the business day next preceding the day
on which the meeting is held.

(b) The record date for determining shareholders entitled to
give consent to action in writing without a meeting, (i)
when no prior action by the Board of Trustees has been
taken, shall be the day on which the first written consent
is given, or (ii) when prior action of the Board of Trustees
has been taken, shall be at the close of business on the day
on which the Board of Trustees adopt the resolution relating
to that action or the seventy-fifth day before the date of
such other action, whichever is later.

Section 10. PROXIES. Every person entitled to vote for Trustees or
on any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the Secretary of the Trust. A proxy shall be deemed signed if the shareholder's
name is placed on the proxy (whether by manual signature, typewriting,
telegraphic transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it before the vote pursuant to that proxy by a writing
delivered to the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in person by the
person executing that proxy; or (ii) written notice of the death or incapacity
of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted; provided however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless otherwise
provided in the proxy.

Section 11. INSPECTORS OF ELECTION. Before any meeting of
shareholders, the Board of Trustees may appoint any persons other than nominees
for office to act as inspectors of election at the meeting or its adjournment.
If no inspectors of election are so appointed, the chairman of the meeting may
and on the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may and on the
request of any shareholder or a shareholder's proxy, shall appoint a person to
fill the vacancy.

These inspectors shall:

(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the
existence of a quorum and the authenticity, validity and
effect of proxies;

(b) Receive votes, ballots or consents;

(d) Count and tabulate all votes or consents;

(e) Determine when the polls shall close;

(f) Determine the result; and

(g) Do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.

ARTICLE III
TRUSTEES

Section 1. POWERS. Subject to the applicable provisions of the
Agreement and Declaration of Trust of the Trust and these By-Laws relating to
action required to be approved by the shareholders or by the outstanding shares,
the business and affairs of the Trust shall be managed and all powers shall be
exercised by or under the direction of the Board of Trustees.

Section 2. NUMBER OF TRUSTEES. The exact number of Trustees within
the limits specified in the Agreement and Declaration of Trust of the Trust
shall be fixed from time to time by a written instrument signed or a resolution
approved at a duly constituted meeting by a majority of the Board of Trustees.

Section 3. VACANCIES. Vacancies on the Board of Trustees may be
filled by a majority of the remaining Trustees, though less than a quorum, or by
a sole remaining Trustee, unless the Board of Trustees calls a meeting of
shareholders for the purposes of electing Trustees. In the event that at any
time less than a majority of the Trustees holding office at that time were so
elected by the holders of the outstanding voting securities of the Trust, the
Board of Trustees shall forthwith cause to be held as promptly as possible, and
in any event within sixty (60) days, a meeting of such holders for the purpose
of electing Trustees to fill any existing vacancies on the Board of Trustees,
unless such period is extended by order of the United States Securities and
Exchange Commission.

Notwithstanding the above, whenever and for so long as the Trust is
a participant in or otherwise has in effect a Plan under which the Trust may be
deemed to bear expenses of distributing its shares as that practice is described
in Rule 12b-1 under the Investment Company Act of 1940, then the selection and
nomination of the Trustees who are not interested persons of the Trust (as that
term is defined in the Investment Company Act of 1940) shall be, and is,
committed to the discretion of such disinterested Trustees.

Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings
of the Board of Trustees may be held at any place that has been designated from
time to time by resolution of the Board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the Trust.
Any meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all Trustees participating in the meeting
can hear one another and all such Trustees shall be deemed to be present in
person at the meeting.

Section 5. REGULAR MEETINGS. Regular meetings of the Board of
Trustees shall be held without call at such time as shall from time to time be
fixed by the Board of Trustees. Such regular meetings may be held without
notice.

Section 6. SPECIAL MEETINGS. Special meetings of the Board of
Trustees for any purpose or purposes may be called at any time by the Chairman
of the Board or the President or any Vice President or the Secretary or any
two (2) Trustees.

Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Trustee or sent by first-class mail or
telegram, charges prepaid, addressed to each Trustee at that Trustee's address
as it is shown on the records of the Trust. In case the notice is mailed, it
shall be deposited in the United States mail at least seven (7) calendar days
before the time of the holding of the meeting. In case the notice is delivered
personally or by telephone or to the telegraph company or by express mail or
similar service, it shall be given at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the Trustee or to a person at the office
of the Trustee who the person giving the notice has reason to believe will
promptly communicate it to the Trustee. The notice need not specify the purpose
of the meeting or the place if the meeting is to be held at the principal
executive office of the Trust.

Section 7. QUORUM. A majority of the authorized number of Trustees
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of the Trustees present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Trustees, subject to the
provisions of the Agreement and Declaration of Trust of the Trust. A meeting at
which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of Trustees if any action taken is approved by at
least a majority of the required quorum for that meeting.

Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given
to any Trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any Trustee who attends the meeting without protesting
before or at its commencement the lack of notice to that Trustee.

Section 9. ADJOURNMENT. A majority of the Trustees present,
whether or not constituting a quorum, may adjourn any meeting to another time
and place.

Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than forty-eight (48) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 7 of this Article III to the Trustees who were present at the time of
the adjournment.

Section 11. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Board of Trustees may be taken without a meeting if
a majority of the members of the Board of Trustees shall individually or
collectively consent in writing to that action. Such action by written consent
shall have the same force and effect as a majority vote of the Board of
Trustees. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Trustees.

Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members
of committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Trustees. This Section 12 shall not be construed to preclude any
Trustee from serving the Trust in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation for those services.

Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may,
by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted to
the Trustees under this Agreement and Declaration of Trust of the Trust except
as otherwise expressly provided herein or by resolution of the Board of
Trustees. Except where applicable law may require a Trustee to be present in
person, a Trustee represented by another Trustee pursuant to such power of
attorney shall be deemed to be present for purposes of establishing a quorum and
satisfying the required majority vote.

ARTICLE IV
COMMITTEES

Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may by
resolution adopted by a majority of the authorized number of Trustees designate
one or more committees, each consisting of two (2) or more Trustees, to serve at
the pleasure of the Board. The Board may designate one or more Trustees as
alternate members of any committee who may replace any absent member at any
meeting of the committee. Any committee to the extent provided in the resolution
of the Board, shall have the authority of the Board, except with respect to:

(a) the approval of any action which under applicable law also
requires shareholders' approval or approval of the outstanding
shares, or requires approval by a majority of the entire Board
or certain members of said Board;

(b) the filling of vacancies on the Board of Trustees or in any
committee;

(d) the amendment or repeal of the Agreement and Declaration of
Trust of the Trust or of the By-Laws or the adoption of new
By-Laws;

(e) the amendment or repeal of any resolution of the Board of
Trustees which by its express terms is not so amendable or
repealable;

(f) a distribution to the shareholders of the Trust, except at a
rate or in a periodic amount or within a designated range
determined by the Board of Trustees; or

(g) the appointment of any other committees of the Board of
Trustees or the members of these committees.

Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board of Trustees and its members, except that the time of regular meetings of
committees may be determined either by resolution of the Board of Trustees or by
resolution of the committee. Special meetings of committees may also be called
by resolution of the Board of Trustees. Alternate members shall be given notice
of meetings of committees and shall have the right to attend all meetings of
committees. The Board of Trustees may adopt rules for the governance of any
committee not inconsistent with the provisions of these By-Laws.

ARTICLE V
OFFICERS

Section 1. OFFICERS. The officers of the Trust shall be a President,
a Secretary, and a Treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a Chairman of the Board, one or more Vice Presidents, one or
more Assistant secretaries, one or more Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.

Section 2. ELECTION OF OFFICERS. The officers of the Trust, except
such officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article V, shall be chosen by the Board of Trustees, and
each shall serve at the pleasure of the Board of Trustees, subject to the
rights, if any, of an officer under any contract of employment.

Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint
and may empower the President to appoint such other officers as the business of
the Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.

Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the
rights, if any, of an officer under any contract of employment, any officer may
be removed, either with or without cause, by the Board of Trustees at any
regular or special meeting of the Board of Trustees or by the principal
executive officer or by such other officer upon whom such power of removal may
be conferred by the Board of Trustees.

Any officer may resign at any time by giving written notice to the
Trust. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Trust under any contract to which the officer is a party.

Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or other cause shall be filled in
the manner prescribed in these By-Laws for regular appointment to that office.
The President may make temporary appointments to a vacant office pending action
by the Board of Trustees.

Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
an Officer is elected, shall if present preside at meetings of the Board of
Trustees, shall be the Chief Executive Officer of the Trust and shall, subject
to the control of the Board of Trustees, have general supervision, direction and
control of the business and the Officers of the Trust and exercise and perform
such other powers and duties as may be from time to time assigned to him by the
Board of Trustees or prescribed by the By-Laws.

Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Trustees to the Chairman of the Board, if there be
such an officer, the President shall be the chief operating officer of the Trust
and shall, subject to the control of the Board of Trustees and the Chairman,
have general supervision, direction and control of the business and the officers
of the Trust. He shall preside at all meetings of the shareholders and in the
absence of the Chairman of the Board or if there be none, at all meetings of the
Board of Trustees. He shall have the general powers and duties of management
usually vested in the office of President of a corporation and shall have such
other powers and duties as may be prescribed by the Board of Trustees or these
By-Laws.

Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Trustees or if not ranked, the Executive Vice President (who shall be
considered first ranked) and such other Vice Presidents as shall be designated
by the Board of Trustees, shall perform all the duties of the President and when
so acting shall have all powers of and be subject to all the restrictions upon
the President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Trustees or the President or the Chairman of the Board or by these
By-Laws.

Section 9. SECRETARY. The Secretary shall keep or cause to be kept
at the principal executive office of the Trust or such other place as the Board
of Trustees may direct a book of minutes of all meetings and actions of
Trustees, committees of Trustees and shareholders with the time and place of
holding, whether regular or special, and if special, how authorized, the notice
given, the names of those present at Trustees' meetings or committee meetings,
the number of shares present or represented at shareholders' meetings, and the
proceedings.

The Secretary shall keep or cause to be kept at the principal
executive office of the Trust or at the office of the Trust's transfer agent or
registrar, a share register or a duplicate share register showing the names of
all shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for the same and the number and
date of cancellation of every certificate surrendered for cancellation.

The Secretary shall give or cause to be given notice of all meetings
of the shareholders and of the Board of Trustees required to be given by these
By-Laws or by applicable law and shall have such other powers and perform such
other duties as may be prescribed by the Board of Trustees or by these By-Laws.

Section 10. TREASURER. The Treasurer shall be the chief financial
officer and chief accounting officer of the Trust and shall keep and maintain or
cause to be kept and maintained adequate and correct books and records of
accounts of the properties and business transactions of the Trust, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any Trustee.

The Treasurer shall deposit all monies and other valuables in the
name and to the credit of the Trust with such depositories as may be designated
by the Board of Trustees. He shall disburse the funds of the Trust as may be
ordered by the Board of Trustees, shall render to the President and Trustees,
whenever they request it, an account of all of his transactions as chief
financial officer and of the financial condition of the Trust and shall have
other powers and perform such other duties as may be prescribed by the Board of
Trustees or these By-Laws.

ARTICLE VI
INDEMNIFICATION OF TRUSTEES, OFFICERS
EMPLOYEES AND OTHER AGENTS

Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes without limitation attorney's fees and any expenses of
establishing a right to indemnification under this Article.

Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify
any person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding, if it is determined that person acted in
good faith and reasonably believed: (a) in the case of conduct in his official
capacity as a Trustee of the Trust, that his conduct was in the Trust's best
interests and (b) in all other cases, that his conduct was at least not opposed
to the Trust I s best interests and (c) in the case of a criminal proceeding,
that he had no reasonable cause to believe the conduct of that person was
unlawful. The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contenders or its equivalent shall not of
itself create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best interests of this
Trust or that the person had reasonable cause to believe that the person's
conduct was unlawful.

Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action by or in the right of this Trust to
procure a judgment in its favor by reason of the fact that that person is or was
an agent of this Trust, against expenses actually and reasonably incurred by
that person in connection with the defense or settlement of that action if that
person acted in good faith, in a manner that person believed to be in the best
interests of this Trust and with such care, including reasonable inquiry, as an
ordinarily prudent person in a like position would use under similar
circumstances.

Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any
provision to the contrary contained herein, there shall be no right to
indemnification for any liability arising by reason of willful misfeasance, bad
faith, gross negligence, or the reckless disregard of the duties involved in the
conduct of the agent's office with this Trust.

No indemnification shall be made under Sections 2 or 3 of this
Article:

(a) In respect of any claim, issue, or matter as to which that
person shall have been adjudged to be liable on the basis that
personal benefit was improperly received by him, whether or
not the benefit resulted from an action taken in the person's
official capacity; or

(b) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable in the
performance of that person's duty to this Trust, unless and
only to the extent that the court in which that action was
brought shall determine upon application that in view of all
the circumstances of the case, that person was not liable by
reason of the disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to indemnity
for the expenses which the court shall determine; or

(c) of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval,
or of expenses incurred in defending a threatened or pending
action which is settled or otherwise disposed of without court
approval, unless the required approval set forth in Section 6
of this Article is obtained.

Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent
of this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party Trustees, also
determines that based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.

Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:

(a) A majority vote of a quorum consisting of Trustees who are not
parties to the proceeding and are not interested persons of
the Trust (as defined in the Investment Company Act of 1940);
or

(b) A written opinion by an independent legal counsel.

Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding (a) receipt of a written affirmation by the Trustee of his good faith
belief that he has met the standard of conduct necessary for indemnification
under this Article and a written undertaking by or on behalf of the agent, such
undertaking being an unlimited general obligation to repay the amount of the
advance if it is ultimately determined that he has not met those requirements,
and (b) a determination that the facts then known to those making the
determination would not preclude indemnification under this Article.
Determinations and authorizations of payments under this Section must be made in
the manner specified in Section 6 of this Article for determining that the
indemnification is permissible.

Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this
Article shall affect any right to indemnification to which persons other than
Trustees and officers of this Trust or any subsidiary hereof may be entitled by
contract or otherwise.

Section 9. LIMITATIONS. No indemnification or advance shall be
made under this Article, except as provided in Sections 5 or 6 in any
circumstances where it appears:

(a) That it would be inconsistent with a provision of the
Agreement and Declaration of Trust of the Trust, a resolution
of the shareholders, or an agreement in effect at the time of
accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other
amounts were paid which prohibits or otherwise limits
indemnification; or

(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.

Section 10. INSURANCE. Upon and in the event of a determination by
the Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article and the Agreement and Declaration of Trust of the
Trust.

Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does
not apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this article shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.

ARTICLE VII
RECORDS AND REPORTS

Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust
shall keep at its principal executive office or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Trustees, a record of its shareholders, giving the names and
addresses of all shareholders and the number and series of shares held by each
shareholder.

Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall
keep at its principal executive office the original or a copy of these By-Laws
as amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours.

Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the Board of Trustees and any committee or committees of the Board of Trustees
shall be kept at such place or places designated by the Board of Trustees or in
the absence of such designation, at the principal executive office of the Trust.
The minutes shall be kept in written form and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form. The minutes and accounting books and records shall
be open to inspection upon the written demand of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours for
a purpose reasonably related to the holder's interests as a shareholder or as
the holder of a voting trust certificate. The inspection may be made in person
or by an agent or attorney and shall include the right to copy and make
extracts.

Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the
absolute right at any reasonable time to inspect all books, records, and
documents of every kind and the physical properties of the Trust. This
inspection by a Trustee may be made in person or by an agent or attorney and the
right of inspection includes the right to copy and make extracts of documents.

Section 5. FINANCIAL STATEMENTS. A copy of any financial statements
and any income statement of the Trust for each quarterly period of each fiscal
year and accompanying balance sheet of the Trust as of the end of each such
period that has been prepared by the Trust shall be kept on file in the
principal executive office of the Trust for at least twelve (12) months and each
such statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.

The quarterly income statements and balance sheets referred to in
this section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.

ARTICLE VIII
GENERAL MATTERS

Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, notes or other evidences of
indebtedness issued in the name of or payable to the Trust shall be signed or
endorsed in such manner and by such person or persons as shall be designated
from time to time in accordance with the resolution of the Board of Trustees.

Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Trustees, except as otherwise provided in these By-Laws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Trust and this authority may be
general or confined to specific instances; and unless so authorized or ratified
by the Board of Trustees or within the agency power of an officer, no officer,
agent, or employee shall have any power or authority to bind the Trust by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or for any amount.

Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust may be issued to a
shareholder upon his request when such shares are fully paid. All certificates
shall be signed in the name of the Trust by the Chairman of the Board or the
President or Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or any Assistant Secretary, certifying the number of shares and
the series of shares owned by the shareholders. Any or all of the signatures on
the certificate may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to be that officer, transfer agent, or registrar
before that certificate is issued, it may be issued by the Trust with the same
effect as if that person were an officer, transfer agent or registrar at the
date of issue. Notwithstanding the foregoing, the Trust may adopt and use a
system of issuance, recordation and transfer of its shares by electronic or
other means.

Section 4. LOST CERTIFICATES. Except as provided in this Section 4,
no new certificates for shares shall be issued to replace an old certificate
unless the latter is surrendered to the Trust and cancelled at the same time.
The Board of Trustees may in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the Board of Trustees
may require, including a provision for indemnification of the Trust secured by a
bond or other adequate security sufficient to protect the Trust against any
claim that may be made against it, including any expense or liability on account
of the alleged loss, theft, or destruction of the certificate or the issuance of
the replacement certificate.

Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST.
The Chairman of the Board, the President or any Vice President or any other
person authorized by resolution of the Board of Trustees or by any of the
foregoing designated officers, is authorized to vote or represent on behalf of
the Trust any and all shares of any corporation, partnership, trusts, or other
entities, foreign or domestic, standing in the name of the Trust. The authority
granted may be exercised in person or by a proxy duly executed by such
designated person.

Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed
and refixed or changed from time to time by resolution of the Trustees. The
fiscal year of the Trust shall be the taxable year of each Series of the Trust.

ARTICLE IX
AMENDMENTS

Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended
or repealed by the affirmative vote or written consent of a majority of the
outstanding shares entitled to vote, except as otherwise provided by applicable
law or by the Agreement and Declaration of Trust of the Trust or these By-Laws.

Section 2. AMENDMENT BY TRUSTEES. Subject to the right of
shareholders as provided in Section 1 of this Article to adopt, amend or repeal
By-Laws, and except as otherwise provided by applicable law or by the Agreement
and Declaration of Trust of the Trust, these By-Laws may be adopted, amended, or
repealed by the Board of Trustees.

Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT AND DECLARATION
OF TRUST OF THE TRUST. These By-Laws and any amendments thereto shall be
incorporated by reference into the Agreement and Declaration of Trust of the
Trust.

CERTIFICATE OF SECRETARY

I, Deborah R. Gatzek, Secretary of Franklin Strategic Mortgage Portfolio,
a business trust organized under the laws of the State of Delaware, do hereby
certify that the following resolution was adopted by a majority of the trustees
present at a meeting held at the offices of the trust at 777 Mariners Island
Boulevard, San Mateo, California, on April 19, 1994:

WHEREAS, the Board of Trustees has determined that it is advisable and in
the best interests of the shareholders of the Trust to revise the Trust's
By-Laws to specifically provide for the use of proxies which are
communicated by an electronic, telephonic, computerized or
telecommunications method;

NOW THEREFORE, BE IT RESOLVED, that Section 10 of Article II is hereby
resolved to read as follows:

"Section 10. PROXIES. Every person entitled to vote for Trustees or
on any other matter shall have the right to do so either in person
or by one or more agents. Except as otherwise provided in the
Agreement and Declaration of Trust or these By-Laws, matters
relating to the giving, voting or validity of proxies will be
governed by the Delaware General Corporation Law relating to
proxies, and Delaware judicial interpretations thereunder, as if the
Trust were a Delaware corporation and Shareholders of the Trust were
shareholders of a Delaware corporation."

IN WITNESS WHEREOF, I have subscribed my name this 27th day of October, 1994.

/s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

MANAGEMENT AGREEMENT

THIS MANAGEMENT AGREEMENT made between FRANKLIN STRATEGIC MORTGAGE
PORTFOLIO, a Delaware business trust, hereinafter called the "Trust", and
FRANKLIN INSTITUTIONAL SERVICES CORPORATION, a California corporation,
hereinafter called the "Manager."

WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment manager and to have an investment manager perform
various management, statistical, research, investment advisory and other
services for the Trust and for funds hereafter organized as separate series of
the Trust (the "Funds"); and,

WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counselling and supervisory services to
investment companies and other investment counselling clients, and desires to
provide these services to the Funds.

NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:

l. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Funds' assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Funds in any way or otherwise be deemed an agent of the Funds or the Trust.

2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The
Manager undertakes to provide the services hereinafter set forth and to assume
the following obligations:

A. ADMINISTRATIVE SERVICES. The Manager shall furnish to the Funds
adequate (i) office space, which may be space within the offices of the Manager
or in such other place as may be agreed upon from time to time, (ii) office
furnishings, facilities and equipment as may be reasonably required for managing
the affairs and conducting the business of the Funds, including conducting
correspondence and other communications with the shareholders of the Funds,
maintaining all internal bookkeeping, accounting and auditing services and
records in connection with the Funds' investment and business activities. The
Manager shall employ or provide and compensate the executive, secretarial and
clerical personnel necessary to provide such services. The Manager shall also
compensate all officers and employees of the Trust who are officers or employees
of the Manager or its affiliates.

B. INVESTMENT MANAGEMENT SERVICES.

(a) The Manager shall manage the Funds' assets subject to
and in accordance with the respective investment objectives and policies of the
Funds and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Funds' assets and the
purchase and sale of their investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Funds' investment
securities shall be exercised. The Manager shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Funds'
assets and the purchase and sale of their investment securities, (ii) the
reasons for such decisions and (iii) the extent to which those decisions have
been implemented.

(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Funds, orders for the execution of the Funds'
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Funds, but this requirement
shall not be deemed to obligate the Manager to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set forth
in this section have been satisfied. The parties recognize that there are likely
to be many cases in which different brokers are equally able to provide such
best price and execution and that, in selecting among such brokers with respect
to particular trades, it is desirable to choose those brokers who furnish
research, statistical, quotations and other information to the Funds and the
Manager in accordance with the standards set forth below. Moreover, to the
extent that it continues to be lawful to do so and so long as the Board of
Trustees determines that the Funds will benefit, directly or indirectly, by
doing so, the Manager may place orders with a broker who charges a commission
for that transaction which is in excess of the amount of commission that another
broker would have charged for effecting that transaction, provided that the
excess commission is reasonable in relation to the value of "brokerage and
research services" (as defined in Section 28(e)(3) of the Securities Exchange
Act of 1934) provided by that broker.

Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Funds' transactions from
among:

(i) Those brokers and dealers who provide quotations and
other services to the Funds, specifically including the
quotations necessary to determine the Funds' net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and

(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Funds, or which place the Manager in a better position
to make decisions in connection with the management of the
Funds' assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount
of total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Funds may
also be considered as a factor in the selection of
broker-dealers to execute the Funds' portfolio transactions.

(c) When the Manager has determined that any of the Funds
should tender securities pursuant to a "tender offer solicitation," Franklin
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Manager nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the applicable Fund shall enter into an
agreement with the Manager and/or Distributors to reimburse them for all such
expenses connected with attempting to collect such fees, including legal fees
and expenses and that portion of the compensation due to their employees which
is attributable to the time involved in attempting to collect such fees.

(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager with brokers falling into each of the categories
referred to above and the manner in which the allocation has been accomplished.

(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Manager's paramount duty to obtain the best net
price and execution for the Funds.

C. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Funds in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Funds may reasonably request for use in
the preparation of such documents or of other materials necessary or helpful for
the underwriting and distribution of the Funds' shares.

D. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Funds and their investment activities.

3. EXPENSES OF THE FUNDS. It is understood that the Funds will pay all of
their own expenses other than those expressly assumed by the Manager herein,
which expenses payable by the Funds shall include:

A. Fees and expenses paid to the Manager as provided herein;

B. Expenses of all audits by independent public accountants;

C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of their shares;

D. Expenses of obtaining quotations for calculating the value of
the Funds' net assets;

E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;

F. Taxes levied against the Funds;

G. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Funds;.

H. Costs, including the interest expense, of borrowing money;

I. Costs incident to meetings of Board of Trustees and shareholders
of the Funds, reports to the Funds' shareholders, the filing of reports with
regulatory bodies and the maintenance of the Funds' and the Trust's legal
existence;

J. Legal fees, including the legal fees related to the registration
and continued qualification of the Funds' shares for sale;

K. Trustees' fees and expenses to trustees who are not directors,
officers, employees or stockholders of the Manager or any of its affiliates;

L. Costs and expense of registering and maintaining the
registration of the Funds and their shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to their
shareholders;

M. Trade association dues; and

N. The Funds' pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.

4. COMPENSATION OF THE MANAGER. Each Fund shall pay a management fee in
cash to the Manager based upon a percentage of the value of the respective
Fund's net assets, calculated as set forth below, as compensation for the
services rendered and obligations assumed by the Manager, during the preceding
month, on the first business day of the month in each year.

A. For purposes of calculating such fee, the value of the net assets
of a Fund shall be the average daily net assets during the month for which the
payment is made, determined in the same manner as that Fund uses to compute the
value of its net assets in connection with the determination of the net asset
value of its shares, all as set forth more fully in the Trust's current
prospectus and statement of additional information. The management fee payable
by each of the Funds shall be calculated daily at an annual rate of:

40/100 of 1% of the value of its net assets up to and
including $250,000,000;

38/100 of 1% of the value of its net assets in excess of
$250,000,000 up to and including $500,000,000;

36/100 of 1% of the value of its net assets in excess of
$500,000,000.

B. The Management fee payable by any of the Funds shall be reduced
or eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith as set forth in paragraph 2.B.(c) of this
Agreement. The Manager may, from time to time, voluntarily reduce or waive any
management fee due to it hereunder.

C. To the extent that the gross operating costs and expenses of the
Funds (excluding any interest, taxes, brokerage, commissions, amortization of
organization expense, and with the prior written approval of any state
securities commission requiring same, any extraordinary expenses, such as
litigation), exceed the most stringent expense limitation requirements of the
states in which shares of the Funds are qualified for sale, the Manager shall
reduce its fees by the amount of such excess.

5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Funds
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Manager or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Funds as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.

6. LIABILITIES OF THE MANAGER.

A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Manager, the Manager shall not be subject to liability to the Trust or to
the Funds or to any shareholder of the Funds for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by any of
the Funds.

B. Notwithstanding the foregoing, the Manager agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Manager or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Manager or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Manager or any of its affiliates
or any of their officers, directors, employees or stockholders. The Manager
shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Manager or any of its affiliates from the sale of his shares of the
Manager, or similar matters. So long as this Agreement is in effect, the Manager
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6(B) within 30 days after a bill or statement has been received by the Manager
therefor. This provision shall not be deemed to be a waiver of any claim the
Trust may have or may assert against the Manager or others for costs, expenses
or damages heretofore incurred by the Trust or for costs, expenses or damages
the Trust may hereafter incur which are not reimbursable to it hereunder.

C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Manager, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.

7. RENEWAL AND TERMINATION.

A. This Agreement shall become effective on the date written below
and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter as to
each Fund for periods not exceeding one (1) year so long as such continuation is
approved at least annually (i) by a vote of a majority of the outstanding voting
securities of each Fund or by a vote of the Board of Trustees of the Trust, and
(ii) by a vote of a majority of the Trustees of the Trust who are not parties to
the Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.

B. This Agreement:

(i) may at any time be terminated with respect to any of the
Funds without the payment of any penalty either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities of
the Fund seeking to terminate the Agreement, on 30 days' written notice to the
Manager;

(ii) shall immediately terminate with respect to the
Funds in the event of its assignment; and

(iii) may be terminated by the Manager with respect to the
Funds on 60 days' written notice to the applicable Fund.

C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.

D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any
office of such party.

8. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.

9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 1st day of February, 1993.

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

By: /s/ Charles B. Johnson

FRANKLIN INSTITUTIONAL SERVICES CORPORATION

By: /s/ Charles E. Johnson

AMENDMENT TO MANAGEMENT AGREEMENT

This Amendment dated as of August 1, 1995, is to the Management Agreement
dated February 1, 1993, by and between FRANKLIN STRATEGIC MORTGAGE PORTFOLIO, a
Delaware business trust (the "Trust"), for itself and on behalf of any
subsequent series of the Trust subject to the Management Agreement (the
"Funds"), and FRANKLIN INSTITUTIONAL SERVICES CORPORATION, a California
corporation, (the "Manager"). The undersigned parties, intending to be legally
bound, hereby agree as follows:

(1) Paragraph 4 B. is amended to read:

B. The management fee payable by a Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain cost and expenses incurred in
connection therewith as set forth in paragraph 2.B.(c) of this Agreement. The
Manager may waive all or a portion of its fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of its services. The
Manager shall be contractually bound hereunder by the terms of any publicly
announced waiver of its fee, or any limitation of a Fund's expenses, as if such
waiver or limitation were full set forth herein.

(2) All other provisions of the Management Agreement dated February 1,
1993, remain in full force and effect.

IN WITNESS WHEREOF, we have signed this Amendment as of the date and year
first above written.

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

By /s/ Deborah R. Gatzek

FRANKLIN INSTITUTIONAL SERVICES CORPORATION

By /s/ Leslie M. Krater
Leslie M. Krater
Secretary

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
777 Mariners Island Blvd.
San Mateo, California 94404

Franklin Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404

Re: Distribution Agreement

Gentlemen:

We are a Delaware business trust operating as an open-end management
investment company. As such, our company, Franklin Strategic Mortgage
Portfolio (referred to herein as the "Trust") is registered under the
Investment Company Act of 1940, (the "1940 Act"), and its shares are
registered under the Securities Act of 1933 (the "1933 Act"). We desire to
begin issuing our authorized but unissued shares of beneficial interest (the
"Shares") to authorized persons in accordance with applicable Federal and
State securities laws. Shares will be made available for the Funds (referred
to herein as a "Fund" or collectively as the "Funds") formed as a Series of
the Trust.

You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company
is a member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor
for the Shares. We have been authorized to execute and deliver this
Agreement to you by a resolution of our Board of Trustees passed at a meeting
at which a majority of our Trustees, including a majority who are not
otherwise interested persons of the Trust and who are not interested persons
of our investment adviser, its related organizations or with you or your
related organizations, were present and voted in favor of the said resolution
approving this Agreement.

1. Appointment of Underwriter. Upon the execution of this Agreement
and in consideration of the agreements on your part herein expressed and upon
the terms and conditions set forth herein, we hereby appoint you as the
exclusive sales agent for our Shares (except for sales made directly by the
Funds without sales charge) and agree that we will deliver such Shares as you
may sell. You agree to use your best efforts to promote the sale of Shares,
but are not obligated to sell any specific number of Shares.

2. Independent Contractor. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no
authority or power to obligate or bind us by your actions, conduct or
contracts except that you are authorized to accept orders for the purchase or
repurchase of Shares as our agent. You may appoint sub-agents or distribute
through dealers or otherwise as you may determine from time to time, but this
Agreement shall not be construed as authorizing any dealer or other person to
accept orders for sale or repurchase on our behalf or otherwise act as our
agent for any purpose. You may allow such sub-agents or dealers such
commissions or discounts not exceeding the total sales commission as you
shall deem advisable so long as any such commissions or discounts are set
forth in our current prospectus to the extent required by the applicable
Federal and State securities laws.

3. Offering Price. The Shares of the Funds shall be offered for
sale at a price equivalent to their respective net asset value plus a
variable percentage of the public offering price as sales commission. On
each business day on which the New York Stock Exchange is open for business,
we will furnish you with the net asset value of the Shares which shall be
determined in accordance with our then effective prospectus. All Shares will
be sold in the manner set forth in our then effective prospectus.

4. Sales Commission. You shall be entitled to charge a sales
commission on the sale of our Shares in the amount set forth in our then
effective prospectus. Such commission (subject to any quantity or other
discounts or eliminations of commission as set forth in our then current
effective prospectus) shall be an amount mutually agreed upon between us and
equal to the difference between the net asset value and the public offering
price of our Shares.

5. Terms and Conditions of Sales. Shares of the Funds shall be
offered for sale only in those jurisdictions where they have been properly
registered or are exempt from registration, and only to those groups of
people which the Board of Trustees may from time to time determine to be
eligible to purchase such shares.

6. Payment of Shares. At or prior to the time of delivery of any of
our Shares you will pay or cause to be paid to our Custodian or its
successor, for our account, an amount in cash equal to the net asset value of
such Shares. In the event that you pay for Shares sold by you prior to your
receipt of payment from purchasers you are authorized to reimburse yourself
for the net asset value of such Shares from the offering price of such Shares
when received by you.

7. Purchases for Your Own Account. You shall not purchase our
Shares for your own account for purposes of resale to the public, but you may
purchase Shares for your own investment account upon your written assurance
that the purchase is for investment purposes and that the Shares will not be
resold except through redemption by us.

8. Sale of Shares to Affiliates. You may sell our Shares at net
asset value to certain of your and our affiliated persons pursuant to the
applicable provisions of the Federal Securities Statutes and Rules or
Regulations thereunder (the "Rules and Regulations"), including Rule 22d-1
under the 1940 Act, as amended from time to time.

9. Allocation of Expenses. We will pay the expenses:

(a) Of the preparation of the audited and certified financial
statements of our company to be included in any
Post-Effective Amendments ("Amendments") to our
Registration Statement under the 1933 Act or 1940 Act,
including the prospectus and statement of additional
information included therein;

(b) Of the preparation, including legal fees, and of printing
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred; and

(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders.

(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares of any of the Funds;

You will pay the expenses:

(a) Of printing the copies of the prospectuses and any
supplements thereto and statement of additional information
which are necessary to continue to offer our Shares;

(b) Of the preparation, excluding legal fees, and printing of
all Amendments and supplements to our prospectuses and
statement of additional information if the Amendment or
supplement arises from your (including your "Parent's")
activities or Rules and Regulations related to your
activities and those expenses would not otherwise have been
incurred by us;

(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we
have prepared for distribution to our existing
shareholders; and

(d) Incurred by you in advertising, promoting and selling our
Shares.

10. Furnishing of Information. We will furnish to you such
information with respect to the Funds and their Shares, in such form and
signed by such of our officers as you may reasonably request, and we warrant
that the statements therein contained when so signed will be true and
correct. We will also furnish you with such information and will take such
action as you may reasonably request in order to qualify our Shares for sale
to the public under the Blue Sky Laws of jurisdictions in which you may wish
to offer them. We will furnish you with annual audited financial statements
of our books and accounts certified by independent public accountants, with
semi-annual financial statements prepared by us, and, from time to time, with
such additional information regarding our financial condition as you may
reasonably request.

11. Conduct of Business. Other than our currently effective
prospectus, you will not issue any sales material or statements except
literature or advertising which conforms to the requirements of Federal and
State securities laws and regulations and which have been filed, where
necessary, with the appropriate regulatory authorities. You will furnish us
with copies of all such materials prior to their use and no such material
shall be published if we shall reasonably and promptly object.

You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs
with us and with dealers, brokers or investors in accordance with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.

12. Redemption or Repurchase Within Seven Days. If Shares are
tendered to us for redemption or repurchase by us within seven business days
after your acceptance of the original purchase order for such Shares, you
will immediately refund to us the full sales commission (net of allowances to
dealers or brokers) allowed to you on the original sale, and will promptly,
upon receipt thereof, pay to us any refunds from dealers or brokers of the
balance of sales commissions reallowed by you. We shall notify you of such
tender for redemption within 10 days of the day on which notice of such
tender for redemption is received by us.

13. Other Activities. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.

14. Term of Agreement. This Agreement shall become effective on the
date of its execution, and shall remain in effect for a period of two (2)
years. The Agreement is renewable annually thereafter with respect to the
Fund for successive periods not to exceed one year (i) by a vote of a
majority of the outstanding voting securities of the Funds or by a vote of
the Board of Trustees of the Trust, and (ii) by a vote of a majority of the
trustees of the Trust who are not parties to the Agreement or interested
persons of any parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.

This Agreement may at any time be terminated by the Funds without
the payment of any penalty, (i) either by vote of the Board of Trustees of
the Trust or by vote of a majority of the outstanding voting securities of
the Funds, on 90 days' written notice to you; or (ii) by you on 90 days'
written notice to the Fund; and shall immediately terminate with respect to
the Fund in the event of its assignment.

15. Suspension of Sales. We reserve the right at all times to
suspend or limit the public offering of the Shares of the Funds upon two
days' written notice to you.

16. Miscellaneous. This Agreement shall be subject to the laws of
the State of California and shall be interpreted and construed to further
promote the operation of the Trust as an open-end investment company. As
used herein the terms "Net Asset Value", "Offering Price", "Investment
Company", "Open-End Investment Company", "Assignment", "Principal
Underwriter", "Interested Person", "Parents", "Affiliated Person", and
"Majority of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and Regulations
thereunder.

Nothing herein shall be deemed to protect you against any liability to us or
to our securities holders to which you would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of
your duties hereunder, or by reason of your reckless disregard of your
obligations and duties hereunder.

If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.

Very truly yours,

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

By: /s/ Rupert H. Johnson Jr.

Accepted:

FRANKLIN DISTRIBUTORS, INC.

By: Charles B. Johnson

DATED: February 1, 1993

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
777 Mariners Island Blvd.
San Mateo, California 94404

Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404

Re: Amended and Restated Distribution Agreement

Gentlemen:

We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.

You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.

1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for our Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.

However, the Fund and each series retain the right to make direct sales of
its Shares without sales charges consistent with the terms of the then current
prospectus and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.

2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.

3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that series and class plus any applicable
percentage of the public offering price as sales commission or as otherwise set
forth in our then current prospectus. On each business day on which the New York
Stock Exchange is open for business, we will furnish you with the net asset
value of the Shares of each available series and class which shall be determined
in accordance with our then effective prospectus. All Shares will be sold in the
manner set forth in our then effective prospectus and statement of additional
information, and in compliance with applicable law.

4. COMPENSATION.

A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.

B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under
the 1940 Act.

5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.

6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of our Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.

7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.

8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.

9. ALLOCATION OF EXPENSES. We will pay the expenses:

(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus and
statement of additional information included therein;

(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred;

(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders; and

(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares.

You will pay the expenses:

(a) Of printing the copies of the prospectuses and any supplements
thereto and statements of additional information which are
necessary to continue to offer our Shares;

(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses and statements
of additional information if the Amendment or supplement
arises from your (including your "Parent's") activities or
Rules and Regulations related to your activities and those
expenses would not otherwise have been incurred by us;

(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to our existing shareholders; and

(d) Incurred by you in advertising, promoting and selling our
Shares.

10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.

11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.

You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.

12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.

13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.

14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund or, if the
Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.

This Agreement may at any time be terminated by the Fund or by any
series without the payment of any penalty, (i) either by vote of the Board or by
vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.

15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.

16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties. As used herein, the terms "Net Asset Value," "Offering
Price," "Investment Company," "Open-End Investment Company," "Assignment,"
"Principal Underwriter," "Interested Person," "Parent," "Affiliated Person," and
"Majority of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder.

Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.

If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.

Very truly yours,

FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

By: /s/ Deborah R. Gatzek

Accepted:

Franklin/Templeton Distributors, Inc.

By: /s/ Gregory E. Johnson

DATED: April 23, 1995

DEALER AGREEMENT

Effective: May 1, 1995

Dear Securities Dealer:

Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to participate
in the distribution of shares of the Franklin and Templeton mutual funds (the
"Funds") for which we now or in the future serve as principal underwriter,
subject to the terms of this Agreement. We will notify you from time to time of
the Funds which are eligible for distribution and the terms of compensation
under this Agreement. This Agreement supersedes any prior dealer agreements
between us, as stated in paragraph 18, below.

1. Licensing.

(a) You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD") and are presently licensed to
the extent necessary by the appropriate regulatory agency of each state in which
you will offer and sell shares of the Funds. You agree that termination or
suspension of such membership with the NASD, or of your license to do business
by any state or federal regulatory agency, at any time shall terminate or
suspend this Agreement forthwith and shall require you to notify us in writing
of such action. If you are not a member of the NASD but are a dealer subject to
the laws of a foreign country, you agree to conform to the rules of fair
practice of such association. This Agreement is in all respects subject to Rule
26 of the Rules of Fair Practice of the NASD which shall control any provision
to the contrary in this Agreement.

(b) You agree to notify us immediately in writing if at any time you are
not a member in good standing of the Securities Investor Protection Corporation
("SIPC").

2. Sales of Fund Shares. You may offer and sell shares of each Fund and class
only at the public offering price which shall be applicable to, and in effect at
the time of, each transaction. The procedures relating to all orders and the
handling of them shall be subject to the terms of the then current prospectus
and statement of additional information (hereafter, the "prospectus") and new
account application, including amendments, for each such Fund, and our written
instructions from time to time. This Agreement is not exclusive, and either
party may enter into similar agreements with third parties.

3. Duties of Dealer: In General. You agree:

(a) To act as principal, or as agent on behalf of your customers, in all
transactions in shares of the Funds except as provided in paragraph 4 hereof.
You shall not have any authority to act as agent for the issuer (the Funds), for
the Principal Underwriter, or for any other dealer in any respect, nor will you
represent to any third party that you have such authority or are acting in such
capacity.

(b) To purchase shares only from us or from your customers.

(c) To enter orders for the purchase of shares of the Funds only from us
and only for the purpose of covering purchase orders you have already received
from your customers or for your own bona fide investment.

(d) To maintain records of all sales and redemptions of shares made
through you and to furnish us with copies of such records on request.

(e) To distribute prospectuses and reports to your customers in
compliance with applicable legal requirements, except to the extent that we
expressly undertake to do so on your behalf.

(f) That you will not withhold placing customers' orders for shares so
as to profit yourself as a result of such withholding or place orders for shares
in amounts just below the point at which sales charges are reduced so as to
benefit from a higher sales charge applicable to an amount below the breakpoint.

(g) That if any shares confirmed to you hereunder are repurchased or
redeemed by any of the Funds within seven business days after such confirmation
of your original order, you shall forthwith refund to us the full concession
allowed to you on such orders. We shall forthwith pay to the appropriate Fund
our share, if any, of the "charge" on the original sale and shall also pay to
such Fund the refund from you as herein provided. We shall notify you of such
repurchase or redemption within a reasonable time after settlement. Termination
or cancellation of this Agreement shall not relieve you or us from the
requirements of this subparagraph.

(h) That if payment for the shares purchased is not received within the
time customary or the time required by law for such payment, the sale may be
canceled forthwith without any responsibility or liability on our part or on the
part of the Funds, or at our option, we may sell the shares which you ordered
back to the Funds, in which latter case we may hold you responsible for any loss
to the Funds or loss of profit suffered by us resulting from your failure to
make payment as aforesaid. We shall have no liability for any check or other
item returned unpaid to you after you have paid us on behalf of a purchaser. We
may refuse to liquidate the investment unless we receive the purchaser's signed
authorization for the liquidation.

(i) That you shall assume responsibility for any loss to the Funds
caused by a correction made subsequent to trade date, provided such correction
was not based on any error, omission or negligence on our part, and that you
will immediately pay such loss to the Funds upon notification.

(j) That if on a redemption which you have ordered, instructions in
proper form, including outstanding certificates, are not received within the
time customary or the time required by law, the redemption may be canceled
forthwith without any responsibility or liability on our part or on the part of
any Fund, or at our option, we may buy the shares redeemed on behalf of the
Fund, in which latter case we may hold you responsible for any loss to the Fund
or loss of profit suffered by us resulting from your failure to settle the
redemption.

4. Duties of Dealer: Retirement Accounts. In connection with orders for the
purchase of shares on behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone, or wire, you
shall act as agent for the custodian or trustee of such plans (solely with
respect to the time of receipt of the application and payments), and you shall
not place such an order until you have received from your customer payment for
such purchase and, if such purchase represents the first contribution to such a
plan, the completed documents necessary to establish the plan. You agree to
indemnify us and Franklin Templeton Trust Company and/or Templeton Funds Trust
Company as applicable for any claim, loss, or liability resulting from incorrect
investment instructions received from you which cause a tax liability or other
tax penalty.

5. Conditional Orders; Certificates. We will not accept from you any conditional
orders for shares of any of the Funds. Delivery of certificates for shares
purchased shall be made by the Funds only against constructive receipt of the
purchase price, subject to deduction for your concession and our portion of the
sales charge, if any, on such sale. No certificates will be issued unless
specifically requested.

6. Dealer Compensation.

(a) On each purchase of shares by you from us, the total sales charges
and your dealer concessions shall be as stated in each Fund's then current
prospectus, subject to NASD rules and applicable state and federal laws. Such
sales charges and dealer concessions are subject to reductions under a variety
of circumstances as described in the Funds' prospectuses. For an investor to
obtain these reductions, we must be notified at the time of the sale that the
sale qualifies for the reduced charge. If you fail to notify us of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither we nor any of the Funds will be liable for amounts necessary to
reimburse any investor for the reduction which should have been effected.

(b) In accordance with the Funds' prospectuses, we or our affiliates
may, but are not obligated to, make payments to dealers from our own resources
as compensation for certain sales which are made at net asset value and are not
subject to any contingent deferred sales charges ("Qualifying Sales"). If you
notify us of a Qualifying Sale, we may make a contingent advance payment up to
the maximum amount available for payment on the sale. If any of the shares
purchased in a Qualifying Sale are redeemed within twelve months of the end of
the month of purchase, we shall be entitled to recover any advance payment
attributable to the redeemed shares by reducing any account payable or other
monetary obligation we may owe to you or by making demand upon you for repayment
in cash. We reserve the right to withhold advances to any dealer, if for any
reason we believe that we may not be able to recover unearned advances from such
dealer. In addition, dealers will generally be required to enter into a
supplemental agreement with us with respect to such compensation and the
repayment obligation prior to receiving any payments.

7. Redemptions. Redemptions or repurchases of shares will be made at the net
asset value of such shares, less any applicable deferred sales or redemption
charges, in accordance with the applicable prospectuses. Except as permitted by
applicable law, you agree not to purchase any shares from your customers at a
price lower than the redemption or repurchase prices then computed by the Funds.
You shall, however, be permitted to sell shares for the account of the record
owner to the Funds at the repurchase price then currently in effect for such
shares and may charge the owner a fair commission for handling the transaction.

8. Exchanges. Telephone exchange orders will be effective only for shares in
plan balance (uncertificated shares) or for which share certificates have been
previously deposited and may be subject to any fees or other restrictions set
forth in the applicable prospectuses. You may charge the shareholder a fair
commission for handling an exchange transaction. Exchanges from a Fund sold with
no sales charge to a Fund which carries a sales charge, and exchanges from a
Fund sold with a sales charge to a Fund which carries a higher sales charge may
be subject to a sales charge in accordance with the terms of each Fund's
prospectus. You will be obligated to comply with any additional exchange
policies described in each Fund's prospectus, including without limitation any
policy restricting or prohibiting "Timing Accounts" as therein defined.

9. Transaction Processing. All orders are subject to acceptance by us and by the
Fund or its transfer agent, and become effective only upon confirmation by us.
If required by law, each transaction shall be confirmed in writing on a fully
disclosed basis and if confirmed by us, a copy of each confirmation shall be
sent simultaneously to you if you so request. All sales are made subject to
receipt of shares by us from the Funds. We reserve the right in our discretion,
without notice, to suspend the sale of shares or withdraw the offering of shares
entirely. Telephone orders will be effected at the price(s) next computed on the
day they are received from you if, as set forth in each Fund's current
prospectus, they are received prior to the time the price of its shares is
calculated. Orders received after that time will be effected at the price(s)
computed on the next business day. All orders must be accompanied by payment in
U.S. dollars. Orders payable by check must be drawn payable in U.S. dollars on a
U.S. bank, for the full amount of the investment.

10. Multiple Classes. We may from time to time provide to you written compliance
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of shares with different sales charges and distribution-related
operating expenses. In addition, you will be bound by any applicable rules or
regulations of government agencies or self-regulatory organizations generally
affecting the sale or distribution of mutual funds offering multiple classes of
shares.

11. Rule 12b-1 Plans. You are also invited to participate in all Plans adopted
by the Funds (the "Plan Funds") pursuant to Rule 12b-1 under the 1940 Act.

To the extent you provide administrative and other services, including, but not
limited to, furnishing personal and other services and assistance to your
customers who own shares of a Plan Fund, answering routine inquiries regarding a
Fund, assisting in changing account designations and addresses, maintaining such
accounts or such other services as a Fund may require, to the extent permitted
by applicable statutes, rules, or regulations, we shall pay you a Rule 12b-1
servicing fee. To the extent that you participate in the distribution of Fund
shares which are eligible for a Rule 12b-1 distribution fee, we shall also pay
you a Rule 12b-1 distribution fee. All Rule 12b-1 servicing and distribution
fees shall be based on the value of shares attributable to customers of your
firm and eligible for such payment, and shall be calculated on the basis and at
the rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate annual
fees paid to you pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in each Fund's prospectus, which amount shall be a
specified percent of the value of the Fund's net assets held in your customers'
accounts which are eligible for payment pursuant to this Agreement (determined
in the same manner as each Fund uses to compute its net assets as set forth in
its effective Prospectus).

You shall furnish us and each Fund with such information as shall reasonably be
requested by the Boards of Directors, Trustees or Managing General Partners
(hereinafter referred to as "Directors") of such Funds with respect to the fees
paid to you pursuant to the Schedule. We shall furnish to the Boards of
Directors of the Plan Funds, for their review on a quarterly basis, a written
report of the amounts expended under the Plans and the purposes for which such
expenditures were made.

The Plans and provisions of any agreement relating to such Plans must be
approved annually by a vote of the Plan Funds' Directors, including such persons
who are not interested persons of the Plan Funds and who have no financial
interest in the Plans or any related agreement ("Rule 12b-1 Directors"). The
Plans or the provisions of this Agreement relating to such Plans may be
terminated at any time by the vote of a majority of the Plan Funds' Boards of
Directors, including Rule 12b-1 Directors, or by a vote of a majority of the
outstanding shares of the Plan Funds, on sixty (60) days' written notice,
without payment of any penalty. The Plans or the provisions of this Agreement
may also be terminated by any act that terminates the Underwriting Agreement
between us and the Plan Funds, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Plan Funds. In the event of the termination of the Plans for
any reason, the provisions of this Agreement relating to the Plans will also
terminate.

Continuation of the Plans and provisions of this Agreement relating to such
Plans are conditioned on Rule 12b-1 Directors being ultimately responsible for
selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, Plan Funds are permitted to implement or continue Plans or the provisions
of this Agreement relating to such Plans from year-to-year only if, based on
certain legal considerations, the Boards of Directors are able to conclude that
the Plans will benefit the Plan Funds. Absent such yearly determination the
Plans and the provisions of this Agreement relating to the Plans must be
terminated as set forth above. In addition, any obligation assumed by a Fund
pursuant to this Agreement shall be limited in all cases to the assets of such
Fund and no person shall seek satisfaction thereof from shareholders of a Fund.
You agree to waive payment of any amounts payable to you by us under a Fund's
Plan of Distribution pursuant to Rule 12b-1 until such time as we are in receipt
of such fee from the Fund.

The provisions of the Rule 12b-1 Plans between the Plan Funds and us, insofar as
they relate to Plans, shall control over the provisions of this Agreement in the
event of any inconsistency.

12. Registration of Shares. Upon request, we shall notify you of the states or
other jurisdictions in which each Fund's shares are currently registered or
qualified for sale to the public. We shall have no obligation to register or
qualify, or to maintain registration or qualification of, Fund shares in any
state or other jurisdiction. We shall have no responsibility, under the laws
regulating the sale of securities in any U.S. or foreign jurisdiction, for the
qualification or status of persons selling Fund shares or for the manner of sale
of Fund shares. Except as stated in this paragraph, we shall not, in any event,
be liable or responsible for the issue, form, validity, enforceability and value
of such shares or for any matter in connection therewith, and no obligation not
expressly assumed by us in this Agreement shall be implied. Nothing in this
Agreement, however, shall be deemed to be a condition, stipulation or provision
binding any person acquiring any security to waive compliance with any provision
of the Securities Act of 1933, or of the rules and regulations of the Securities
and Exchange Commission, or to relieve the parties hereto from any liability
arising under the Securities Act of 1933.

13. Additional Registrations. If it is necessary to register or qualify the
shares in any foreign jurisdictions in which you intend to offer the shares of
any Funds, it will be your responsibility to arrange for and to pay the costs of
such registration or qualification; prior to any such registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such
registration or qualification without the written consent of the Funds and of
ourselves.

14. Fund Information. No person is authorized to give any information or make
any representations concerning shares of any Fund except those contained in the
Fund's current prospectus or in materials issued by us as information
supplemental to such prospectus. We will supply prospectuses, reasonable
quantities of supplemental sale literature, sales bulletins, and additional
information as issued. You agree not to use other advertising or sales material
relating to the Funds except that which (a) conforms to the requirements of any
applicable laws or regulations of any government or authorized agency in the
U.S. or any other country, having jurisdiction over the offering or sale of
shares of the Funds, and (b) is approved in writing by us in advance of such
use. Such approval may be withdrawn by us in whole or in part upon notice to
you, and you shall, upon receipt of such notice, immediately discontinue the use
of such sales literature, sales material and advertising. You are not authorized
to modify or translate any such materials without our prior written consent.

15. Indemnification. You further agree to indemnify, defend and hold harmless
the Principal Underwriter, the Funds, their officers, directors and employees
from any and all losses, claims, liabilities and expenses arising out of (1) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, in or related to the offer
and sale by you of shares of the Funds pursuant to this Agreement (except to the
extent that our negligence or failure to follow correct instructions received
from you is the cause of such loss, claim, liability or expense), (2) any
redemption or exchange pursuant to telephone instructions received from you or
your agent or employees, or (3) the breach by you of any of the terms and
conditions of this Agreement.

16. Termination; Succession; Amendment. Each party to this Agreement may cancel
its participation in this Agreement by giving written notice to the other
parties. Such notice shall be deemed to have been given and to be effective on
the date on which it was either delivered personally to the other parties or any
officer or member thereof, or was mailed postpaid or delivered to a telegraph
office for transmission to the other parties' Chief Legal Officers at the
addresses shown herein or in the most recent NASD Manual. This Agreement shall
terminate immediately upon the appointment of a Trustee under the Securities
Investor Protection Act or any other act of insolvency by you. The termination
of this Agreement by any of the foregoing means shall have no effect upon
transactions entered into prior to the effective date of termination. A trade
placed by you subsequent to your voluntary termination of this Agreement will
not serve to reinstate the Agreement. Reinstatement, except in the case of a
temporary suspension of a dealer, will only be effective upon written
notification by us. Unless terminated, this Agreement shall be binding upon each
party's successors or assigns. This Agreement may be amended by us at any time
by written notice to you and your placing of an order or acceptance of payments
of any kind after the effective date and receipt of notice of any such Amendment
shall constitute your acceptance of such Amendment.

17. Setoff; Dispute Resolution. Should any of your concession accounts with us
have a debit balance, we may offset and recover the amount owed from any other
account you have with us, without notice or demand to you. In the event of a
dispute concerning any provision of this Agreement, either party may require the
dispute to be submitted to binding arbitration under the commercial arbitration
rules of the NASD or the American Arbitration Association. Judgment upon any
arbitration award may be entered by any state or federal court having
jurisdiction. This Agreement shall be construed in accordance with the laws of
the State of California, not including any provision which would require the
general application of the law of another jurisdiction.

18. Acceptance; Cumulative Effect. This Agreement is cumulative and supersedes
any agreement previously in effect. It shall be binding upon the parties hereto
when signed by us and accepted by you. If you have a current dealer agreement
with us, your first trade or acceptance of payments from us after receipt of
this Agreement, as it may be amended pursuant to paragraph 16, above, shall
constitute your acceptance of its terms. Otherwise, your signature below shall
constitute your acceptance of its terms.

FRANKLIN/TEMPLETON DISTRIBUTORS, INC.

By:

Greg Johnson, President

777 Mariners Island Blvd. San Mateo, CA 94404 Attention: Chief Legal Officer
(for legal notices only) 415/312-2000

700 Central Avenue St. Petersburg, Florida 33701-3628 813/823-8712

Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.

DEALER NAME

By:

(Signature)

Name:

Title:

Address:

Telephone:

NASD CRD #

Franklin Templeton Dealer #

(Internal Use Only)

95.89/104 (05/95)

MUTUAL FUND PURCHASE AND SALES AGREEMENT
FOR ACCOUNTS OF BANK AND TRUST COMPANY CUSTOMERS
Effective: July 1, 1995

1. INTRODUCTION

The parties to this Agreement are a bank or trust company ("Bank") and
Franklin/Templeton Distributors, Inc. ("FTDI"). This Agreement sets forth the
terms and conditions under which FTDI will execute purchases and redemptions of
shares of the Franklin or Templeton mutual funds for which FTDI now or in the
future serves as principal underwriter ("Funds"), at the request of the Bank
upon the order and for the account of Bank's customers ("Customers"). In this
Agreement, "Customer" shall include the beneficial owners of an account and any
agent or attorney-in-fact duly authorized or appointed to act on the owners'
behalf with respect to the account. FTDI will notify Bank from time to time of
the Funds which are eligible for distribution and the terms of compensation
under this Agreement. This Agreement is not exclusive, and either party may
enter into similar agreements with third parties. This Agreement supersedes any
prior agreements between the parties, as stated in paragraph 6(j), below.

2. REPRESENTATIONS AND WARRANTIES OF BANK

Bank warrants and represents to FTDI and the Funds that:

a) Bank is a "bank" as defined in Section 3(a)(6) of the Securities and Exchange
Act of 1934, as amended (the "34 Act"):

"The term 'bank' means (A) a banking institution organized under the laws
of the United States, (B) a member bank of the Federal Reserve System, (C) any
other banking institution, whether incorporated or not, doing business under the
law of any State or of the United States, a substantial portion of the business
of which consists of receiving deposits or exercising a fiduciary power similar
to those permitted to national banks under the authority of the Comptroller of
the Currency pursuant to the first section of Public Law 87-722 (12 U.S.C. 92a),
and which is supervised and examined by State or Federal authority having
supervision over banks, and which is not operated for the purpose of evading the
provisions of this title, and (D) a receiver, conservator, or other liquidating
agent of any institution or firm included in clauses (A), (B) or (C) of this
paragraph."

b) Bank is authorized to enter into this Agreement, and Bank's performance of
its obligations and receipt of consideration under this Agreement will not
violate any law, regulation, charter, agreement, or regulatory restriction to
which Bank is subject.

c) Bank has received all regulatory agency approvals and taken all legal and
other steps necessary for offering the services Bank will provide to Customers
in connection with this Agreement.

3. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL UNDERWRITER

FTDI warrants and represents to Bank that:

a) FTDI is a broker/dealer registered under the '34 Act.

b) FTDI is the principal underwriter of the Funds.

4. COVENANTS OF BANK

For each Transaction under this Agreement, Bank will:

a) be authorized to engage in the Transaction;

b) act as agent for the Customer;

c) act solely at the request of and for the account of the Customer;

d) not submit an order unless Bank has already received the order from the
Customer;

e) not submit a purchase order unless Bank has already delivered to the
Customer a copy of the then current prospectus for the Fund(s) whose
shares are to be purchased;

f) not withhold placing any Customer's order for the purpose of profiting from
the delay;

g) have no beneficial ownership of the securities in any purchase Transaction
(the Customer will have the full beneficial ownership), unless Bank is the
Customer (in which case, Bank will not engage in the Transaction unless the
Transaction is legally permissible for Bank); and

h) not accept or withhold any Fee otherwise allowed under Sections 5(d) and (e)
of this Agreement, if prohibited by the Employee Retirement Income Security Act
("ERISA") or trust or similar laws to which Bank is subject, in the case of
purchases or redemptions (hereinafter, "Transactions") of Fund shares involving
retirement plans, trusts, or similar accounts.

i) maintain records of all sales and redemptions of shares made through Bank and
to furnish FTDI with copies of such records on request.

j) distribute prospectuses, statements of additional information and reports to
Bank's customers in compliance with applicable legal requirements, except to the
extent that FTDI expressly undertakes to do so on behalf of Bank.

While this Agreement is in effect, Bank will:

k) not purchase any shares from any person at a price lower than the redemption
price then quoted by the applicable Fund;

l) repay FTDI the full Fee received by Bank under Sections 5(d) and (e) of this
Agreement, for any shares purchased under this Agreement which are repurchased
by the Fund within 7 business days after the purchase; in turn, FTDI shall pay
to the Fund the amount repaid by Bank and will notify Bank of any such
repurchase within a reasonable time;

m) in connection with orders for the purchase of shares on behalf of an
Individual Retirement Account, Self-Employed Retirement Plan or other retirement
accounts, by mail, telephone, or wire, Bank shall act as agent for the custodian
or trustee of such plans (solely with respect to the time of receipt of the
application and payments) and shall not place such an order until Bank has
received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a plan, the completed documents
necessary to establish the plan. Bank agrees to indemnify FTDI and Franklin
Templeton Trust Company and/or Templeton Funds Trust Company as applicable for
any claim, loss, or liability resulting from incorrect investment instructions
received from Bank which cause a tax liability or other tax penalty.

n) be responsible for compliance with all laws and regulations, including those
of the applicable federal and state bank regulatory authorities, with regard to
Bank and Bank's Customers; and

o) immediately notify FTDI in writing at the address given below, should Bank
cease to be a bank as set forth in Section 2(a) of this Agreement.

5. TERMS AND CONDITIONS FOR TRANSACTIONS

a) Price

Transaction orders received from Bank will be accepted only at the public
offering price and in compliance with procedures applicable to each order as set
forth in the then current prospectus and statement of additional information
(hereinafter, collectively, "prospectus") for the applicable Fund. All orders
must be accompanied by payment in U.S. dollars. Orders payable by check must be
drawn payable in U.S. dollars on a U.S. bank, for the full amount of the
investment. All sales are made subject to receipt of shares by FTDI from the
Funds. FTDI reserves the right in its discretion, without notice, to suspend the
sale of shares or withdraw the offering of shares entirely.

b) Orders and Confirmations

All purchase orders are subject to acceptance or rejection by FTDI and by
the Fund or its transfer agent at their sole discretion, and become effective
only upon confirmation by FTDI. Transaction orders shall be made using the
procedures and forms required by FTDI from time to time. Orders received on any
business day after the time for calculating the price of Fund shares as set
forth in each Fund's current prospectus will be effected at the price determined
on the next business day. A written confirming statement will be sent to Bank
and to Customer upon settlement of each Transaction.

c) Multiple Class Guidelines

FTDI may from time to time provide to Bank written compliance guidelines
or standards relating to the sale or distribution of Funds offering multiple
classes of shares with different sales charges and distribution-related
operating expenses. In addition, Bank will be bound by any applicable rules or
regulations of government agencies or self-regulatory organizations generally
affecting the sale or distribution of mutual funds offering multiple classes of
shares.

d) Payments by Bank for Purchases

On the settlement date for each purchase, Bank shall either (i) remit the
full purchase price by wire transfer to an account designated by FTDI, or (ii)
following FTDI's procedures, wire the purchase price less the Fee allowed by
Section 5(e) of this Agreement. Twice monthly, FTDI will pay Bank Fees not
previously paid to or withheld by Bank. Each calendar month, FTDI, as
applicable, will prepare and mail an activity statement summarizing all
Transactions.

e) Fees and Payments

Where permitted by the prospectus for each Fund, a charge, concession, or
fee ("Fee") may be paid to Bank, related to services provided by Bank in
connection with Transactions. The amount of the Fee, if any, is set by the
relevant prospectus. Adjustments in the Fee are available for certain purchases,
and Bank is solely responsible for notifying FTDI when any purchase order is
qualified for such an adjustment. If Bank fails to notify FTDI of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither FTDI nor any of the Funds will be liable for amounts necessary
to reimburse any investor for the reduction which should have been effected.

In accordance with the Funds' prospectuses, FTDI or its affiliates may,
but are not obligated to, make payments from their own resources to banks or
dealers as compensation for certain sales which are made at net asset value and
are not subject to any contingent deferred sales charges ("Qualifying Sales").
If Bank notifies FTDI of a Qualifying Sale, FTDI may make a contingent advance
payment up to the maximum amount available for payment on the sale. If any of
the shares purchased in a Qualifying Sale are redeemed within twelve months of
the end of the month of purchase, FTDI shall be entitled to recover any advance
payment attributable to the redeemed shares by reducing any account payable or
other monetary obligation FTDI may owe to Bank or by making demand upon Bank for
repayment in cash. FTDI reserves the right to withhold advances to any bank or
dealer, if for any reason it believes that it may not be able to recover
unearned advances from such bank or dealer. In addition, banks and dealers will
generally be required to enter into a supplemental agreement with FTDI with
respect to such compensation and the repayment obligation prior to receiving any
payments.

f) Rule 12b-1 Plans

Bank is also invited to participate in all Plans adopted by the Funds (the
"Plan Funds") pursuant to Rule 12b-1 under the 1940 Act.

To the extent Bank provides administrative and other services, including,
but not limited to, furnishing personal and other services and assistance to
Bank's customers who own shares of a Plan Fund, answering routine inquiries
regarding a Fund, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, FTDI shall pay
Bank Rule 12b-1 fees. All Rule 12b-1 fees shall be based on the value of shares
attributable to customers of Bank and eligible for such payment, and shall be
calculated on the basis and at the rates set forth in the compensation schedule
then in effect. Without prior approval by a majority of the outstanding shares
of a Fund, the aggregate annual fees paid to Bank pursuant to each Plan shall
not exceed the amounts stated as the "annual maximums" in each Fund's
prospectus, which amount shall be a specified percent of the value of the Fund's
net assets held in Bank's customers' accounts which are eligible for payment
pursuant to this Agreement (determined in the same manner as each Fund uses to
compute its net assets as set forth in its effective Prospectus).

Bank shall furnish FTDI and each Fund with such information as shall
reasonably be requested by the Board of Directors, Trustees or Managing General
Partners (hereinafter referred to as "Directors") of such Funds with respect to
the fees paid to Bank pursuant to the Schedule. FTDI shall furnish to the Boards
of Directors of the Plan Funds, for their review on a quarterly basis, a written
report of the amounts expended under the Plans and the purposes for which such
expenditures were made.

The Plans and provisions of any agreement relating to such Plans must be
approved annually by a vote of the Plan Funds' Directors, including such persons
who are not interested persons of the Plan Funds and who have no financial
interest in the Plans or any related agreement ("Rule 12b-1 Directors"). The
Plans or the provisions of this Agreement relating to such Plans may be
terminated at any time by the vote of a majority of the Plan Funds' Boards of
Directors, including Rule 12b-1 Directors, or by a vote of a majority of the
outstanding shares of the Plan Funds, on sixty (60) days' written notice,
without payment of any penalty. The Plans or the provisions of this Agreement
may also be terminated by any act that terminates the Underwriting Agreement
between FTDI and the Plan Funds, and/or the management or administration
agreement between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc.
or their affiliates and the Plan Funds. In the event of the termination of the
Plans for any reason, the provisions of this Agreement relating to the Plans
will also terminate.

Continuation of the Plans and provisions of this Agreement relating to
such Plans are conditioned on Rule 12b-1 Directors being ultimately responsible
for selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, Plan Funds are permitted to implement or continue Plans or the provisions
of this Agreement relating to such Plans from year-to-year only if, based on
certain legal considerations, the Boards of Directors are able to conclude that
the Plans will benefit the Plan Funds. Absent such yearly determination, the
Plans and the provisions of this Agreement relating to the Plans must be
terminated as set forth above. In addition, any obligation assumed by a Fund
pursuant to this Agreement shall be limited in all cases to the assets of such
Fund and no person shall seek satisfaction thereof from shareholders of a Fund.
Bank agrees to waive payment of any amounts payable to Bank by FTDI under a
Fund's Plan of Distribution pursuant to Rule 12b-1 until such time as FTDI is in
receipt of such fee from the Fund.

The provisions of the Rule 12b-1 Plans between the Plan Funds and FTDI,
insofar as they relate to Plans, shall control over the provisions of this
Agreement in the event of any inconsistency.

g) Other Distribution Services

From time to time, FTDI may offer telephone and other augmented services
in connection with Transactions under this Agreement. If Bank uses any such
service, Bank will be subject to the procedures applicable to the service,
whether or not Bank has executed any agreement required for the service.

h) Conditional Orders; Certificates

FTDI will not accept any conditional Transaction orders. Delivery of
certificates or confirmations for shares purchased shall be made by the Fund
conditional upon receipt of the purchase price, subject to deduction of any Fee.
No certificates will be issued unless specifically requested.

i) Cancellation of Orders

If payment for shares purchased is not received within the time customary
or the time required by law for such payment, the sale may be canceled without
notice or demand, and neither FTDI nor the Fund(s) shall have any responsibility
or liability for such a cancellation; alternatively, the unpaid shares may be
sold back to the Fund, and Bank shall be liable for any resulting loss to FTDI
or to the Fund(s). FTDI shall have no liability for any check or other item
returned unpaid to Bank after Bank has paid FTDI on behalf of a purchaser. FTDI
may refuse to liquidate the investment unless it receives the purchaser's signed
authorization for the liquidation.

j) Order Corrections

Bank shall assume responsibility for any loss to a Fund(s) caused by a
correction made subsequent to trade date, provided such correction was not based
on any error, omission or negligence on FTDI's part, and Bank will immediately
pay such loss to the Fund(s) upon notification.

k) Redemptions; Cancellation

Redemptions or repurchases of shares will be made at the net asset value
of such shares, less any applicable deferred sales or redemption charges, in
accordance with the applicable prospectuses. As agent, Bank may sell shares for
the account of the record owner to the Funds at the repurchase price then
currently in effect for such shares and may charge the owner a fair fee for
handling the transaction. If on a redemption which Bank has ordered,
instructions in proper form, including outstanding certificates, are not
received within the time customary or the time required by law, the redemption
may be canceled forthwith without any responsibility or liability on the part of
FTDI or any Fund, or at its option FTDI may buy the shares redeemed on behalf of
the Fund, in which latter case it may hold Bank responsible for any loss to the
Fund or loss of profit suffered by FTDI resulting from Bank's failure to settle
the redemption.

l) Exchanges

Telephone exchange orders will be effective only for shares in plan
balance (uncertificated shares) or for which share certificates have been
previously deposited and may be subject to any fees or other restrictions set
forth in the applicable prospectuses. Bank may charge the shareholder a fair fee
for handling an exchange transaction. Exchanges from a Fund sold with no sales
charge to a Fund which carries a sales charge, and exchanges from a Fund sold
with a sales charge to a Fund which carries a higher sales charge may be subject
to a sales charge in accordance with the terms of each Fund's prospectus. Bank
will be obligated to comply with any additional exchange policies described in
each Fund's prospectus, including without limitation any policy restricting or
prohibiting "Timing Accounts" as therein defined.

m) Qualification of Shares; Indemnification

Upon request, FTDI shall notify Bank of the states or other jurisdictions
in which each Fund's shares are currently registered or qualified for sale to
the public. FTDI shall have no obligation to register or qualify, or to maintain
registration or qualification of, Fund shares in any state or other
jurisdiction. FTDI shall have no responsibility, under the laws regulating the
sale of securities in any U.S. or foreign jurisdiction, for the qualification or
status of persons selling Fund shares or for the manner of sale of Fund shares.
Except as stated in this paragraph, FTDI shall not, in any event, be liable or
responsible for the issue, form, validity, enforceability and value of such
shares or for any matter in connection therewith, and no obligation not
expressly assumed by FTDI in this Agreement shall be implied. If it is necessary
to register or qualify shares of any Fund in any foreign jurisdictions in which
Bank intends to offer such shares, it will be Bank's responsibility to arrange
for and to pay the costs of such registration or qualification; prior to any
such registration or qualification Bank will notify FTDI of its intent and of
any limitations that might be imposed on the Funds and Bank agrees not to
proceed with such registration or qualification without the written consent of
the Funds and of FTDI.

Bank further agrees to indemnify, defend and hold harmless the Principal
Underwriter, the Funds, their officers, directors and employees from any and all
losses, claims, liabilities and expenses, arising out of (1) any alleged
violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, in or related to the offer
and sale by Bank of shares of the Funds pursuant to this Agreement (except to
the extent that FTDI's negligence or failure to follow correct instructions
received from Bank is the cause of such loss, claim, liability or expense), (2)
any redemption or exchange pursuant to telephone instructions received from Bank
or its agents or employees, or (3) the breach by Bank of any of the terms and
conditions of this Agreement.

However, nothing in this Agreement shall be deemed to be a condition,
stipulation, or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, or of the rules and
regulations of the Securities and Exchange Commission, or to relieve the parties
hereto from any liability arising under the Securities Act of 1933.

n) Prospectus and Sales Materials; Limit on Advertising

No person is authorized to give any information or make any
representations concerning shares of any Fund except those contained in the
Fund's current prospectus or in materials issued by FTDI as information
supplemental to such prospectus. FTDI will supply prospectuses, reasonable
quantities of supplemental sale literature, sales bulletins, and additional
information as issued. Bank agrees not to use other advertising or sales
material relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country, having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by FTDI
in advance of such use. Such approval may be withdrawn by FTDI in whole or in
part upon notice to Bank, and Bank shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales material and
advertising. Bank is not authorized to modify or translate any such materials
without the prior written consent of FTDI.

o) Customer Information

(1) Definition. For purposes of this paragraph 5(h)(iv), 'Customer
Information' means customer names and other identifying information pertaining
to Bank's mutual fund customers which is furnished by Bank to FTDI in the
ordinary course of business under this Agreement. Customer Information shall not
include any information obtained from other sources.

(2) Permitted Uses. FTDI may use Customer Information to fulfill its
obligations under this Agreement, the Distribution Agreements between the Funds
and FTDI, the Funds' prospectuses, or other duties imposed by law. In addition,
FTDI or its affiliates may use Customer Information in communications to
shareholders to market the Funds or other investment products or services,
including without limitation variable annuities, variable life insurance, and
retirement plans and related services. FTDI may also use Customer Information if
it obtains Bank's prior written consent.

(3) Prohibited Uses. Except as stated above, FTDI shall not disclose
Customer Information to third parties, and shall not use Customer Information in
connection with any advertising, marketing or solicitation of any products or
services, provided that Bank offers or soon expect to offer comparable products
or services to mutual fund customers and have so notified FTDI.

(4) Survival; Termination. The agreements described in this paragraph
5(h)(iv) shall survive the termination of this Agreement, but shall terminate as
to any account upon FTDI's receipt of valid notification of either the
termination of that account with Bank or the transfer of that account to another
bank or dealer.

6. GENERAL

a) Successors and Assignments

This Agreement binds Bank and FTDI and their respective heirs, successors
and assigns. Bank may not assign its right and duties under this Agreement
without the advance, written authorization of FTDI.

b) Paragraph Headings

The paragraph headings of this Agreement are for convenience only, and
shall not be deemed to define, limit, or describe the scope or intent of this
Agreement.

c) Severability

Should any provision of this Agreement be determined to be invalid or
unenforceable under any law, rule, or regulation, that determination shall not
affect the validity or enforceability of any other provision of this Agreement.

d) Waivers

There shall be no waiver of any provision of this Agreement except a
written waiver signed by Bank and FTDI. No written waiver shall be deemed a
continuing waiver or a waiver of any other provision, unless the waiver
expresses such intention.

e) Sole Agreement

This Agreement is the entire agreement of Bank and FTDI and supersedes all
oral negotiations and prior writings.

f) Governing Law

This Agreement shall be construed in accordance with the laws of the State
of California, not including any provision which would require the general
application of the law of another jurisdiction, and shall be binding upon the
parties hereto when signed by FTDI and accepted by Bank, either by Bank's
signature in the space provided below or by Bank's first trade entered after
receipt of this Agreement.

g) Arbitration

Should any of Bank's concession accounts with FTDI have a debit balance,
FTDI may offset and recover the amount owed from any other account Bank has with
FTDI, without notice or demand to Bank. Either party may submit any dispute
under this Agreement to binding arbitration under the commercial arbitration
rules of the American Arbitration Association. Judgment upon any arbitration
award may be entered by any state or federal court having jurisdiction.

h) Amendments

FTDI may amend this Agreement at any time by depositing a written notice
of the amendment in the U.S. mail, first class postage pre-paid, addressed to
Bank's address given below. Bank's placement of any Transaction order or
acceptance of any payments after the effective date and receipt of notice of any
such amendment shall constitute Bank's acceptance of the amendment.

i) Term and Termination

This Agreement shall continue in effect until terminated. FTDI or Bank may
terminate this Agreement at any time by written notice to the other, but such
termination shall not affect the payment or repayment of Fees on Transactions
prior to the termination date. Termination also will not affect the indemnities
given under this Agreement.

j) Acceptance; Cumulative Effect

This Agreement is cumulative and supersedes any agreement previously in
effect. It shall be binding upon the parties hereto when signed by FTDI and
accepted by Bank. If Bank has a current agreement with FTDI, Bank's first trade
or acceptance of payments from FTDI after receipt of this Agreement, as it may
be amended pursuant to paragraph 6(h), above, shall constitute Bank's acceptance
of the terms of this Agreement. Otherwise, Bank's signature below shall
constitute Bank's acceptance of these terms.

FRANKLIN/TEMPLETON DISTRIBUTORS, INC.

By:

Greg Johnson, President

777 Mariners Island Blvd. San Mateo, CA 94404 Attention: Chief Legal Officer
(for legal notices only)

415/312-2000

700 Central Avenue St. Petersburg, Florida 33701-3628

813/823-8712

To the Bank or Trust Company: If you have not previously signed an agreement
with us for the sale of mutual fund shares to your customers, please complete
and sign this section and return the original to us.

BANK or TRUST COMPANY

(Firm's name)

By:

(Signature)

Name:

Title:Address:

Telephone:

CUSTODY AGREEMENT

THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 1, 1993, by and between FRANKLIN STRATEGIC MORTGAGE PORTFOLIO, a
Delaware business trust (the "Trust"), and BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, a banking association organized under the laws of the
United States (the "Custodian").

RECITALS

A. The Trust is an investment company registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act") that
invests and reinvests, on behalf of its series, in Domestic Securities and
Foreign Securities.

B. The Custodian is, and has represented to the Trust that the
Custodian is, a "bank" as that term is defined in Section 2(a)(5) of the
Investment Company Act of 1940, as amended and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.

C. The Trust and the Custodian desire to provide for the retention
of the Custodian as a custodian of the assets of the Trust and such subsequent
series as the parties hereto may determine from time-to-time, on the terms and
subject to the provisions set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:

Section 1. DEFINITIONS

For purpose of this Agreement, the following terms shall have the
respective meanings specified below:

"Agreement" shall mean this Custody Agreement.

"Board of" Trustees" shall mean the Board of Trustees of the
Trust.

"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking institutions
are authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.

"Custodian" shall mean Bank of America National Trust and Savings
Association.

"Domestic Securities" shal1 have the meaning provided in
Subsection 2.1 hereof.

"Executive Committee" shall mean the executive committee of the
Board of Trustees.

"Foreign Custodian" shall have the meaning provided in Section
4.1 hereof.

"Foreign Securities" shall have the meaning provided in Section
2.1 hereof.

"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.

"Trust" shall mean the Franklin Strategic Mortgage Portfolio and any
separate series of the Trust hereinafter organized.

"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.

"Securities" shall have the meaning provided in Section 2.1
hereof.

"Securities System" shall have the meaning provided in Section
3.1 hereof.

"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.

"Shares" shall mean shares of beneficial interest of
the Trust.

"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.

"Transfer Agent" shall mean the duly appointed and acting transfer
agent for the Trust.

"Writing" shall mean a communication in writing, a communication by
telex, the Custodian's Global Custody Instruction System , facsimile
transmission, bankwire or other teleprocess or electronic instruction system
acceptable to the Custodian.

Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS

2.1 Appointment of Custodian. The Trust hereby appoints and
designates the Custodian as a custodian of the assets of the Trust including
cash, securities the Trust desires to be held within the United States
("Domestic Securities") and securities it desires to be held outside the United
States ("Foreign Securities"). Domestic Securities and Foreign Securities are
sometimes referred to herein, collectively, as "Securities". The Custodian
hereby accepts such appointment and designation and agrees that it shall
maintain custody of the assets of the Trust delivered to it hereunder in the
manner provided for herein.

2.2 Delivery of Assets. The Trust agrees to deliver to the Custodian
Securities and cash owned by the Trust, payments of income, principal or capital
distributions received by the Trust with respect to Securities owned by the
Trust from time to time, and the consideration received by it for such Shares or
other securities of the Trust as may be issued and sold from time to time. The
Custodian shall have no responsibility whatsoever for any property or assets of
the Trust held or received by the Trust and not delivered to the Custodian
pursuant to and in accordance with the terms hereof. All Securities accepted by
the Custodian on behalf of the Trust under the terms of this Agreement shall be
in "street name" or other good delivery form as determined by the Custodian.

2.3 Subcustodians. Upon receipt of Proper Instructions and a
certified copy of a resolution of the Board of Trustees or of the Executive
Committee certified by the Secretary or an Assistant Secretary of the Trust, the
Custodian may from time to time appoint one or more Subcustodians or Foreign
Custodians to hold assets of the Trust in accordance with the provisions of this
.Agreement.

2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of the Trust held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.

Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE TRUST HELD
BY THE CUSTODIAN

3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of the
Trust, all non-cash property delivered by the Trust to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.

3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by the Trust and held by the Custodian in
the following cases or as otherwise directed in Proper Instructions:

(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Trust and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;

(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Trust;

(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;

(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Trust, or
(ii) a tender offer or repurchase by the Trust of its own Shares;

(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;

(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Trust, the name or nominee name of the Custodian,
the name or nominee name of any Subcustodian or Foreign Custodian; or for
exchange for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units; provided that,
in any such case, the new Securities are to be delivered to the Custodian, a
Subcustodian or Foreign Custodian;

(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;

(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;

(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;

(j) for delivery in connection with any loans of Securities
made by the Trust, but only against receipt by the Custodian, a Subcustodian or
a Foreign Custodian of adequate collateral as determined by the Trust (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Trust prior to the receipt of such
collateral;

(k) for delivery as security in connection with any borrowings
by the Trust requiring a pledge of assets by the Trust, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;

(l) for delivery in accordance with the provisions of any
agreement among the Trust, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Trust;

(m) for delivery in accordance with the provisions of any
agreement among the Trust, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Trust;

(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and

(o) for any other proper purpose, but only upon receipt of
proper Instructions, and a certified copy of a resolution of the Trustees or of
the Executive Committee certified by the Secretary or an Assistant Secretary of
the Trust, specifying the securities to be delivered, setting forth the purpose
for which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.

3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the Trust, in the name or nominee name
of the Custodian or in the name or nominee name of any Subcustodian or Foreign
Custodian. The Trust agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.

3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for the Trust, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of the Trust, other than cash maintained by
the Trust in a bank account established and used in accordance with Rule 17f-3
under the Investment Company Act. Funds held by the Custodian for the Trust may
be deposited by it to its credit as Custodian in the banking departments of the
Custodian, a Subcustodian or a Foreign Custodian. It is understood and agreed by
the Custodian and the Trust that the rate of interest, if any, payable on such
funds (including foreign currency deposits) that are deposited with the
Custodian may not be a market rate of interest and that the rate of interest
payable by the Custodian to the Trust shall be agreed upon by the Custodian and
the Trust from time to time. Such funds shall be deposited by the Custodian in
its capacity as Custodian and shall be withdrawable by the Custodian only in
that capacity.

3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
the Trust, settle Securities trades for the account of the Trust and credit and
debit the Trust's account with the Custodian in connection therewith as follows:

(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Trust on the
contractual settlement date. The Custodian shall have no liability of any kind
to any person, including the Trust, if the Custodian effects payment on behalf
of the Trust as provided for herein or in Proper Instructions, and the seller or
selling broker fails to deliver the Securities purchased.

(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by delivering a certificate or other indicia of
ownership, and shall credit the account of the Trust with the proceeds of such
sale on the contractual settlement date. The Custodian shall have no liability
of any kind to any person, including the Trust, if the Custodian delivers such a
certificate(s) or other indicia of ownership as provided for herein or in Proper
Instructions, and the purchaser or purchasing broker fails to effect payment to
the Trust within a reasonable time period, as determined by the Custodian in its
sole discretion. In such event, the Custodian shall be entitled to reimbursement
of the amount so credited to the account of the Trust in connection with such
sale.

(c) The Trust is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Trust, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.

(d) The Custodian shall credit the account of the Trust with
interest income payable on interest bearing Securities on payable date. Interest
income on cash balances will be credited monthly to the account of the Trust on
the first Business Day (on which the Custodian is open for business) following
the end of each month. Dividends and other amounts payable with respect to
Domestic Securities and Foreign Securities shall be credited to the account of
the Trust when received by the Custodian. The Custodian shall not be required to
commence suit or collection proceedings or resort to any extraordinary means to
collect such income and other amounts payable with respect to Securities owned
by the Trust. The collection of income due the Trust on Domestic Securities
loaned pursuant to the provisions of Subsection 3.2(j) shall be the
responsibility of the Trust. The Custodian will have no duty or responsibility
in connection therewith, other than to provide the Trust with such information
or data as may be necessary to assist the Trust in arranging for the timely
delivery to the Custodian of the income to which the Trust is entitled. The
Custodian shall have no liability to any person, including the Trust, if the
Custodian credits the account of the Trust with such income or other amounts
payable with respect to Securities owned by the Trust (other than Securities
loaned by the Trust pursuant to Subsection 3.2(j) hereof) and the Custodian
subsequently is unable to collect such income or other amounts from the payors
thereof within a reasonable time period, as determined by the Custodian in its
sole discretion. In such event, the Custodian shall be entitled to reimbursement
of the amount so credited to the account of the Trust.

3.6 Payment of Trust Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of the Trust in the following cases or as
otherwise directed in Proper Instructions:

(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Trust but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Trust and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Trust of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Trust;

(b) in connection with conversion, exchange or surrender of
Securities owned by the Trust as set forth in Subsection 3.2 hereof;

(d) for the payment of any expense or liability incurred by
the Trust, including but not limited to the following payments for the account
of the Trust: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Trust whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and

(e) for the payment of any dividends or distributions
declared by the Board of Trustees with respect to the Shares.

3.7 Appointment of Subcustodians. The Custodian may, upon receipt of
Proper Instructions, appoint another bank or trust company, which is itself
qualified under the Investment Company Act to act as a custodian (a
"Subcustodian"), as the agent of the Custodian to carry out such of the duties
of the Custodian hereunder as a Custodian may from time to time direct;
provided, however, that the appointment of any Subcustodian shall not relieve
the Custodian of its responsibilities or liabilities hereunder.

3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by the Trust in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:

(a) the Custodian may hold Domestic Securities of the Trust in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;

(b) the records of the Custodian with respect to Domestic
Securities of the Trust which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Trust;

(C) the Custodian shall pay for Domestic Securities purchased
for the account of the Trust upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Trust. The Custodian
shall transfer Domestic Securities sold for the account of the Trust upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Trust. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Trust shall be
maintained for the Trust by the Custodian and be provided to the Trust at its
request. Upon request, the Custodian shall furnish the Trust confirmation of
each transfer to or from the account of the Trust in the form of a written
advice or notice; and

(d) upon request, the Custodian shall provide the Trust with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.

3.9 Segregated Account. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated account or accounts for
and on behalf of the Trust, into which account or accounts may be transferred
cash and/or Securities, including Securities maintained in an account by the
Custodian pursuant to Section 3.8 hereof, (i) in accordance with the provisions
of any agreement among the Trust, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Trust, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Trust
or commodity futures contracts or options thereon purchased or sold by the Trust
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Trustees or of the Executive Committee
certified by the Secretary or an Assistant Secretary, setting forth the purpose
or purposes of such segregated account and declaring such purposes to be proper
corporate purposes.

3.10 ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Trust held by it and in connection with
transfers of such securities.

3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to the Trust all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of the Trust or a nominee of the Trust,
the Custodian shall use its best reasonable efforts, consistent with applicable
law, to cause all proxies to be promptly executed by the registered holder of
such Securities in accordance with Proper Instructions.

3.12 Communications Relating to Trust Portfolio Securities. The
Custodian shall transmit promptly to the Trust all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Trust and the maturity of futures contracts
purchased or sold by the Trust) received by the Custodian from issuers of
Securities being held for the Trust. With respect to tender or exchange offers,
the Custodian shall transmit promptly to the Trust all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If the Trust desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Trust shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action

3.13 Reports by Custodian. Custodian shall each business day
furnish the Trust with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month
Custodian shall furnish the Trust with a list of the portfolio securities
showing the quantity of each issue owned, the cost of each issue and the market
value of each issue at the end of each month. Such monthly report shall also
contain separate listings of (a) unsettled trades and (b) when-issued
securities. Custodian shall furnish such other reports as may be mutually agreed
upon from time-to-time.

Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
TRUST HELD OUTSIDE THE UNITED STATES

4.1 Custody outside the United States. The Trust authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the Board of Trustees or the
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board of
Trustees or of the Executive Committee certified by the Secretary or an
Assistant Secretary of the Trust. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by Section 3 hereof.

4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Investment Company Act, and
(ii) cash and cash equivalents in such amounts as the Custodian or the Trust may
determine to be reasonably necessary to effect the Trust's Foreign Securities
transactions.

4.3 Foreign Securities Depositories. Except as may otherwise be
agreed upon in writing by the Custodian and the Trust, assets of the Trust shall
be maintained in Foreign Securities Depositories only through arrangements
implemented by the Custodian or Foreign Custodians pursuant to the terms hereof.

4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the Trust, the Foreign Securities of the Trust
held by each Foreign Custodian.

4.5 Agreements with Foreign Custodians. Each agreement with a
Foreign Custodian shall provide generally that: (a) the Trust's assets will not
be subject to any right, charge, security interest, lien or claim of any kind in
favor of the Foreign Custodian or its creditors, except a claim of payment for
their safe custody or administration; (b) beneficial ownership for the Trust's
assets will be freely transferable without the payment of money or value other
than for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to the Trust; (d) the independent public
accountants for the Trust, will be given access to the records of the Foreign
Custodian relating to the assets of the Trust or confirmation of the contents of
those records; (e) the disposition of assets of the Trust held by the Foreign
Custodian will be subject only to the instructions of the Custodian or its
agents; (f) the Foreign Custodian shall indemnify and hold harmless the
Custodian and the Trust from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the Foreign Custodian's
performance of its obligations under such agreement; (g) to the extent
practicable, the Trust's assets will be adequately insured in the event of loss;
and (h) the Custodian will receive periodic reports with respect to the
safekeeping of the Trust's assets, including notification of any transfer to or
from the Trust's account.

4.6 Access of Independent Accountants of the Trust. Upon request of
the Trust, the Custodian will use its best reasonable efforts to arrange for the
independent accountants of the Trust to be afforded access to the books and
records of any Foreign Custodian insofar as such books and records relate to the
custody by any such Foreign Custodian of assets of the Trust.

4.7 Transactions in Foreign Custody Accounts. Upon receipt of
Proper Instructions, the Custodian shall instruct the appropriate Foreign
Custodian to transfer, exchange or deliver Foreign Securities owned by the
Trust, but, except to the extent explicitly provided herein, only in any of the
cases specified in Subsection 3.2. Upon receipt of Proper Instructions, the
Custodian shall pay out or instruct the appropriate Foreign Custodian to pay out
monies of the Trust in any of the cases specified in Subsection 3.6.
Notwithstanding anything herein to the contrary, settlement and payment for
Foreign Securities received for the account of the Trust and delivery of Foreign
Securities maintained for the account of the Trust may be effected in accordance
with the customary or established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the purchaser
thereof or to a dealer therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer. Foreign Securities maintained in the
custody of a Foreign Custodian may be maintained in the name of such entity or
its nominee name to the same extent as set forth in Section 3.3 of this
Agreement and the Trust agrees to hold any Foreign Custodian and its nominee
harmless from any liability as a holder of record of such securities.

4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall require the Foreign Custodian to
exercise reasonable care in the performance of its duties and to indemnify and
hold harmless the Custodian and the Trust from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Custodian's performance of such obligations. At the election of the
Trust, it shall be entitled to be subrogated to the rights of the Custodian with
respect to any claims against a Foreign Custodian as a consequence of any such
loss, damage, cost, expense, liability or claim if and to the extent that the
Trust has not been made whole for any such loss, damage, cost, expense,
liability or claim.

4.9 Monitoring Responsibilities.

(a) The Custodian will promptly inform the Trust in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or is notified by (i) a foreign banking
institution employed as a Foreign Custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below $200
million or that its shareholders' equity has declined below $200 million (in
each case computed in accordance with generally accepted United States
accounting principles) and denominated in U.S. dollars, or (ii) a subsidiary of
a United States bank or bank holding company acting as a Foreign Custodian that
there appears to be a substantial likelihood that its shareholders' equity will
decline below $100 million or that its shareholders' equity has declined below
$100 million (in each case computed in accordance with generally accepted United
States accounting principles) and denominated in U.S. dollars.

(b) The custodian will furnish such information as may be
reasonably necessary to assist the Trust's Board of Trustees in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.

Section 5. PROPER INSTRUCTIONS

As used in this Agreement, the term "Proper Instructions" means
instructions of the Trust received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in Writing by an Authorized Person, but the Trust will
hold the Custodian harmless for its failure to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or the Custodian's failure to produce such confirmation at
any subsequent time. Unless otherwise expressly provided, all Proper
Instructions shall continue in full force and effect until canceled or
superseded. If the Custodian requires test arrangements, authentication methods
or other security devices to be used with respect to Proper Instructions, any
Proper Instructions given by the Trust thereafter shall be given and processed
in accordance with such terms and conditions for the use of such arrangements,
methods or devices as the Custodian may put into effect and modify from time to
time. The Trust shall safeguard any testkeys, identification codes or other
security devices which the Custodian shall make available to it. The Custodian
may electronically record any Proper Instructions given by telephone, and any
other telephone discussions, with respect to its activities hereunder. As used
in this Agreement, the term "Authorized Persons" means such officers or such
agents of the Trust as have been designated by a resolution of the Board of
trustees or of the Executive Committee, a certified copy of which has been
provided to the Custodian, to act on behalf of the Trust under this Agreement.
Each of such persons shall continue to be an Authorized Person until such time
as the Custodian receives Proper Instructions that any such officer or agent is
no longer an Authorized Person.

Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY

The Custodian may in its discretion, without express authority from
the Trust:

(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Trust;

(b) endorse for collection, in the name of the Trust,
checks, drafts and other negotiable instruments; and

(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Trust except as otherwise
provided in Proper Instructions.

Section 7. EVIDENCE OF AUTHORITY

The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of the Trust. The Custodian may receive and
accept a certified copy of a resolution of the Board of Trustees or Executive
Committee as conclusive evidence (a) of the authority of any person to act in
accordance with such resolution or (b) of any determination or of any action by
the Board of Trustees or Executive Committee as described in such resolution,
and such resolution may be considered as in full force and effect until receipt
by the Custodian of written notice by an Authorized Person to the contrary.

Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION

The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the Board of Trustees to keep the books of account of
the Trust and/or compute the net asset value per Share of the outstanding Shares
of the Trust.

Section 9. RECORDS

The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Trust and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Trust and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Trust's request, supply the Trust with a tabulation of Securities
owned by the Trust and held by the Custodian and shall, when requested to do so
by the Trust and for such compensation as shall be agreed upon between the Trust
and the Custodian, include certificate numbers in such tabulations.

Section 10. COMPENSATION OF CUSTODIAN

The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Trust and the Custodian.

Section 11. RESPONSIBILITY OF CUSTODIAN

The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to
the Trust for any loss which shall occur as the result of the failure of a
Foreign Custodian or a Foreign Securities Depository engaged by such Foreign
Custodian or the Custodian to exercise reasonable care with respect to the
safekeeping of securities and other assets of the Trust to the same extent that
the Custodian would be liable to the Trust if the Custodian itself were holding
such securities and other assets. In the event of any loss to the Trust by
reason of the failure of the Custodian, a Foreign Custodian or a Foreign
Securities Depository engaged by such Foreign Custodian or the Custodian to
utilize reasonable care, the Custodian shall be liable to the Trust to the
extent of the Trust's damages, to be determined based on the market value of the
property which is the subject of the loss at the date of discovery of such loss
and without reference to any special conditions or circumstances. The Custodian
shall be held to the exercise of reasonable care in carrying out this Agreement.
The Trust agrees to indemnify and hold harmless the custodian and its nominees
from all taxes, charges, expenses, assessments, claims and liabilities
(including legal fees and expenses) incurred by any of them in connection with
the performance of this Agreement, except such as may arise from any negligent
action, negligent failure to act or willful misconduct on the part of the
indemnified entity or any Foreign Custodian or Foreign Securities Depository.
The Custodian shall be entitled to rely, and may act, on advice of counsel (who
may be counsel for the Trust) on all matters and shall be without liability for
any action reasonably taken or omitted pursuant to such advice. The Custodian
need not maintain any insurance for the benefit of the Trust.

All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Trust. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board of
Trustees and may rely on the genuineness of any such documents which it may in
good faith believe to be validly executed. The Custodian shall not be liable for
any loss resulting from, or caused by, the direction of the Trust to maintain
custody of any Securities or cash in a foreign country including, but not
limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences or
events beyond the control of the Custodian. Finally, the Custodian shall not be
liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of the Trust
held by the Custodian.

Section 12. LIMITED LIABILITY OF THE TRUST

The Custodian acknowledges that it has received notice of and
accepts the limitations of the Trust's liability as set forth in its Agreement
and Declaration of Trust. The Custodian agrees that the Trust's obligation
hereunder shall be limited to the assets of the Trust, and that the Custodian
shall not seek satisfaction of any such obligation from the shareholders of the
Trust nor from any Trustee, officer, employee, or agent of the Trust.

Section 13. EFFECTIVE PERIOD; TERMINATION

This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by the Trust or the
Custodian by 60 days notice in Writing to the other provided that any
termination by the Trust shall be authorized by a resolution of the Board of
Trustees, a certified copy of which shall accompany such notice of termination,
and provided further, that such resolution shall specify the names of the
persons to whom the Custodian shall deliver the assets of the Trust held by it.
If notice of termination is given by the Custodian, the Trust shall, within 60
days following the giving of such notice, deliver to the Custodian a certified
copy of a resolution of the Board of Trustees specifying the names of the
persons to whom the Custodian shall deliver assets of the Trust held by it. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Trust assets to the persons so specified). If within 60 days following the
giving of a notice of termination by the Custodian, the Custodian does not
receive from the Trust a certified copy of a resolution of the Board of Trustees
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Trust held by it, the Custodian, at its election, may deliver such
assets to a bank or trust company doing business in the State of California to
be held and disposed of pursuant to the provisions of this Agreement or may
continue to hold such assets until a certified copy of one or more resolutions
as aforesaid is delivered to the Custodian. The obligations of the parties
hereto regarding the use of reasonable care, indemnities and payment of fees and
expenses shall survive the termination of this Agreement.

Section 14. MISCELLANEOUS

14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and the Trust or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to the Trust of
investment banking, securities dealing or brokerages services or any other
banking or financial services.

14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.

14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.

14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):

if to the Trust :

Franklin Strategic Mortgage Portfolio c/o Franklin
Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Trust Manager

if to the Custodian:

Bank of America NT & SA 1455 Market Street
16th Floor, Dept. 5014 San Francisco, CA 94104

14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.

14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.

14.7 Governing Law. This Agreement shall be construed in
accordance with, and governed in all respects by, the laws of the State of
California (without giving effect to principles of conflict of laws).

14.8 Force Majeure. Subject to the provisions of Section 11 hereof
regarding the Custodian's general standard of care, no failure, delay or default
in performance of any obligation hereunder shall constitute an event of default
or a breach of this agreement, or give rise to any liability whatsoever on the
part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.

14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.

14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.

14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.

14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.

14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the Trust
and the Custodian and their respective successors and assigns, if any.

14.14 Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto and supersedes all prior agreements and
understandings between the parties hereto relating to the subject matter hereof.

14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the date first above written.

"Custodian": BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION

By: /s/ illegible

Its: Vice President

"Trust": FRANKLIN STRATEGIC MORTGAGE PORTFOLIO

/s/ Charles B. Johnson
By: Charles B. Johnson

Its: President

(Franklin logo)

FRANKLIN
RESOURCES, INC.
777 Mariners Island Blvd.
San Mateo, CA 94404
415/312-5818
FAX 415/312-3528

Martin L. Flanagan CPA, CFA
Senior Vice President
Chief Financial Officer

April 12, 1995

Mr. Stephen H. Kilbuck
Vice President Corporate Banking
Bank of America, NT & SA
555 California Street, 41st Floor
San Francisco, CA 94104

Dear Steve:

Various Franklin Funds/Portfolios (the "Funds") and Bank of America,
National Trust and Savings Association ("Bank") are parties to custody
agreements (the "Agreements") as well as separate cash management and deposit
services arrangements.

By this Letter Agreement, each of the Funds and Bank desire to establish
the cash compensation to be paid by each Fund for services rendered to it by
Bank.

Effective April 1, 1995, commencing with the first statement prepared
thereafter each Fund will pay to Bank a monthly fee in cash equal to an annual
rate of 87.5/100 ths. (.875) basis points of the net asset value of each such
Funds domestic portfolios held in custody by Bank and nine and three-tenths
(9.3) basis points of the net asset value of each such Funds international
portfolios held in custody by Bank or held by foreign sub-custodians calculated
as of the last business day of the month. For purposes of calculating the
monthly fee, 000007291 will be used as the monthly factor for the domestic
portfolio and .0000775 will be used as the monthly factor for the international
portfolio. The obligation of each Fund is separate from the obligation of any
other Fund.

The purpose of this Letter of Agreement is to provide for a fair level of
compensation to Bank for its service. The fee is based on the assumption that
each Fund will continue to use services of a type and volume comparable to the
services currently used. The parties agree that any party may initiate
discussions concerning revisions to the terms of this Letter Agreement at any
time it believes the level of compensation to be inappropriate. The parties
further agree that any party may, upon at least sixty (60) days' written notice,
terminate this Letter Agreement with respect to that party. Upon its
termination, if the parties have not agreed to a substitute fee arrangement, any
party may also terminate all or some of the service provided by Bank upon
additional sixty (60) days' written notice.

On an ongoing basis, Bank will continue to prepare the monthly corporate
account analysis statements on behalf of each Fund, which estimates all revenues
and expenses for the parties' relationship. From time to time, Bank and any
Fund(s) may renegotiate the estimated "prices" used in the account analysis
process. The account analysis statement will provide a basis for any
negotiations between the parties on the appropriateness of the fee agreement as
embodied in this Letter Agreement. However, no payment of any kind shall be due
on account of any shortfall on the account analysis statement.

Sincerely,

Authorized Officer for Each Trust/Franklin
Fund Portfolio (List Attached)

By /s/ Martin L. Flanagan
Martin L. Flanagan
Executive Financial Officer

ACCEPTED AND AGREED TO BY:

BANK OF AMERICA, NT & SA

By /s/ Stephen H. Kilbuck

Title: Vice President

FRANKLIN GROUP OF FUNDS

FUND # FUND INIT NAME OF FUND

022 FUT FRANKLIN UNIVERSAL TRUST - (closed-end)
033 FPMT FRANKLIN PRINCIPAL MATURITY TRUST - (closed-end)
024 FMIT FRANKLIN MULTI-INCOME TRUST - (closed-end)
101 FGF FRANKLIN GOLD FUND
102 FPRF FRANKLIN PREMIER RETURN FUND
(Franklin Option Fund until April 30, 1991)
103 FEF FRANKLIN EQUITY FUND
105 AGE AGE HIGH INCOME FUND, INC.
FCF FRANKLIN CUSTODIAN FUNDS, INC.
106 GROWTH SERIES
107 UTILITIES SERIES
108 DYNATECH SERIES
109 INCOME SERIES
110 U.S. GOVERNMENT SECURITIES SERIES
111* FMF FRANKLIN MONEY FUND (MMP feeder as of 8/1/94)
112 FCTFIF FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
113* FFMF FRANKLIN FEDERAL MONEY FUND (USGSMMP feeder as of 8/1/94)
114 FTEMF FRANKLIN TAX-EXEMPT MONEY FUND
115 FNYTFIF FRANKLIN NEW YORK TAX-FREE INCOME FUND, INC.
116 FFTFIF FRANKLIN FEDERAL TAX-FREE INCOME FUND
FTFT FRANKLIN TAX-FREE TRUST
118 FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
119 FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
120 FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
121 FRANKLIN INSURED TAX-FREE INCOME FUND
122 FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
123 FRANKLIN PUERTO RICO TAX-FREE INCOME FUND
126 FRANKLIN ARIZONA TAX-FREE INCOME FUND
127 FRANKLIN COLORADO TAX-FREE INCOME FUND
128 FRANKLIN GEORGIA TAX-FREE INCOME FUND
129 FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
130 FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
160 FRANKLIN MISSOURI TAX-FREE INCOME FUND
161 FRANKLIN OREGON TAX-FREE INCOME FUND
162 FRANKLIN TEXAS TAX-FREE INCOME FUND
163 FRANKLIN VIRGINIA TAX-FREE INCOME FUND
164 FRANKLIN ALABAMA TAX-FREE INCOME FUND
165 FRANKLIN FLORIDA TAX-FREE INCOME FUND
166 FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
167 FRANKLIN INDIANA TAX-FREE INCOME FUND
168 FRANKLIN LOUISIANA TAX-FREE INCOME FUND
169 FRANKLIN MARYLAND TAX-FREE INCOME FUND
170 FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
171 FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
172 FRANKLIN KENTUCKY TAX-FREE INCOME FUND
174 FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
177 FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND
178 FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
FCTFT FRANKLIN CALIFORNIA TAX-FREE TRUST
124 FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND
125 FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND
152 FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME
FUND
FNYTFT FRANKLIN NEW YORK TAX-FREE TRUST
(Franklin New York-Tax Exempt Money Fund until 1/91)
131 FRANKLIN NEW YORK TAX-EXEMPT MONEY FUND
153 FRANKLIN NEW YORK INTERMEDIATE-TERM TAX-FREE INCOME FUND
181 FRANKLIN NEW YORK INSURED TAX-FREE INCOME FUND
FIST FRANKLIN INVESTORS SECURITIES TRUST
135 FRANKLIN GLOBAL GOVERNMENT INCOME FUND
(formerly Franklin Global Opportunity Income Fund)
136 FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT
SECURITIES FUND
137 FRANKLIN CONVERTIBLE SECURITIES FUND
138* FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
(formerly Franklin Adjustable Rate Mortgage Fund)
(USGARMP feeder)
139 FRANKLIN EQUITY INCOME FUND
(Franklin Special Equity Income Fund until 8/17/93)
151* FRANKLIN ADJUSTABLE RATE SECURITIES FUND
(ARSP retail feeder)
IFT INSTITUTIONAL FIDUCIARY TRUST
140* MONEY MARKET PORTFOLIO (MMP feeder)
141* FRANKLIN LATE DAY MONEY MARKET PORTFOLIO
(Franklin Government Investors Money Market
Portfolio until 6/15/93)
142* FRANKLIN U.S. GOVERNMENT SECURITIES MONEY MARKET
PORTFOLIO (USGSMMP feeder)
143* FRANKLIN U.S. TREASURY MONEY MARKET PORTFOLIO
144* FRANKLIN INSTITUTIONAL ADJUSTABLE U.S. GOVERNMENT
SECURITIES FUND (USGARMP feeder)
145* FRANKLIN INSTITUTIONAL ADJUSTABLE RATE SECURITIES FUND
(ARSP feeder)
146* FRANKLIN U.S. GOVERNMENT AGENCY MONEY MARKET FUND
147* AEA CASH MANAGEMENT FUND (MMP feeder)
(formerly Franklin Star MOney Market Portfolio)
149* FRANKLIN CASH RESERVES FUND (MMP feeder)
150 FBSIF FRANKLIN BALANCE SHEET INVESTMENT FUND
154 FTAIBF FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND
155 FTAUSGSF FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND
156 FTAHYSF FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND
FMT FRANKLIN MANAGED TRUST
117 FRANKLIN CORPORATE QUALIFIED DIVIDEND FUND
(Franklin Corporate Cash Portfolio until 5/31/91)
158 FRANKLIN RISING DIVIDENDS FUND
159 FRANKLIN INVESTMENT GRADE INCOME FUND
- ---- FRANKLIN INSTITUTIONAL RISING DIVIDENDS FUND (PT feeder)
(not yet filed)
157 FSMP FRANKLIN STRATEGIC MORTGAGE PORTFOLIO (effective 2/1/93)
FMST FRANKLIN MUNICIPAL SECURITIES TRUST
173 FRANKLIN HAWAII MUNICIPAL BOND FUND
175 FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
176 FRANKLIN WASHINGTON MUNICIPAL BOND FUND
220 FRANKLIN TENNESSEE MUNICIPAL BOND FUND
221 FRANKLIN ARKANSAS MUNICIPAL BOND FUND
FSS FRANKLIN STRATEGIC SERIES (changed from Cal 250)
194 FRANKLIN STRATEGIC INCOME FUND
195 FRANKLIN MIDCAP GROWTH FUND (filed - not yet being sold)
196 FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
(formerly FISCO MidCap Growth Fund)
197 FRANKLIN GLOBAL UTILITIES FUND
198 FRANKLIN SMALL CAP GROWTH FUND
199 FRANKLIN GLOBAL HEALTH CARE FUND
ARSP ADJUSTABLE RATE SECURITIES PORTFOLIOS (THE PARENT)
182 U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
(master fund)
183 ADJUSTABLE RATE SECURITIES PORTFOLIO (filed under 1940
Act Only) (master fund)
MMP THE MONEY MARKET PORTFOLIOS (master fund parent)
(filed under 1940 Act only)
184* THE MONEY MARKET PORTFOLIO (master fund)
186* THE U.S. GOVERNMENT SECURITIES MONEY MARKET PORTFOLIO
(master fund)
187 MGP MIDCAP GROWTH PORTFOLIO (master fund) (1940 Act filing only
- not yet being sold)
PT THE PORTFOLIOS TRUST (master fund parent) (1940 Act filing
only - not yet being sold)
188 THE RISING DIVIDENDS PORTFOLIO (master fund)
FIT FRANKLIN INTERNATIONAL TRUST
190 FRANKLIN PACIFIC GROWTH FUND
191 FRANKLIN INTERNATIONAL EQUITY FUND
FREST FRANKLIN REAL ESTATE SECURITIES TRUST
192 FRANKLIN REAL ESTATE SECURITIES FUND
FTGT FRANKLIN TEMPLETON GLOBAL TRUST (formerly Huntington Funds)
210* FRANKLIN TEMPLETON GERMAN GOVERNMENT BOND FUND
211* FRANKLIN TEMPLETON GLOBAL CURRENCY FUND
212* FRANKLIN TEMPLETON HARD CURRENCY FUND
213* FRANKLIN TEMPLETON HIGH INCOME CURRENCY FUND
FVF FRANKLIN VALUEMARK FUNDS (ALLIANZ)
821 MONEY MARKET FUND
822 EQUITY GROWTH FUND
823 PRECIOUS METALS FUND
824 REAL ESTATE SECURITIES FUND
825 UTILITY EQUITY FUND
826 HIGH INCOME FUND
827 GLOBAL INCOME FUND
828 INVESTMENT GRADE INTERMEDIATE BOND FUND
829 INCOME SECURITIES FUND
830 U.S. GOVERNMENT SECURITIES FUND
831 ZERO COUPON FUND - 1995
832 ZERO COUPON FUND - 2000
833 ZERO COUPON FUND - 2005
834 ZERO COUPON FUND - 2010
835 ADJUSTABLE U.S. GOVERNMENT FUND
836 RISING DIVIDENDS FUND
837 TEMPLETON PACIFIC GROWTH FUND (Pacific Growth Fund
until 10/15/93)
838 TEMPLETON INTERNATIONAL EQUITY FUND (International
Equity Fund until 10/15/93)
839 TEMPLETON DEVELOPING MARKETS EQUITY FUND
840 TEMPLETON GLOBAL GROWTH FUND
841 TEMPLETON WORLDWIDE ASSET ALLOCATION FUND
(not yet effective)
891 FGST FRANKLIN GOVERNMENT SECURITIES TRUST (AETNA)
193 FRANKLIN STABLE VALUE FUND
511 FRANKLIN TEMPLETON MONEY FUND II (expected effective
date: 05/01/95)

STRADLEY RONON
STEVENS & YOUNG
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Fax: (215) 564-8120

January 8, 1993

Franklin Strategic Mortgage Portfolio
777 Mariners Island Boulevard
San Mateo, California 94404

Gentlemen:

We understand that the Franklin Strategic Mortgage Portfolio, a
Delaware business trust (the "Trust"), has filed with the Securities and
Exchange Commission a Registration Statement on Form N-1A under the Securities
Act of 1933 and the Investment Company Act of 1940. We also understand that,
pursuant to said Registration Statement, the Trust has elected to register an
indefinite number of shares of beneficial interest pursuant to Rule 24f-2 under
the Investment Company Act of 1940.

In connection with the registration of such shares, we have examined
the Trust's Agreement and Declaration of Trust, its Bylaws, and the Registration
Statement, as amended, or as proposed to be amended, including all exhibits
thereto, as well as such other records and documents as we have deemed
necessary. Based upon such examination, we are of the opinion that:

1. The Trust has been duly organized and is validly existing in
good standing as a business trust under the laws of the State of Delaware; and

2. The shares of beneficial interest in the Trust to be offered to
the public have been duly authorized for issuance and will be legally issued,
fully paid and non-assessable when said shares have been issued and sold in
accordance with the terms and in the manner set forth in the Trust's
Registration Statement, as amended.

We hereby consent to the filing of this opinion as an exhibit to the
Trust's Registration Statement and to the reference to our name in the documents
comprising said Registration Statement.

Very truly yours,

/s/ Audrey C. Talley
By: Audrey C. Talley

CONSENT OF INDEPENDENT AUDITORS

To the Board of Trustees of Franklin Strategic Mortgage Portfolio

We consent to the incorporation by reference in Post-Effective Amendment No.
4 to the Registration Statement of Franklin Strategic Mortgage Portfolio on
Form N-1A (File No. 33-53414) of our report dated November 3, 1995 on our
audit of the financial statements and financial highlights of Franklin
Strategic Mortgage Portfolio, which report is included in the Annual Report
to Shareholders for the year ended September 30, 1995, which is incorporated
by reference in the Registration Statement.

/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.

San Francisco, California
November 28, 1995

Franklin Strategic Mortgage Portfolio
777 Mariners Island Blvd.
San Mateo, CA 94404

The undersigned hereby subscribes for the purchase of 500,000 shares of
beneficial interest of Franklin Strategic Mortgage Portfolio (hereinafter
referred to as the "Trust"), at a price of $10.00 per share for a total
investment of $5,000,000 (hereinafter referred to as the "Shares"). In
connection with said subscription, the undersigned hereby represents that:

1. There is no present reason to anticipate any change in circumstances or any
other occasion or event which would cause the undersigned to sell or redeem the
Shares shortly after the purchase thereof.

2. There are no agreements or arrangements between the undersigned and the
Trust, or any of its officers, trustees, employees or its investment manager or
any affiliated persons thereof with respect to the resale, future distribution
or redemption of the Shares.

3. The sale of the Shares will only be made by redemption to the Trust and
not by a transfer to any third party.

4. The undersigned is aware that in issuing and selling these Shares, the Trust
is relying upon the aforementioned representations.

5. The undersigned is fully aware that the organization expenses of the Trust,
including the costs and expenses of registration of the Trust under the
Investment Company Act of 1940, are being charged to the operation of the Trust
over a period of five years commencing from the effective date of the Trust's
Registration Statement, and that in the event the undersigned redeems any
portion of these Shares during said amortization period, the undersigned will
reimburse the Trust for the pro rata share of the unamortized organization
expenses (by a reduction of the redemption proceeds) in the same proportion as
the number of Shares being redeemed bear to the total number of remaining
initial Shares acquired by the undersigned hereunder.

FRANKLIN RESOURCES, INC.

Dated: January 25, 1993 By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President

POWER OF ATTORNEY

The undersigned officers and trustees of FRANKLIN STRATEGIC MORTGAGE
PORTFOLIO hereby appoint HARMON E. BURNS, DEBORAH R. GATZEK, MARK H. PLAFKER,
KAREN L. SKIDMORE and LARRY L. GREENE (with full power to each of them to act
alone) his attorney-in-fact and agent, in all capacities, to execute, and to
file any of the documents referred to below relating to Post-Effective
Amendments to the Company's Registration Statement on Form N-1A under the
Investment Company Act of 1940 and under the Securities Act of 1933 covering the
sale of shares by the Company under prospectuses becoming effective after this
date, including any amendment or amendments increasing or decreasing the amount
of securities for which registration is being sought, with all exhibits and any
and all documents required to be filed with respect thereto with any regulatory
authority. Each of the undersigned grants to each of said attorneys full
authority to do every act necessary to be done in order to effectuate the same
as fully, to all intents and purposes as he could do if personally present,
thereby ratifying all that said attorneys-in-fact and agents may lawfully do or
cause to be done by virtue hereof.

The undersigned officers and trustees hereby execute this Power of Attorney as
of this 15th day of August 1995.

/S/ RUPERT H. JOHNSON, JR. /S/ CHARLES B. JOHNSON
Rupert H. Johnson, Jr., Charles B. Johnson,
Principal Executive Officer
and Trustee Trustee

/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
Frank H. Abbott,III, Harris J. Ashton,
Trustee Trustee

/S/ HARMON E. BURNS /S/ S. JOSEPH FORTUNATO
Harmon E. Burns, S. Joseph Fortunato,
Trustee Trustee

/S/ DAVID W. GARBELLANO /S/ FRANK W. T. LAHAYE
David W. Garbellano, Frank W. T. LaHaye,
Trustee Trustee

/S/ MARTIN L. FLANAGAN /S/ DIOMEDES LOO-TAM
Martin L. Flanagan, Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting Officer

CERTIFICATE OF SECRETARY

I, Deborah R. Gatzek, certify that I am Secretary of Franklin Strategic
Mortgage Portfolio (the "Trust").

As Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at
a meeting held at 777 Mariners Island Boulevard, San Mateo, California, on
August 15, 1995.

RESOLVED, that a Power of Attorney, substantially in the form of the
Power of Attorney presented to this Board, appointing Harmon E. Burns,
Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene and Mark H.
Plafker as attorneys-in-fact for the purpose of filing documents with
the Securities and Exchange Commission, be executed by each Trustee and
designated officer.

I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.

/s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary

Dated: August 15, 1995

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN STRATEGIC MORTGAGE PORTFOLIO SEPTEMBER 30, 1995 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 5,744,540
<INVESTMENTS-AT-VALUE> 5,899,994
<RECEIVABLES> 291,359
<ASSETS-OTHER> 15,638
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,206,991
<PAYABLE-FOR-SECURITIES> 211,092
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,993
<TOTAL-LIABILITIES> 227,085
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,017,241
<SHARES-COMMON-STOCK> 603,712
<SHARES-COMMON-PRIOR> 554,311
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (192,789)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 155,454
<NET-ASSETS> 5,979,906
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 412,210
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 412,210
<REALIZED-GAINS-CURRENT> (76,041)
<APPREC-INCREASE-CURRENT> 355,238
<NET-CHANGE-FROM-OPS> 691,407
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (412,210)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30,048
<NUMBER-OF-SHARES-REDEEMED> (23,228)
<SHARES-REINVESTED> 42,581
<NET-CHANGE-IN-ASSETS> 756,596
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (116,748)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 46,567
<AVERAGE-NET-ASSETS> 5,554,540
<PER-SHARE-NAV-BEGIN> 9.420
<PER-SHARE-NII> .714
<PER-SHARE-GAIN-APPREC> .490
<PER-SHARE-DIVIDEND> (.714)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.910
<EXPENSE-RATIO> .000 <F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000

<F1> THE ANNUALIZED EXPENSE RATIO EXCLUDING EXPENSE WAIVER IS 1.24%.

</TABLE>