FRANKLIN REAL ESTATE SECURITIES TRUST, 497, 1995-02-24

FRANKLIN REAL ESTATE SECURITIES TRUST
497, 1995-02-24

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92P

SUPPLEMENT DATED FEBRUARY 1, 1995

TO THE PROSPECTUS OF

FRANKLIN REAL ESTATE SECURITIES FUND
FRANKLIN REAL ESTATE SECURITIES TRUST
DATED SEPTEMBER 1, 1994

The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund:

1. EXPENSE TABLE

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

2. MANAGEMENT OF THE FUND

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

3. HOW TO BUY SHARES OF THE FUND

a) Add the following language as paragraph two:

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

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-----------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
- ----------------- -------------- --------------- ----------------------
<S> <C> <C> <C>
Less than $100,000.................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000....................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000....................... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000.................... 2.25% 2.30% 2.00%
$1,000,000 or more ................................... none none (see below)**
</TABLE>

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

**The following commissions will be paid by Distributors, from its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 1.00% on sales of $1 million but less than $2 million,
plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.

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

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

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

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

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

PURCHASES AT NET ASSET VALUE

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

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

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

<PAGE>
information may be obtained from Shareholder Services at 1-800/632-2301. See
"Distributions in Cash" under "Distributions to Shareholders."

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in an unaffiliated mutual fund which
charged the investor a contingent deferred sales charge upon redemption and
which has investment objectives similar to those of the Fund.

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

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

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

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

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be

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

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

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

a) The following option is added to "Exchanges by Telephone":

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

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

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

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

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

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

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

FRANKLIN
REAL ESTATE
SECURITIES FUND

Franklin Real Estate Securities Trust

PROSPECTUS SEPTEMBER 1, 1994

[LOGO]

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

Franklin Real Estate Securities Fund (the "Fund") is a non-diversified series
of Franklin Real Estate Securities Trust ("Trust"), an open-end management
investment company, with the investment objective of maximizing total return.
In this connection, the Fund will invest primarily in securities of companies
operating in the real estate industry. Under normal circumstances at least 65%
of the Fund's total assets will be invested in real estate securities,
primarily equity securities issued by real estate investment trusts ("REITs").
The Fund may also invest in equity securities issued by home builders and
developers and in debt and convertible securities issued by REITs, home
builders and developers.

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

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

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

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

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

<PAGE>

<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- ----
<S> <C>
Expense Table.................... 2

Financial Highlights............. 4

About the Fund................... 4

Investment Objective
and Policies Followed by
the Fund....................... 4

Management of the Fund........... 12

Distributions to Shareholders.... 13

Taxation of the Fund and Its
Shareholders................... 15

How to Buy Shares of the Fund.... 16

Purchasing Shares of the Fund in
Connection with Retirement
Plans Involving Tax-Deferred
Investments.................... 22

Other Programs and Privileges
Available to Fund
Shareholders................... 23

Exchange Privilege............... 25

How to Sell Shares of the Fund... 27

Telephone Transactions........... 30

Valuation of Fund Shares......... 31

How to Get Information Regarding
an Investment in the Fund...... 32

Performance...................... 33

General Information.............. 33

Account Registrations............ 34

Important Notice Regarding
Taxpayer IRS Certifications.... 35

Portfolio Operations............. 36

Appendix......................... 36
</TABLE>

EXPENSE TABLE
- -------------------------------------------------------------------------------
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. The figures are based on annualized
management fees and 12b-1 fees set by contract and on estimates of the other
annualized operating expenses of the Fund.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).................................... 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends................... NONE
Deferred Sales Charge.................................................. NONE
Redemption Fees........................................................ NONE
Exchange Fee (per transaction)......................................... $5.00*
</TABLE>

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

<PAGE>

<TABLE>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees ................................................... 0.63%
12b-1 Fees......................................................... 0.25%***
Other Expenses (net of expense reduction):
Professional Fees......................................... 0.07%
Registration Fees......................................... 0.10%
Other..................................................... 0.18%
Total Other Expenses............................................... 0.35%
-----
Total Fund Operating Expenses...................................... 1.23%
-----
</TABLE>

**All figures under "Other Expenses" are estimates for the current fiscal
period. During the period from inception (January 3, 1994) through April 30,
1994, the Adviser voluntarily agreed to limit its management fees and to assume
responsibility for making payments to offset certain operating expenses
otherwise payable by the Fund. With this reduction, management fees and total
operating expenses represented 0% and 0.25%, respectively, of the average net
assets of the Fund. If this reduction had not been made, management fees and
total operating expenses for the Fund would have been 0.63% and 2.91%,
respectively. The Adviser is not obligated to limit fees or assume other
operating expenses in the future.

***Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules. Given the
Fund's maximum initial sales charge and the rate of the Fund's Rule 12b-1 fee,
however, it is estimated that this would take a substantial number of years.

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

EXAMPLE

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C>
$57 $82
</TABLE>

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

<PAGE>

FINANCIAL HIGHLIGHTS

The information for the period January 3, 1994 (effective date) through
April 30, 1994 has been audited by Coopers & Lybrand, independent auditors,
whose audit report appears in the financial statements in the Fund's
Statement of Additional Information. See the discussion "Reports to
Shareholders" under "General Information."

<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED NET ASSET
PERIOD VALUE AT NET & UNREALIZED TOTAL FROM DISTRIBUTIONS VALUES
ENDED BEGINNING INVESTMENT GAINS ON INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
APRIL 30 OF YEAR INCOME SECURITIES OPERATIONS GAINS DISTRIBUTIONS OF YEAR RETURN**
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994* $10.00 $0.06 $0.86 $0.92 - - $10.92 9.20%
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
PERIOD AT END EXPENSES INCOME PORTFOLIO
ENDED OF YEAR TO AVERAGE TO AVERAGE TURNOVER
APRIL 30 (IN 000'S) NET ASSETS NET ASSETS RATE
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994* $5,634 0.25%*** 3.19% -%
</TABLE>

*For the period January 3 (effective date of registration) to April 30, 1994.

**Total return measures the change in value of an investment over the period
indicated. It does not include the maximum 4.5% initial sales charge and
assumes reinvestment of dividends and capital gains, if any, at net asset
value.

***During the period indicated above, Franklin Advisors, Inc., the investment
manager, reduced its management fees, and reimbursed other expenses incurred by
the Fund. Had such action not been taken, the ratio of expenses to average net
assets would have been 2.91% (annualized).

ABOUT THE FUND

Franklin Real Estate Securities Trust is an open-end management investment
company, commonly called a "mutual fund," which is registered with the SEC
under the Investment Company Act of 1940 (the "1940 Act"). The Trust is a
Delaware business trust, organized on September 14, 1993.

Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price, which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.50% to less than 0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

INVESTMENT OBJECTIVE AND POLICIES OF THE FUND

The Fund's investment objective is to maximize total return. In this
connection, the Fund will invest primarily in securities of companies operating
in the real estate industry. The Fund's objective is a fundamental policy and
may not be changed without shareholder approval. Under normal circumstances at
least 65% of the Fund's total assets will be invested in real estate
securities, primarily equity real estate investment trusts. The Fund may also
invest in equity securities issued by home builders and developers and in debt
and convertible securities issued by REITs, home builders and developers. Under
ordinary market conditions, the Fund will seek to achieve maximum total return.
The Fund will seek to accomplish this objective in the context of its policy of
investing primarily in the equity securities of companies operating in the real
estate industry. The objective is a fundamental policy of the Fund and may not
be changed without shareholder approval. "Real estate securities" include
equity, convertible and debt securities of companies having the following
characteristics and will be subject to the following limitations:

1. Companies qualifying as a REIT for federal income tax purposes. In order to
qualify as a REIT, a company must derive at least 75% of its gross income from
real estate sources (rents, mortgage interest, gains from the sale of real
estate assets), and

<PAGE>

at least 95% from real estate sources, plus dividends, interest and gains from
the sale of securities. Real property, mortgage loans, cash and certain
securities must comprise 75% of a company's assets. In order to qualify as a
REIT, a company must also make distributions to shareholders aggregating
annually at least 95% of its REIT taxable income.

2. Companies, such as home builders and developers, having at least 50% of
their assets related to, or deriving at least 50% of their revenues from, the
ownership, construction, management, or sale of residential, commercial or
industrial real estate.

The Fund will invest primarily in equity real estate securities of companies
listed on a securities exchange or over-the-counter markets. The Fund will
invest more than 25% of its total assets in the real estate industry as
described above.

The Fund may enter into repurchase agreements, loan its portfolio securities,
and engage in other activities which are discussed more fully below under "Some
of the Fund's Other Investment Policies."

RISK FACTORS/SPECIAL CONSIDERATIONS

An investment in the Fund will generally be subject to the risks associated
with real estate because of its policy of concentration in the securities of
companies in the real estate industry. These risks include declines in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants and increases in interest rates. The value of securities
of companies which service the real estate industry will also be affected by
such risks.

In addition, equity REITs will be affected by changes in the value of the
underlying property owned by the trusts, while a mortgage real estate
investment trust will be affected by the quality of the properties to which it
has extended credit. Equity and mortgage real estate investment trusts are
dependent upon the REITs' management skill, may not be diversified and are
subject to the risks of financing projects. Because the Fund invests primarily
in the real estate industry, it could conceivably own real estate directly as a
result of a default on debt securities it may own. If the Fund has rental
income or income from the disposition of real property, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company. REITS are also subject to heavy cash flow dependency,
defaults by borrowers, self-liquidation and the possibility of failing to
qualify for tax-free pass-through of income under the Internal Revenue Code and
to maintain exemption from the 1940 Act. Changes in prevailing interest rates
also will inversely affect the value of the debt securities in which the Fund
will invest. By investing in real estate investment trusts indirectly through
the Fund, a shareholder will bear not only his proportionate share of the
expenses of the Fund, but also, indirectly, similar expenses of the real estate
investment trusts.

The Fund is non-diversified under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of assets that may be invested at any time in the securities of any
one issuer. However, the Fund intends to comply with the diversification and
other requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to "regulated investment companies" so that it will not be
subject to U.S. federal income tax on income and capital gain distributions to
shareholders. Ac-

<PAGE>

cordingly, the Fund will not purchase securities if, as a result, more than 25%
of its total assets would be invested in the securities of a single issuer or,
with respect to 50% of its total assets, more than 5% of such assets would be
invested in the securities of a single issuer. To the extent the Fund is not
fully diversified, it may be more susceptible to adverse economic, political or
regulatory developments affecting a single issuer than would be the case if it
were more broadly diversified.

A portion of the Fund's assets may be invested in convertible and debt
securities of issuers in any industry. Convertible and debt securities acquired
by the Fund may be rated below investment grade, or unrated; however, the Fund
will not acquire such securities rated lower than B by Moody's Investors
Service ("Moody's") or Standard & Poor's Corporation ("S&P"), or that are not
rated but determined by the investment manager to be of comparable quality.
Lower rated securities, those rated BB or lower by S&P or Ba or lower by
Moody's, are considered by S&P and Moody's, on balance, to be predominantly
speculative with respect to capacity to pay preferred stock dividends or
principal or interest, as the case may be, in accordance with the terms of the
obligation and will generally involve more credit risk than securities in the
higher rating categories. These lower rated convertible and debt securities are
subject to credit risk considerations substantially similar to such
considerations affecting high risk, high yield bonds, commonly referred to as
"junk bonds." The Fund does not intend to invest more than 35% of its entire
portfolio in such high risk, high yield bonds. Convertible and debt securities
within the top three categories (e.g., AAA, AA and A by S&P or Aaa, Aa or A by
Moody's) comprise what are known as high-grade securities and are regarded as
having a strong capacity to pay dividends. Medium-grade convertible and debt
securities (e.g., BBB by S&P or Baa by Moody's) are regarded as having an
adequate capacity to pay dividends but with greater vulnerability to adverse
economic conditions and some speculative characteristics. See the Appendix to
this Prospectus for a description of these ratings.

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

Generally, when interest rates rise, the value of the Fund's convertible and
debt investments will decline. Conversely, when rates fall, the value of such
investments may rise. As a result, the value of the Fund's shares and the
dividends per share paid by the Fund may fluctuate.

The Fund should not be considered suitable for investors who are unable or
unwilling to assume the risks of loss inherent in such a program, nor should
investment in the Fund be considered a balanced or complete investment program.

<PAGE>

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

The Fund's investments in convertible and debt securities rated below
investment grade and in unrated securities of comparable quality (referred to
in this discussion as "lower-rated" securities) have credit characteristics
similar to lower-rated bonds. The market values of lower-rated securities tend
to reflect individual corporate developments to a greater extent than do
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. Such lower-rated securities also tend to be more
sensitive to economic conditions than higher-rated securities. Even securities
rated BBB or Baa by S&P and Moody's, respectively, ratings which are considered
investment grade, possess some speculative characteristics.

Companies that issue lower-rated, convertible and debt securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with acquiring the securities
of such issuers is greater than is the case with higher-rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-rated securities may experience
financial stress. During these periods, such issuers may not have sufficient
earnings to meet their payment obligation. The issuer's ability to service its
payment obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. An economic downturn
may disrupt the market for lower-rated securities and adversely affect the
value of outstanding convertible and debt securities and the ability of issuers
of such securities to pay dividends, or principal or interest, as the case may
be. Any one of these negative developments may cause the market value of a
lower-rated security to decline and such decline will be reflected in the value
of the Fund's shares. At the extreme, if an issuer is unable to meet these
obligations, the issue may go into default or bankruptcy and the Fund may lose
all, or a significant portion, of its investment.

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

The Fund is authorized to acquire lower-rated, convertible and debt securities
that are sold without registration under the federal securities laws

<PAGE>

and therefore carry restrictions on resale. Many recently issued lower-rated
securities have been sold with registration rights, covenants and penalty
provisions for delayed registration. If the Fund is required to sell such
restricted securities before the securities have been registered, it may be
deemed an underwriter of such securities as defined in the Securities Act of
1933, which entails special responsibilities and liabilities. The Fund may
incur special costs in disposing of such securities; however, the Fund will
generally incur no costs when the issuer is responsible for registering the
securities.

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

Certain provisions of federal income tax law place limitations on the use of
high yielding securities by issuers in connection with leveraged buy-outs,
mergers and acquisitions, or limit the deductibility of interest payments on
such securities. This legislation could reduce the market for such securities
generally, could negatively affect the financial condition of issuers of high
yield securities by removing or reducing a source of future financing, and
could negatively affect the value of specific high yield issues and the high
yield market in general.

Factors adversely impacting the market value of lower-rated securities will
adversely impact the Fund's net asset value. The Fund will rely on the
investment manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the investment manager will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.

The prices of many lower-rated securities may also be depressed by adverse
publicity regarding such securities, such as the publicity which appeared
during 1989 and 1990, or by poor general economic conditions, such as the
economic slowdown which occurred during 1991 and continued for some period
thereafter.

CONVERSION TO MASTER/FEEDER FUND STRUCTURE

Currently, in seeking to accomplish its objective of maximizing total return,
the Fund invests directly in a portfolio of equity securities of companies
primarily engaged in the real estate industry, and in debt and convertible
securities issued by such companies. Certain funds administered by the
investment manager participate as feeder funds in master/feeder fund
structures. Under a master/ feeder structure, one or more feeder funds, such as
the Fund, invests its assets in a master fund which, in turn, invests its
assets directly in the securities. The Fund hereby reserves the right to
convert to a master/feeder fund structure at a future date. Various state
governments have adopted the North American Securities Administrators
Association Guidelines for registration of master/feeder funds. If required by
those guidelines, as then in effect, the Fund will seek shareholder approval
prior to converting the Fund to a master/feeder structure, subject to there not
being adopted a superseding contrary provision or ruling under federal law. If
it is determined by the requisite regulatory authorities that such approval is
not required, shareholders will be deemed to have consented to such conversion
by their purchase of Fund shares and no further shareholder approval will be
sought or

<PAGE>

needed. Shareholders will, however, be informed in writing in advance of the
conversion. The determination to convert the Fund to a master/feeder fund
structure will not result in an increase in the fees or expenses paid by the
Fund or its shareholders. The investment objective and other fundamental
policies of the Fund, which can be changed only with shareholder approval, are
structured so as to permit the Fund to invest directly in securities or
indirectly in securities through a master/ feeder fund structure.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

To maximize the return on uninvested cash, as well as for other specified
purposes, the Fund may invest up to 35% of its assets in a combination of the
following types of investments subject to the same limitations regarding
ratings previously discussed.

Real Estate Related Investments. In addition to the Fund's investments in real
estate securities, as defined above, the Fund may also invest a portion of its
assets in debt or equity securities of issuers engaged in businesses closely
related to the real estate industry and publicly traded on an exchange or in
the over-the-counter market, including companies whose products and services
are closely related to the real estate industry, such as manufacturers and
distributors of building supplies; financial institutions that issue or service
mortgages, such as savings and loan associations or mortgage bankers; and
companies whose principal business is unrelated to the real estate industry but
who have significant real estate holdings (at least 50% of their respective
assets) believed to be undervalued relative to the price of those companies'
securities.

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

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

Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of the assets of the Fund, except that the Fund may borrow up to
10% of its total asset value to meet redemption requests and for other
temporary or

<PAGE>

emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.

Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities which cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund has valued the
securities, and include illiquid equity securities, illiquid securities with
legal or contractual restriction on resale, repurchase agreements of more than
seven days duration, illiquid real estate investment trusts, and other
securities which are not readily marketable) may not constitute, at the time of
purchase, more than 10% of the value of the total net assets of the Fund. The
Trust's Board of Trustees has authorized the Fund to invest in restricted
securities (which might otherwise be considered illiquid) where such investment
is consistent with the Fund's investment objective and has authorized such
securities to be considered to be liquid (and thus not subject to the foregoing
10% limitation), to the extent the investment manager determines on a daily
basis that there is a liquid institutional or other market for such securities.
The Trust's Board of Trustees will review the investment manager's
determinations of liquidity, retain ultimate responsibility for such
determinations and will consider appropriate action, consistent with the Fund's
objective and policies, if a security should become illiquid subsequent to its
purchase. To the extent the Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the Fund may be increased if
qualified institutional buyers are no longer interested in purchasing these
securities or the market for these securities contracts. See "The Fund's
Investment Objective and Restrictions - Short-term Investments," in the
Statement of Additional Information.

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

Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options which trade on securities exchanges and in
the over-the-counter market in order to hedge against the risk of market or
industry-wide stock price fluctuations or to increase income to the Fund.
(Pending receipt of a waiver of applicable requirements from state securities
regulators, the Fund will not engage in options in the over-the-counter
market.) The Fund may purchase and sell futures and options on futures with
respect to

<PAGE>

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

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

Positions in exchange traded options and futures may be closed out only on an
exchange which provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. There can be no assurance that a liquid secondary
market will exist for any particular option or futures contract at any specific
time.

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

In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss
by the Fund of margin deposits in the event of bankruptcy of a broker with whom
the Fund has an open position in a futures contract or option.

The Fund's investment in options and futures contracts may be limited by the
requirements of the Code for qualification as a regulated investment company
and are subject to special tax rules that may affect the amount, timing and
character of distributions to shareholders. These securities also require the
application of complex and special tax rules and elections, more information
about which is included in the Statement of Additional Information under the
caption "Additional Information Regarding Taxation."

Portfolio Turnover. The Fund anticipates that its annual portfolio turnover
rate generally will not exceed 100%, but this rate should not be construed as a
limiting factor in the operation of the Fund's portfolio. High portfolio
turnover increases transaction costs which must be paid by the Fund. High
turnover may also result in the realization of net capital gain, which is
taxable when distributed to shareholders. (See "Taxation of the Fund and Its
Shareholders.")

<PAGE>

MANAGEMENT OF THE FUND

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

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

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

The Fund is responsible for its own operating expenses, including, but not
limited to: the Manager's fee; taxes, if any; custodian, legal and auditing
fees; fees and expenses of trustees who are not members of, affiliated with, or
interested persons of the Manager; salaries of any personnel not affiliated
with the Manager; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the value of the Fund's net assets;
printing and other expenses which are not expressly assumed by the Manager.

Under the management agreement dated January 3, 1994, the Manager receives a
monthly fee equal to an annual rate of 0.625 of 1% of the value of average
daily net assets up to and including $100 million; 0.50 of 1% of the value of
average daily net assets over $100 million up to and including $250 million;
0.45 of 1% of the value of average daily net assets over $250 million up to and
including $10 billion; 0.44 of 1% of the value of average daily net assets over
$10 billion up to and including $12.5 billion; 0.42 of 1% of the value of
average daily net assets over $12.5 billion up to and including $15 billion;
and 0.40 of 1% of the value of average daily net assets over $15 billion.

During the start-up period of the Fund, Advisers will limit its management fees
and will, in addition, assume responsibility for making payments, if necessary,
to offset certain operating expenses otherwise payable by the Fund. This action
by Advisers to limit its management fees and assume responsibility for payment
of expenses related to the operations of the Fund may be terminated by Advisers
at any time. The management agreement specifies that the management fee will be
reduced to the extent necessary to comply with the most stringent limits on the
expenses which may be borne by the Fund as prescribed by any state in which the
Fund's shares are offered for sale. Currently, the most restrictive of such
provisions limits a fund's allowable expenses as a percentage of its average
net assets for each fiscal year to 2.5% of the first $30 million in assets, 2%
of the next $70 million, and 1.5% of assets in excess of $100 million.

During the fiscal period ended April 30, 1994, fees totaling 0.625% of average
net assets of the Fund would have accrued to Advisers. Total operating
expenses, including management fees, would have represented 2.91% of the
average net assets of the Fund. Because Advisers limited its fees and assumed
certain other Fund expenses, the Fund

<PAGE>

paid no management fees and paid operating expenses totaling 0.25% of the
average net assets, for the fiscal period ended April 30, 1994. The Expense
Table set forth earlier in this prospectus discusses these expenses, including
such expenses which are estimated based upon the Fund's operations during the
current fiscal year.

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 "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the
Statement of Additional Information.

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

PLAN OF DISTRIBUTION

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

DISTRIBUTIONS TO SHAREHOLDERS

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

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

2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or

<PAGE>

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#
year or adjust the timing of these distributions for operational or other
reasons.

DISTRIBUTION DATE

Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends annually in December for shareholders of record on the first business
day preceding the 15th of the month, payable on or about the last business day
of December. The amount of income dividend payments by the Fund is dependent
upon the amount of net income received by the Fund from its portfolio holdings,
is not guaranteed and is subject to the discretion of the Board of Trustees.
Fund shares are quoted ex-dividend on the first business day following the
record date. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF
RETURN ON AN INVESTMENT IN ITS SHARES.

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

DIVIDEND REINVESTMENT

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

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

DISTRIBUTIONS IN CASH

A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds or the Templeton Group, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a
14

<PAGE>

member of the Automated Clearing House, the payments may be made automatically
by electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Dividends which may be
paid in the interim will be sent to the address of record. Additional
information regarding automated fund transfers may be obtained from Franklin's
Shareholder Services Department. Dividend and capital gain distributions are
eligible for investment in another fund in the Franklin Group of Funds(R) or
the Templeton Group at net asset value.

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

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

TAXATION OF THE FUND AND ITS SHAREHOLDERS

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

The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such, and intends to continue to so
qualify. By distributing all of its net investment income and net realized
short-term and net long-term capital gain for a fiscal year and by meeting
certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income
or excise taxes.

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

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

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.

For corporate shareholders, only a small portion, if any, of the distributions
received by the Fund will generally qualify for the corporate
dividends-received deduction due to the Fund's primary investment in equity
securities of REITs and debt obligations.

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange
of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days

<PAGE>

of their purchase (for purposes of determining gain or loss with respect to
such shares) if the sales proceeds are reinvested in the Fund or in another
fund in the Franklin/Templeton Group and a sales charge which would otherwise
apply to the reinvestment is reduced or eliminated. Any portion of such sales
charge excluded from the tax basis of the shares sold will be added to the tax
basis of the shares acquired in the reinvestment. Shareholders should consult
with their tax advisors concerning the tax rules applicable to the redemption
or exchange of Fund shares.

The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions. The REIT equity securities in
which the Fund will primarily invest customarily pay tax basis return of
capital distributions, and these distributions will be received by the Fund. If
these distributions are in turn paid to Fund shareholders, then such
shareholders will receive nontaxable return of capital distributions which will
reduce their cost basis of the Fund shares for purposes of computing gain or
loss on sale or disposition of Fund shares.

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

HOW TO BUY SHARES OF THE FUND

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

PURCHASE PRICE OF FUND SHARES

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

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

<PAGE>

<TABLE>
<CAPTION>
Total Sales Charge
--------------------------------------------------------
Percentage Dealer Concession
Size of Transaction Percentage of Net Amount As Percentage
at Offering Price of Offering Price Invested of Offering Price*
------------------- ----------------- ------------- ------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more 0% 0% 0%
</TABLE>

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

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

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

<PAGE>

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

QUANTITY DISCOUNTS IN SALES CHARGES

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

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

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

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

AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not
be available for disposal

<PAGE>

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

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

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.

A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other

<PAGE>

materials related to the Fund in its publications and mailings to members at
reduced or no cost to Distributors, and must seek to arrange for payroll
deduction or other bulk transmission of investments to the Fund.

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

PURCHASES AT NET ASSET VALUE

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

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

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the

<PAGE>

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

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

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

<PAGE>

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

GENERAL

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

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

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

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

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

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

A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying partial distribution from an employer-sponsored retirement
plan, such as a 401(k) plan or qualified pension plan. Additionally if the
eligible distribution is directly transferred to a rollover IRA account, the
distribution will be exempt from 20% mandatory federal withholding, a new
withholding law enacted in 1993.

The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small businesses
(generally 25 or fewer employees) to provide a retirement plan for their
employees and, at the same, provide for a tax deduction to the employer.
SEP-IRA contributions are made to an employee's IRA, at the discretion of the
employer, up to the lesser of $30,000 or 15% of compensation* per em-

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

<PAGE>

ployee. The SAR-SEP allows employees to contribute a portion of their salary to
an IRA on a pre-tax basis through salary deferrals. The maximum annual salary
deferral limit for a SAR-SEP is the lesser of 15% of compensation (adjusted for
deferrals) or $9,240 (1994 limit; indexed for inflation).

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

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

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

Redemptions from any Franklin retirement plan accounts require the completion
of specific distribution forms to comply with IRS regulations. Please see "How
to Sell Shares of the Fund." For additional information about the Franklin
retirement plans, shareholders may request brochures describing each of the
plans from their securities dealer, investment advisor or Distributors. The
brochures contain more specific information about the retirement plans
available from Franklin. Individuals and employers should consult with a
competent tax or financial advisor before choosing a retirement plan.

OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS

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

SHARE CERTIFICATES

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

<PAGE>

more of the value of the lost, stolen or destroyed certificate. A certificate
will be issued if requested in writing by the shareholder or by the securities
dealer.

CONFIRMATIONS

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

AUTOMATIC INVESTMENT PLAN

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

<PAGE>

will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because
the amount withdrawn under the plan may be more than the shareholder's actual
yield or income, part of the payment may be a return of the shareholder's
investment.

The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in effect. A
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments or suspend such payments by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.

INSTITUTIONAL ACCOUNTS

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

EXCHANGE PRIVILEGE

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

EXCHANGES BY MAIL

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

EXCHANGES BY TELEPHONE

SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVES OF RECORD, IF ANY, MAY
EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT
1-800/632-2301. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.

The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange

<PAGE>

Privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions
- - Verification Procedures."

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

EXCHANGES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

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

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

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

<PAGE>

RETIREMENT ACCOUNTS

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

TIMING ACCOUNTS

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

RESTRICTIONS ON EXCHANGES

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

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

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

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

HOW TO SELL SHARES OF THE FUND

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

REDEMPTIONS BY MAIL

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

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

REDEMPTIONS BY TELEPHONE

SHAREHOLDERS WHO FILE A TELEPHONE TRANSACTION APPLICATION (THE "APPLICATION")
MAY REDEEM SHARES OF THE FUND BY TELEPHONE, SUBJECT TO THE RESTRICTED ACCOUNT
EXCEPTION NOTED UNDER "TELEPHONE TRANSACTIONS - RESTRICTED ACCOUNTS." THE
APPLICATION MAY BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT THE
ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND INVESTOR
SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN
BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN
CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION
PROCEDURES."

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

REDEEMING SHARES THROUGH SECURITIES DEALERS

The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a dealer
or similar agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the
Fund receives the shareholder's written request in proper form. These
documents, as described in the preceding section, are required even if the
shareholder's securities dealer has placed the repurchase order.

After receipt of a repurchase order from the dealer, the Fund will still
require a signed letter of instruction and all other documents set forth above.
A shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents

<PAGE>

required to complete ("settle") the repurchase in proper form. The redemption
proceeds will not earn dividends or interest during the time between receipt of
the dealer's repurchase order and the date the redemption is processed upon
receipt of all documents necessary to settle the repurchase. Thus, it is in a
shareholder's best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. The shareholder's dealer may charge
a fee for handling the order. The Statement of Additional Information contains
more information on the redemption of shares.

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

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

RETIREMENT ACCOUNTS

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

OTHER

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

TELEPHONE TRANSACTIONS

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

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

VERIFICATION PROCEDURES

The Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the
purpose of establishing the caller's identification, and by sending a
confirmation statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the Fund and Investor
Services follow instructions communicated by telephone which were reasonably
believed to be genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the

<PAGE>

shareholder caused by an unauthorized transaction. Shareholders are, of course,
under no obligation to apply for or accept telephone transaction privileges. In
any instance where the Fund or Investor Services is not reasonably satisfied
that instructions received by telephone are genuine, the requested transaction
will not be executed, and neither the Fund nor Investor Services will be liable
for any losses which may occur because of a delay in implementing a
transaction.

RESTRICTED ACCOUNTS

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

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

GENERAL

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

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

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

VALUATION OF FUND SHARES

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

The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including without limitation the
current market value of any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves, is deducted from the aggregate
gross value of all assets, and the difference is divided by the number of
shares of the Fund outstanding at the time. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued and dividends are recorded
on the ex-dividend date. Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and ask
prices. Over-the-counter portfolio securities for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make mar-

<PAGE>

kets in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Portfolio
securities underlying actively traded call options are valued at their market
price as determined above. The current market value of any option held by the
Fund is its last sales price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is believed to fairly
reflect the contract's market value. Other securities for which market
quotations are readily available are valued at the current market price, which
may be obtained from a pricing service, based on a variety of factors,
including recent trades, institutional size trading in similar types of
securities (considering yield, risk and maturity) and/or developments related
to specific issues. Securities and other assets for which market prices are not
readily available are valued at fair value as determined following procedures
approved by the Board of Trustees. All money market instruments with a maturity
of more than 60 days are valued at current market, as discussed above. All
money market instruments with a maturity of 60 days or less are valued at their
amortized cost, which the Board of Trustees has determined in good faith
constitutes fair value for purposes of complying with the 1940 Act. This
valuation method will continue to be used until such time as the trustees
determine that it does not constitute fair value for such purposes. With the
approval of the trustees, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND

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

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R)
by calling the automated Franklin Tele-FACTS(R) system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 92 followed by the # sign, when requested to do so by the automated
operator. The TeleFACTS system is also available for exchange transactions. See
"Exchange Privilege."

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

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

<PAGE>

PERFORMANCE

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

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

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

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

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

Additional information on Fund performance will be included in the Fund's
Annual Report to Shareholders and the Statement of Additional Information.

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

The Fund's fiscal year ends April 30. Annual reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial

<PAGE>

statements are automatically sent to shareholders. 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.

ORGANIZATION

The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest with a
par value of $.01 per share, which may be issued in any number of series.
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.

VOTING RIGHTS

Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series or the Trust unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees
the holders of more than 50% of the shares voting can elect all of the
trustees, if they choose to do so, and in such event, the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board of Trustees. The Trust does not intend to hold annual shareholders'
meetings. The Trust may, however, hold a special shareholders' meeting 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 any series. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or
removal of trustees such as that provided in Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has been in existence for at least 12 months and has
a value of less than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at
least six months, provided advance notice is given to the shareholder. More
information is included in the Statement of Additional Information.

OTHER INFORMATION

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

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

ACCOUNT REGISTRATIONS

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

Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may

<PAGE>

require court action to obtain release of the funds until the minor reaches the
legal age of majority "Adult" as custodian for the benefit of the "Minor" under
the Uniform Transfer or Gifts to Minors Act.

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

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

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

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

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

IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS

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

<PAGE>

the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.

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

PORTFOLIO OPERATIONS

The following persons are primarily responsible for the day-to-day management
of the Fund's portfolio:

Matt Avery
Portfolio Manager
Franklin Advisers, Inc.

Mr. Avery manages the Fund's portfolio and manages other funds for which
Advisers serves as investment manager. Mr. Avery received a Master's degree in
Business Administration from University of California, Los Angeles Graduate
School of Management and a Bachelor of Science degree in Industrial Engineering
from Stanford University. Mr. Avery joined Franklin in 1987.

Tom Branch
Portfolio Manager
Franklin Advisers, Inc.

Mr. Branch received a Bachelor of Science degree in Business Administration
with a concentration in Finance from California Polytechnic State University,
San Luis Obispo. Mr. Branch joined Franklin in July, 1993.

APPENDIX

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:

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

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

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

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

<PAGE>

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

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

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

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

DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:

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

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

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

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

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

SUPPLEMENT DATED FEBRUARY 1, 1995

TO THE STATEMENT OF ADDITIONAL INFORMATION OF

FRANKLIN REAL ESTATE SECURITIES TRUST
DATED SEPTEMBER 1, 1994

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

ADDITIONAL INFORMATION REGARDING PURCHASES

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

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

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

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

<PAGE>
been made at a single time. Upon such remittance the reserved shares held for
the investor's account will be deposited to an account in the name of the
investor or delivered to the investor or to the investor's order. If within
20 days after written request such difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account
prior to fulfillment of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to the investor.

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

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

REINVESTMENT DATE

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

<PAGE>

<PAGE>
FRANKLIN

REAL ESTATE
SECURITIES FUND

FRANKLIN REAL ESTATE SECURITIES TRUST

STATEMENT OF

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

<PAGE>
FRANKLIN

REAL ESTATE
SECURITIES FUND

FRANKLIN REAL ESTATE SECURITIES TRUST

STATEMENT OF

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

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
About the Fund (See also the Prospectus
"About the Fund,"
"General Information")....................... 2

The Fund's Investment Objective and
Restrictions (See also the Prospectus
"Investment Objective and Policies
Followed by the Fund")....................... 2

Officers and Trustees ........................ 8

Investment Management and Other
Services (See also the Prospectus
"Management of the Fund").................... 11

The Fund's Policies Regarding
Brokers Used on Portfolio Transactions ...... 12

Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares").................. 14

Additional Information
Regarding Taxation........................... 15

The Fund's Underwriter........................ 17

General Information........................... 18

Financial Statements.......................... 23
</TABLE>

Franklin Real Estate Securities Fund (the "Fund") is a non-diversified series
of Franklin Real Estate Securities Trust ("Trust"), an open-end management
investment company. The Fund's investment objective is to maximize total
return. In this connection, the Fund will invest primarily in securities of
companies operating in the real estate industry.

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

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

<PAGE>

ABOUT THE FUND

Franklin Real Estate Securities Fund is a non-diversified series of the Trust,
an open-end management investment company, commonly called a "mutual fund,"
which is registered with the Securities and Exchange Commission ("SEC") under
the Investment Company Act of 1940, as amended, (the "1940 Act"). The Trust is
a Delaware business trust, organized on September 14, 1993.

THE FUND'S INVESTMENT
OBJECTIVE AND RESTRICTIONS

As noted in the Prospectus, the Fund's investment objective is to maximize
total return. In this connection, the Fund will invest primarily in securities
of companies operating in the real estate industry. Under normal circumstances
at least 65% of the Fund's total assets will be invested in real estate
securities, primarily equity real estate investment trusts ("REITs"). The Fund
may also invest in equity securities issued by home builders and developers and
in debt and convertible securities issued by REITs, homebuilders and
developers.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

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

Short-term Investments. As stated in the Prospectus, the Fund may invest cash
temporarily in short-term debt instruments. Based upon the terms of an order
issued by the SEC which granted exemptive relief from certain provisions of the
1940 Act, the Fund may invest its short-term cash in shares of one or more
money market funds managed by Franklin Advisers, Inc. or its affiliates.

Illiquid Investments. As stated in the Prospectus, the Fund will not invest
more than 10% of the value of its total net assets in illiquid securities.
Generally, an "illiquid security" is any security that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the Fund has valued the instrument. Subject to this limitation, the
Trust's Board of Trustees has authorized the Fund to invest in restricted
securities where such investment is consistent with the Fund's investment
objective and has authorized such securities to be considered to be liquid to
the extent the investment manager determines that there is a liquid
institutional or other market for such securities -- for example, restricted
securities which may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The Board of Trustees will
review any determination by the investment manager to treat a restricted
security as a liquid security on an ongoing basis, including the investment
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the investment manager and the Board of
Trustees will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of transfer).

TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES

Call and Put Options on Securities. The Fund intends to write covered put and
call options and purchase put and call options which trade on securities
exchanges and in the over-the-counter market.

<PAGE>

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

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

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

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

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

The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the Fund's gain will
be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, the Fund may elect
to close the position or take delivery of the security at the exercise price,
and the Fund's return will be the premium received from the put options minus
the amount by which # the market price of the security is below the exercise
price.

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

The Fund intends to purchase put options on particular securities in order to
protect against a decline in the market value of the underlying security below
the exercise price less the premium paid for the option. A put option gives the
option holder the right to sell the underlying security at the option exercise
price at any time during the option period. The ability to purchase put options
will allow the Fund to protect the unrealized gain in an appreciated security
in its portfolio without actually selling the security. In addition, the Fund
will continue to receive interest or dividend income on the security. The Fund
may sell a put option which it has previously purchased prior to the sale of
the securities underlying such option. Such sales will result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid for the put option that is sold.
Such gain or loss may be wholly or partially offset by a change in the value of
the underlying security which the Fund owns or has the right to acquire.

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

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

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

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

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

Futures Contracts. The Fund may enter into contracts for the purchase or sale
of futures contracts based upon securities or 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 speci # fied future period at a specified price. A "sale" of a
futures contract means the acquisition of a contractual obligation to deliver
such security or cash value

<PAGE>
called for by the contract on a specified date. A "purchase" of a futures
contract means the acquisition of a contractual obligation to take delivery of
the security or cash value called for by the contract at a specified date.
Futures contracts have been designed by exchanges which have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market.

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

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

The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security.

To the extent the Fund enters into a futures contract, it will maintain with
its custodian, to the extent required by the rules of the SEC, assets in a
segregated account to cover its obligations with respect to such contract,
which will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contract and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.

Stock Index Futures. As noted above, stock index futures contracts obligate the
seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. No physical delivery of the underlying stocks
in the index is made.

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

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

Call and put options on stock index futures are similar to options on
securities except that, rather than the right to purchase or sell stock at a
specified price, options on a stock index futures give the # holder the right
to receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option

<PAGE>
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.

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

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

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

Positions in options, futures and related options on futures 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 option
or futures contract at any specific time. Thus, it may not be possible to close
such an option or futures position. The inability to close options or futures
positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities. The Fund will enter into an option or futures
position only if there appears to be a liquid secondary market for such options
or futures.

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

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

The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation

<PAGE>

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

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
Fund's shareholders. In order to change any of these restrictions (i) 67% or
more of the voting securities present at a meeting of shareholders if the
holders of more than 50% of the voting securities of the Fund are represented
at that meeting or (ii) more than 50% of the outstanding voting securities of
the Fund, whichever is less, must vote to make the change.

THE FUND DOES NOT:

1. Invest directly in real estate, except that the Fund could own real estate
directly as a result of a default on debt securities it owns.

2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be
deemed a loan.

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

4. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry, except that the Fund will concentrate its
investments in real estate securities, and except that, to the extent this
restriction is applicable, all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and policies as the Fund.

5. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities), except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund.

6. Invest more than 10% of the value of its total assets in illiquid securities
with legal or contractual restrictions on resale (although the Fund may invest
in such securities to the extent permitted under the federal securities laws)
or which are not readily marketable, except that all or substantially all of
the assets of the Fund may be invested in another registered investment company
having the same investment objective and policies as the Fund.

7. Invest in securities which have a record of less than three years continuous
operation, including the operations of any predecessor companies, if more than
5% of the Fund's total assets would be invested in such companies except that
all or sub-

<PAGE>

stantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund. (This limitation does not apply to issuers of real estate
investment trusts.)

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

9. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts, except that the Fund may invest in financial futures
and related options on futures with respect to securities and securities
indices.

10. Lease or acquire any interests, including interest issued by limited
partnerships (other than publicly traded equity securities) in oil, gas, or
other mineral exploration or development programs.

11. Invest in excess of 5% of its total assets in options unrelated to any Fund
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof.

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

13. Invest in the securities of other investment companies, except to the
extent permitted by 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 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.

14. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
or purchase or retain securities of any issuer if, to the knowledge of the
Fund, one or more of the officers or trustees of the Fund, or its investment
adviser, own beneficially more than one-half of 1% of the securities of such
issuer and all such officers and trustees together own beneficially more than
5% of such securities, except that, to the extent this restriction is
applicable, all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund, or except as permitted under investment restriction
Number 13 regarding the purchase of shares of money market funds managed by the
Fund's investment manager or its affiliates.

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

The investment objective of the Fund is a fundamental policy and may only be
changed with the approval of shareholders of the Fund.

Portfolio Turnover. The Fund expects that its annual portfolio turnover rate
will generally not exceed 100%, but this rate should not be construed as a
limiting factor. High portfolio turnover increases transaction costs which must
be paid by the Fund. High turnover may also result in the realization of net
capital gain, which is taxable when distributed to shareholders.

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

<PAGE>
who are responsible for administering the day-to-day operations of the Fund.
The affiliations of the officers and trustees and their principal occupations
for the past five years are listed below. Trustees who are deemed to be
"interested persons" of the Fund, as defined in the 1940 Act, are indicated by
an asterisk (*).

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

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

*Harmon E. Burns Vice President Executive Vice President, Secretary
777 Mariners Island Blvd. and Trustee and Director, Franklin Resources,
San Mateo, CA 94404 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 all the
investment companies in the Franklin
Group of Funds.

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

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

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
- ----------------- --------------------- --------------------------------------------
<S> <C> <C>
*Charles B. Johnson Chairman President and Director, Franklin Resources,
777 Mariners Island Blvd. of the Board and Inc. and Franklin/Templeton Distributors,
San Mateo, CA 94404 Trustee Inc.; Chairman of the Board and Director,
Franklin/Templeton Investor Services, Inc.
and General Host Corporation; director of
certain of the investment companies in the
Templeton Group of Funds; and officer and/or
director, trustee or managing general
partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc.
and of most of the investment companies in
the Franklin Group of Funds.

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

Frank W. T. LaHaye Trustee General Partner, Peregrine Associates
20833 Stevens Creek Blvd. and Miller & LaHaye, which are General
Suite 102 Partners of Peregrine Ventures and
Cupertino, CA 95014 Peregrine Ventures II (venture capital
firms); Chairman of the Board and
Director, Quarterdeck Office Systems,
Inc.; Director, FischerImaging
Corporation; and director or trustee,
as the case may be, of most of the
investment companies in the Franklin
Group of Funds.

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

Kenneth V. Domingues Vice President Senior Vice President, Franklin Resources,
777 Mariners Island Blvd. and Treasurer Inc. and Franklin Advisers, Inc.; Vice
San Mateo, CA 94404 President, 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 all the

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five ears
- ----------------- ---------------------- -------------------------------------------
<S> <C> <C>
Charles E. Johnson Vice President President and Chief Executive Officers
777 Mariners Island Blvd. of Templeton Worldwide, Inc.; Senior
San Mateo CA 94404 Vice President, Franklin Resources,
Inc. and Franklin/Templeton
Distributors, Inc.; President and
Director, Templeton Worldwide, Inc.;
President, Franklin Institutional
Services Corporation; director of
certain of the investment companies in
the Templeton Group of Funds; officer
and/or director, as the case may be,
of some of the subsidiaries of
Franklin Resources, Inc.; and officer
and/or director or trustee, as the
case may be, of some of the investment
companies in the Franklin Group of
Funds.

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

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

</TABLE>

As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(R) or the Templeton Group of
Funds. Trustees not affiliated with the investment manager may be but are not
currently paid fees or expenses incurred in connection with attending meetings.
Certain officers or trustees who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries. Charles E. Johnson
is the son and nephew, respectively, of Charles B. Johnson and Rupert H.
Johnson, Jr., who are brothers.

From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best of the Fund's knowledge, the only entity holding
beneficially or of record more than 5% of the Fund's outstanding shares is
Franklin Resources, Inc., 777 Mariners Island Boulevard, San Mateo, California
94404, which provided the initial capital for the Fund.

INVESTMENT MANAGEMENT AND
OTHER SERVICES

The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $112
billion in assets for over 3.5 million shareholders. The preceding table
indicates those officers and trustees who are also affiliated persons of
Distributors and Advisers.

Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for
the Fund to purchase, hold or sell and the selection of brokers through whom
the Fund's portfolio transactions are executed. The Manager's activities are
subject to the review and supervision of the Board of Trustees to whom the
Manager renders periodic reports of the Fund's investment activities. The
Manager, at its own expense, furnishes the Fund with office space and office
furnishings, facilities and equipment required for managing the business
affairs of the Fund; maintains all internal bookkeeping, clerical, secretarial
and administrative personnel and services; and provides certain telephone and
other mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of

<PAGE>
the Fund. The Fund bears all of its expenses not assumed by the Manager. See
the Statement of Operations and footnote 6 in the financial statements at the
end of this Statement of Additional Information for additional details of these
expenses.

Pursuant to the management agreement, the Fund is obligated to pay the Manager
a fee computed at the close of business on the last business day of each month
equal to an annual rate of 0.625 of 1% of the value of average daily net assets
up to and including $100 million; 0.50 of 1% of the value of average daily net
assets over $100 million up to and including $250 million; 0.45 of 1% of the
value of average daily net assets over $250 million up to and including $10
billion; 0.44 of 1% of the value of average daily net assets over $10 billion
up to and including $12.5 billion; 0.42 of 1% of the value of average daily net
assets over $12.5 billion up to and including $15 billion; and 0.40 of 1% of
the value of average daily net assets over $15 billion. The Manager has agreed
to reduce its fee to the extent necessary to comply with the most stringent
limits on the expenses which may be borne by the Fund as prescribed by any
state in which the Fund's shares are offered for sale. The most stringent
current limit requires the Manager to reduce or eliminate its fee to the extent
that aggregate operating expenses of the Fund (excluding interest, taxes,
brokerage commissions and extraordinary expenses such as litigation costs)
would otherwise exceed in any fiscal year 2.5% of the first $30 million of
average net assets of the Fund, 2% of the next $70 million of average net
assets of the Fund and 1.5% of average net assets of the Fund in excess of $100
million. The Trust's expenses did not exceed the applicable expense limitations
of the states in which the Trust's shares are registered.

In addition, the Manager will limit its management fees and assume
responsibility for certain other expenses during the formation stages of the
Fund, as described in the Prospectus of the Fund. This action by the Manager to
limit its management fees and assume responsibility for payment of certain
expenses may be cancelled or modified at any time. For the Fund's fiscal period
ended April 30, 1994, the management fees the Fund was contractually obligated
to pay the Manager were $6,042, and the management fees actually paid by the
Fund for the same period were $0; in addition, the Manager made payments of
$19,689 for other expenses as shown in the accompanying financial statement.

The management agreement is in effect until January 3, 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 Trust's Board of
Trustees or by a vote of the holders of a majority of the Fund's outstanding
voting securities and, in either event, by a majority vote of the trustees who
are not parties to the management agreement or interested persons of any such
party (other than as trustees of the Trust), cast in person at a meeting called
for that purpose. The management agreement may be terminated without penalty at
any time by the Board of Trustees of the Trust, by vote of the majority of the
Fund's outstanding shares or by the Manager on 60 days' written notice and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.

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

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

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

THE FUND'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS

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

When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the

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

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

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

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

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

If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by the Manager are considered at or
about the same time, transactions in such securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by the Manager, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. It is 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 fiscal period ended April 30, 1994, the Fund paid total brokerage
commissions of $7,951. As of that date, the Fund did not own any securities of
its regular broker-dealers.

<PAGE>
ADDITIONAL INFORMATION
REGARDING FUND SHARES

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

In connection with exchanges (see "Exchange Privilege" in the Prospectus),
since the proceeds from the sale of shares of an investment company are
generally not available until the fifth business day following the redemption,
the funds into which the Fund shareholders are seeking to exchange reserve the
right to delay issuing shares until said fifth business day. The redemption of
shares of the Fund to complete an exchange for shares of any investment company
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 when effective.

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

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

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

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

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

PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS

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

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

PURCHASES AT NET ASSET VALUE

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

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the begin-

<PAGE>
ning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the Trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. The Fund does not intend
to redeem illiquid securities in kind; however, should it happen, shareholders
may not be able to timely recover their investment and may also incur brokerage
costs in selling such securities.

REDEMPTIONS BY THE FUND

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

CALCULATION OF NET ASSET VALUE

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

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

REINVESTMENT DATE

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

SPECIAL SERVICES

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

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

ADDITIONAL INFORMATION REGARDING TAXATION

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

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

<PAGE>
distributed nor taxed to the Fund) to shareholders by December 31 of each year
in order to avoid the imposition of a federal excise tax. Under these rules,
certain distributions which are declared in October, November or December but
which, for operational reasons, may not be paid to the shareholder until the
following January, will be treated for tax purposes as if paid by the Fund and
received by the shareholder on December 31 of the calendar year in which they
are declared. The Fund intends as a matter of policy to declare and pay such
dividends, if any, in December to avoid the imposition of this tax, but does
not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.

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

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.

The Fund's investment in options and futures contracts, including stock
options, stock index options, stock index futures and options on stock index
futures are subject to many complex and special tax rules. For example,
over-the-counter options on debt securities and equity options, including
options on stock and on narrow-based stock indexes, will be subject to tax
under Section 1234 of the Code, generally producing a long-term or short-term
capital gain or loss upon exercise, lapse, or closing out of the option or sale
of the underlying stock or security. By contrast, the Fund treatment of certain
other options, futures and forward contracts entered into by the Fund is
generally governed by Section 1256 of the Code. These "Section 1256" positions
generally include listed options on debt securities, options on broad-based
stock indexes, options on securities indexes, options on futures contracts,
regulated futures contracts and certain foreign currency contracts and options
thereon.

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

<PAGE>
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 January 3, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

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

The underwriting agreement will continue in effect for successive annual
periods provided that its continuance is specifically approved at least
annually by a vote of the Trust's Board of Trustees, or by a vote of the
holders of a majority of the Fund's outstanding voting securities and, in
either event by a majority vote of the 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.

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the Fund's fiscal period ended April 30, 1994 were $92,347.
After allowances to dealers, Distributors retained $963, during that fiscal
period. Distributors received no other compensation from the Fund for acting as
underwriter.

DISTRIBUTION PLAN

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

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

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

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

The terms and provisions of the Plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.

To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the Plan as a result of applicable
federal law prohibiting certain banks from engaging in the distribution of
mutual fund shares. Such banking institutions, however, are permitted to
receive fees under the Plan for administrative servicing or for agency
transactions. If a bank were prohibited from providing such services, its
customers who are shareholders would be permitted to remain shareholders of the
Fund and alternate means for continuing the servicing of such shareholders
would be sought. In such an event, changes in the services provided might occur
and such shareholders might no longer be able to avail

<PAGE>
themselves of any automatic investment or other services then being provided by
the bank. It is not expected that shareholders would suffer any adverse
financial consequences as a result of any of these changes. Securities laws of
states in which the Fund's shares are offered for sale may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions selling shares of the Fund may be required to register as dealers
pursuant to state law.

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

The Plan has been approved by Resources, the Fund's initial shareholder, and by
the trustees, including those trustees who are not interested persons, as
defined in the 1940 Act. The Plan is effective through April 30, 1995, and
renewable annually by a vote of the Trust's Board of Trustees, including a
majority vote of the trustees who are non-interested persons of the Trust and
who have no direct or indirect financial interest in the operation of the Plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such trustees be done by the non-interested
trustees. The Plan and any related agreement may be terminated at any time,
without any penalty, by vote of a majority of the non-interested trustees on
not more than 60 days' written notice, by Distributors on not more than 60
days' written notice, by any act that constitutes an assignment of the
Management Agreement with the Manager or the Underwriting Agreement with
Distributors, or by vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.

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

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

GENERAL INFORMATION

PERFORMANCE

As noted in the Prospectus, the Fund may from time to time quote various
performance figures to 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 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 that the
maximum sales charge is deducted from the initial $1,000 purchase order, and
that income dividends and capital gains are reinvested at net asset
value. 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 in the sales charge structure, historical
performance information will be restated to reflect the maximum sales charge in
effect currently.

<PAGE>
In considering the quotations of total return by the Fund, investors should
remember that the maximum sales charge reflected in each quotation (currently
4.50%) is a one-time fee (charged on all direct purchases) which will have its
greatest impact during the early stages of an investor's investment in the
Fund. The actual performance of an investment will be affected less by this
charge the longer an investor retains the investment in the Fund.

Any average annual total return figures quoted by the Fund will be calculated
according to the SEC formula:

P(1 + T)n = ERV

Where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

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

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in
the same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five-, or ten-year periods (or
fractional portion thereof). The total rate of return for the Fund from
inception (January 3, 1994) to the end of the fiscal period ended April 30,
1994 was 4.30%.

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 April 30, 1994, the date of
the financial statements included herein, was 3.32%.

Yield figures are obtained using the following SEC formula:

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

Where:

a = dividends and interest earned during the period

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

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

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

CURRENT DISTRIBUTION RATE

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

VOLATILITY

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

<PAGE>
OTHER PERFORMANCE QUOTATIONS

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

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

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

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

COMPARISONS

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

a) NAREIT Equity REIT Index - The NAREIT Equity REIT Index is a compilation of
market weighted securities data collected from all tax-qualified equity real
estate investment trusts listed on the New York and American Stock Exchanges
and the NASDAQ. The index tracks performance, as well as REIT assets, by
property type and geographic region.

b) Russell-NCREIF Property Index - The Russell-NCREIF Property Index is a
compilation of real estate investment data collected from the members of the
National Council of Real Estate Investment Fiduciaries. The index is a
property-specific institutional real estate performance benchmark in the United
States, which summarizies the historical performance of income-producing
properties owned by pension and profit sharing plans.

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

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

e) 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.

f) 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.

g) 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.

h) 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.

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

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

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

l) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a

<PAGE>
statistical measure of change, over time, in the price of goods and services in
major expenditure groups.

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

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

o) Russell 3000 Index - composed of 3,000 large U.S. companies by market
capitalization, representing approximately 98% of the U.S. equity market. The
average market capitalization (as of May 31, 1991) is $1.0 billion.

p) Russell 2000 Small Stock Index - consists of the smallest 2,000 companies in
the Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization. The average market capitalization (as of May 31, 1991)
is $100 million.

q) 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.

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

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

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

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

OTHER FEATURES AND BENEFITS

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

MISCELLANEOUS INFORMATION

The Fund is a member of the Franklin/Templeton Group, one of the largest mutual
fund organizations in the United States and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $112 billion in
assets under management for more than 3.5 million shareholder accounts and
offers 101 U.S.-based mutual funds. The Fund may identify itself by its NASDAQ
or CUSIP number.

The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
36 mutual fund groups in service quality for 1993. One other fund group was
also ranked number one. Franklin has been ranked number one in service quality
by Dalbar for five of the past six years.

<PAGE>
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.

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Trustees of Franklin Real Estate Securities
Trust:

We have audited the accompanying statement of assets and liabilities of the
Franklin Real Estate Securities Trust, including the statement of investments
in securities and net assets, as of April 30, 1994, and the related statements
of operations and changes in net assets and the financial highlights, included
under the caption "Financial Highlights," for the period January 3, 1994
(effective date) to April 30, 1994. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.

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

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Real Estate Securities Trust as of April 30, 1994, and the results of
its operations, the changes in its net assets, and the financial highlights for
the period January 3, 1994 (effective date) to April 30, 1994, in conformity
with generally accepted accounting principles.

COOPERS & LYBRAND

San Francisco, California
June 3, 1994

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

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

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 80.1%
EQUITY REIT - APARTMENTS 28.5%
5,000 Amli Residential Properties Trust .................... $ 106,250
5,000 Bay Apartment Communities, Inc. ...................... 102,500
2,500 Camden Properties Trust .............................. 60,938
2,500 Columbus Realty Trust ................................ 52,813
6,000 Equity Residential Properties Trust .................. 196,500
3,000 Gables Residential Trust ............................. 72,750
2,500 Irvine Apartment Communities, Inc. ................... 50,938
8,000 Merry Land & Investment Co. .......................... 183,000
6,000 Mid-America Apartments Communities, Inc. ............. 146,250
3,000 Oasis Residential, Inc. .............................. 76,875
4,500 Post Properties, Inc. ................................ 137,250
8,000 Property Trust of America ............................ 149,000
6,000 Southwestern Properties Trust ........................ 79,500
5,000 Summit Properties, Inc. .............................. 100,000
6,000 United Dominion Realty Trust, Inc. ................... 88,500
----------
1,603,064
----------
EQUITY REIT - DIVERSIFIED 2.4%
2,500 Colonial Properties Trust ............................ 58,125
2,500 Trinet Corporate Realty Trust ........................ 77,500
----------
135,625
----------
EQUITY REIT - HEALTH CARE 3.4%
1,750 Health Care Property Investors, Inc. ................. 52,719
1,200 Nationwide Health Property Investment ................ 47,400
4,000 OMEGA Healthcare Investors, Inc. ..................... 93,000
----------
193,119
----------
EQUITY REIT - INDUSTRIAL 5.7%
2,500 Duke Realty Investment, Inc. ......................... 60,313
13,000 Security Capital Industrial Trust .................... 209,625
2,500 Spieker Properties, Inc. ............................. 53,438
----------
323,376
----------
EQUITY REIT - OFFICE 2.8%
6,000 Crescent Real Estate Equities, Inc. .................. 159,750
----------
EQUITY REIT - RECREATION .9%
2,500 National Golf Properties, Inc. ....................... 49,375
</TABLE> ----------

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

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

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

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
EQUITY REIT - RESIDENTIAL COMMUNITIES 5.3%
7,000 Manufactured Home Communities, Inc. .................... $ 156,625
4,000 ROC Communities, Inc. .................................. 94,500
2,000 Sun Communities, Inc. .................................. 47,750
----------
298,875
----------
EQUITY REIT - RETAIL - COMMUNITY SHOPPING CENTERS 7.3%
2,300 Developers Diversified Realty Corp. .................... 73,313
2,500 Federal Realty Investment Trust ........................ 61,563
1,500 Kimco Realty Corp. ..................................... 53,813
3,000 The Macerich Co. ...................................... 58,875
3,000 Vornado Realty Trust ................................... 98,625
1,650 Weingarten Realty, Inc. ................................ 62,288
----------
408,477
----------
EQUITY REIT - RETAIL - OUTLET CENTERS 5.4%
2,500 Chelsea GCA Realty, Inc. ............................... 73,750
3,500 Horizon Outlet Centers ................................ 86,625
3,000 McArthur Glen Realty Corp. ............................. 65,625
2,500 Tanger Factory Outlet Centers, Inc. .................... 80,938
----------
306,938
----------
EQUITY REIT - RETAIL - REGIONAL MALLS 4.2%
3,000 DeBartolo Realty Corp. ................................ 44,625
2,500 General Growth Properties Trust ........................ 49,063
3,000 Mills Corp. ............................................ 63,375
3,000 Simon Property Group, Inc. ............................. 80,250
----------
237,313
----------
EQUITY REIT - STORAGE 2.8%
6,000 Storage USA, Inc. ...................................... 157,500
----------
HOME BUILDERS 6.5%
3,500 a Beazer Homes USA, Inc. ................................. 58,188
2,500 Centex Corp. ........................................... 71,250
3,500 a Hovnanian Enterprises, Inc., Class A ................... 43,750
3,000 Kaufman & Broad Homes Corp. ............................ 54,375
2,250 Lennar Corp. ........................................... 46,125
5,500 a NVR, Inc. .............................................. 41,250
2,500 a U.S. Home Corp. ........................................ 52,188
----------
367,126
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

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

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HOTEL 4.2%
11,000 Equity Inns, Inc. .................................................. $ 140,250
10,000 a Host Marriott Corp. ................................................ 97,500
----------
237,750
----------
REAL ESTATE DEVELOPMENT - COMMERCIAL .7%
2,000 Rouse Co. .......................................................... 38,500
----------
TOTAL COMMON STOCKS (COST $4,334,901) ........................ 4,516,788
----------
PREFERRED STOCKS .4%
500 b Catellus Development Corp., $3.625 cvt. pfd., Series B (COST $24,875) 20,239
----------
TOTAL COMMON STOCKS AND PREFERRED STOCKS (COST $4,359,776) ... $4,537,027
----------

FACE AMOUNT
- -----------
c,d RECEIVABLES FROM REPURCHASE AGREEMENTS 21.0%

$1,217,523 Joint Repurchase Agreement, 3.56%, 05/02/94 (Maturity Value $1,183,285)
(COST $1,182,934)
Collateral: U.S. Treasury Bills, 10/27/94
U.S. Treasury Notes, 4.625%, 12/31/94 ................ 1,182,934
----------
TOTAL INVESTMENTS (COST $5,542,710) 101.5% ........... 5,719,961
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (1.5)% .... (85,721)
----------
NET ASSETS 100.0% ................................... $5,634,240
==========

At April 30, 1994, the net unrealized appreciation based on the cost
of investments for income tax purposes of $5,542,710 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost ................ $ 274,793
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value ............... (97,542)
----------
Net unrealized appreciation ...................................... $ 177,251
==========
</TABLE>

PORTFOLIO ABBREVIATION:
REIT - Real Estate Investment Trust

a non-income producing.
b See Note 7 regarding Rule 144A securities.
c Face amount for repurchase agreements is for the underlying collateral.
d See Note 1e regarding joint repurchase agreements.

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

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994

<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value
(identified cost $4,359,776) $4,537,027
Receivables from repurchase agreements,
at value and cost 1,182,934
Cash 224,113
Receivables:
Dividends and interest 16,409
Capital shares sold 89,065
Receivable from investment manager 22,559
Prepaid registration 16,748
Unamortized organization costs 12,702
----------
Total assets 6,101,557
----------
Liabilities:
Payables:
Investment securities purchased 424,850
Capital shares repurchased 293
Shareholder servicing costs 140
Accrued expenses and other payables 42,034
----------
Total liabilities 467,317
----------
Net assets, at value $5,634,240
==========
Net assets consist of:
Undistributed net investment income $ 30,886
Unrealized appreciation on investments 177,251
Capital shares 5,159
Additional paid-in capital 5,420,944
----------
Net assets, at value $5,634,240
==========
Computation of net asset value and
offering price per share:
Net asset value and redemption price
per share ($5,634,240 (PI) 515,905 shares
outstanding) $10.92
======
Maximum offering price (100/95.5 of $10.92)* $11.43
======

STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 3, 1994 (EFFECTIVE DATE)
TO APRIL 30, 1994

Investment income:
Dividends $ 25,406
Interest (Note 1) 7,904
--------
Total income $ 33,310

Expenses:
Shareholder servicing costs (Note 6) 226
Registration fees 8,374
Custodian fees 82
Distribution fees 2,424
Professional fees 10,100
Amortization of organization costs 907
Payments from manager (Note 6) (19,689)
--------
Total expenses 2,424
--------
Net investment income 30,886
Net unrealized gain on investments 177,251
--------
Net increase in net assets resulting
from operations $208,137
========

STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JANUARY 3, 1994 (EFFECTIVE DATE)
TO APRIL 30, 1994

Increase in net assets:
Operations:
Net investment income $ 30,886
Net unrealized appreciation during
the period 177,251
----------
Net increase in net assets resulting
from operations 208,137
Increase in net assets from capital share
transactions (Note 4) 5,326,103
----------
Net increase in net assets 5,534,240
Net assets:
Beginning of period 100,000
----------
End of period (including undistributed net
investment income of $30,886) $5,634,240
==========
</TABLE>

*On sales of $100,000 or more, the offering price is reduced as stated in the
section of the prospectus entitled "How to Buy Shares of the Fund."

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

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin Real Estate Securities Trust (the Trust) is an open-end, non
diversified management investment company (mutual fund) registered under the
Investment Company Act of 1940 as amended. The Trust currently consists of one
fund, Franklin Real Estate Securities Fund (the Fund).

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

A. SECURITY VALUATION:

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

The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Trustees - see Note 7.

Short-term securities and similar investments with remaining maturities of 60
days or less are valued at amortized cost, which approximates value.

B. INCOME TAXES:

The Trust intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is
required.

C. SECURITY TRANSACTIONS:

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

D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.

A portion of the distributions received by the Fund from investments in REIT
securities may be characterized as tax basis return of capital (ROC)
distributions, which are not recorded as dividend income, but will reduce the
cost basis of the REIT securities. ROC distributions exceeding the cost basis
of the REIT security will be recognized by the Fund as capital gain.

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

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

NOTES TO FINANCIAL STATEMENTS (CONT.)

1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)

E. REPURCHASE AGREEMENTS:

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

The Trust may enter into a Joint Repurchase Agreement whereby its uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements. The value and face amount of the Joint
Repurchase Agreement has been allocated to the Trust based on its pro-rata
interest at April 30, 1994.

2. UNAMORTIZED ORGANIZATION COSTS

The organization costs of the Trust are amortized on a straight-line basis over
a period of five years from January 3, 1994 (the effective date of registration
under the Securities Act of 1933). In the event Franklin Resources, Inc. (which
was the sole shareholder prior to the effective date) redeems its shares within
the five-year period, the pro-rata share of the then-unamortized deferred
organization cost will be deducted from the redemption price paid to Franklin
Resources, Inc. New investors purchasing shares of the Trust subsequent to that
date bear such costs during the amortization period only as such charges are
accrued daily against investment income.

3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

At April 30, 1994, for tax purposes, the Trust had no accumulated undistributed
net realized gains or losses.

For income tax purposes, the aggregate cost of securities and unrealized
appreciation are the same as for financial statement purposes at April 30,
1994.

4. TRUST SHARES

At April 30, 1994, there was an unlimited number of $.01 par value shares of
beneficial interest authorized and paid-in capital aggregated $5,426,103.
Transactions in the Trust's shares for the period January 3, 1994 (effective
date) to April 30, 1994 were as follows:

<TABLE>
<CAPTION>
SHARES AMOUNT
------- ----------
<S> <C> <C>
Shares sold ....................... 387,262 $4,040,622
Shares redeemed ................... (41) (447)
Changes from exercise of exchange
privilege
Shares sold ...................... 119,351 1,293,160
Shares redeemed .................. (667) (7,232)
------- ----------
Net increase ...................... 505,905 $5,326,103
======= ==========
</TABLE>

<PAGE>

FRANKLIN REAL ESTATE SECURITIES TRUST

FRANKLIN REAL ESTATE SECURITIES FUND

NOTES TO FINANCIAL STATEMENTS (CONT.)

5. PURCHASES AND SALES OF SECURITIES

Purchases of securities (excluding short-term securities) for the period
January 3, 1994 (effective date) to April 30, 1994 aggregated $4,370,483. There
were no sales of securities during this period.

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., ("Manager"), under the terms of a management
agreement, provides investment advice, administrative services, office space
and facilities to the Trust, and receives fees computed daily on the net assets
of the Trust at an annualized rate of 5/8 of 1% of the first $100 million of
average net assets of the Trust, 1/2 of 1% of average net assets in excess of
$100 million up to $250 million, 45/100 of 1% of average net assets in excess
of $250 million up to $10 billion, 44/100 of 1% of average net assets in excess
of $10 billion up to $12.5 billion, 42/100 of 1% of average net assets in
excess of $12.5 billion up to $15 billion and 40/100 of 1% of average net
assets in excess of $15 billion. Fees incurred by the Trust under the agreement
aggregated $6,042 for the period ended April 30, 1994. The terms of the
management agreement provide that aggregate annual expenses of the Trust be
limited to the extent necessary to comply with the limitations set forth in the
laws, regulations and administrative interpretations of the states in which the
Trust's shares are registered. The Trust's expenses did not exceed these
limitations; however, for the period ended April 30, 1994, Franklin Advisers,
Inc. reduced its management fees by $6,042, and made payments of $19,689 for
other expenses as shown in the Statement of Operations.

In its capacity as underwriter for the shares of the Trust, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Trust's shares for the
period ended April 30, 1994 totaling $92,347, of which $91,384 was paid to
other dealers. Commissions are deducted from the gross proceeds received from
the sale of the shares of the Trust, and as such are not expenses of the Trust.

Under the terms of a shareholder service agreement with Franklin/Templeton
Investor Services, Inc., the Trust pays costs on a per shareholder account
basis. Costs incurred for the period ended April 30, 1994 aggregated $226, of
which $213 was paid to Franklin/Templeton Investor Services, Inc.

Under the terms of a distribution agreement pursuant to Rule 12b-1 of the
Investment Company Act of 1940, the Trust will reimburse Franklin/Templeton
Distributors, Inc. in an amount up to 0.25% per annum of the Trust's average
daily net assets for costs incurred in the promotion, offering and marketing of
the Trust's shares. Fees incurred by the Trust under the agreement aggregated
$2,424 for the period ended April 30, 1994.

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

At April 30, 1994, Franklin Resources, Inc. owned 39% of the Trust's
outstanding shares.

7. RULE 144A SECURITIES

Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Trust values these
securities as disclosed in Note 1.

At April 30, 1994, the Trust held 144A securities with a value aggregating
$20,239, representing .36% of the Trust's net assets. See the accompanying
Statement of Investments in Securities and Net Assets for specific information
on such securities.

8. FINANCIAL HIGHLIGHTS

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

<PAGE>

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<PAGE>

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<PAGE>