Franklin Templeton International Trust – ‘497’ on 3/16/95

As of:  Thursday, 3/16/95   ·   Accession #:  876441-95-2   ·   File #:  33-41340

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Definitive Material   —   Rule 497
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 497         Definitive Material                                  139    756K 

Document Table of Contents

497
1st Page of 139
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
SUPPLEMENT DATED FEBRUARY 1, 1995   
TO THE PROSPECTUS OF
FRANKLIN INTERNATIONAL EQUITY FUND

FRANKLIN INTERNATIONAL TRUST
DATED MARCH 1, 1994 
AS AMENDED JULY 1, 1994 

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

1. EXPENSE TABLE                                                                

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) The following is added at the end of the first paragraph:                   

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:                                                             

                                                        [Enlarge/Download Table]


                                                                               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*,***
--------------------------------------------------------------------------------------------------------------------
                                                                                                                    
  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)**   

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

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

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

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

    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 funds                                      
    in                                                                                                              

                                       1                                                                            

497
2nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 2nd
    the Franklin Group of Funds(R) and the Templeton Group of Funds. Included                                       
    for these aggregation purposes are (a) the mutual funds in the Franklin                                         
    Group of Funds except Franklin Valuemark Funds and Franklin Government                                          
    Securities Trust (the "Franklin Funds"), (b) other investment products                                          
    underwritten by Distributors or its affiliates (although certain investments                                    
    may not have the same schedule of sales charges and/or may not be subject to                                    
    reduction) and (c) the U.S. mutual funds in the Templeton Group of Funds                                        
    except Templeton American Trust, Inc., Templeton Capital Accumulator Fund,                                      
    Inc., Templeton Variable Annuity Fund, and Templeton Variable Products                                          
    Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton Funds are                                    
    collectively referred to as the "Franklin Templeton Funds.") Sales charge                                       
    reductions based upon aggregate holdings of (a), (b) and (c) above                                              
    ("Franklin Templeton Investments") may be effective only after notification                                     
    to Distributors that the investment qualifies for a discount. References                                        
    throughout the Prospectus, for purposes of aggregating assets or describing                                     
    the exchange privilege, refer to the above descriptions.                                                        

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

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

    PURCHASES AT NET ASSET VALUE                                                                                    

    Shares of the Fund may be purchased without the imposition of either a                                          
    front-end sales charge ("net asset value") or a contingent deferred sales                                       
    charge by (1) officers, 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                                                                                      

                                       2                                                                            

497
3rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 3rd
    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 information may be obtained from                                       
    Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under                                       
    "Distributions to Shareholders."                                                                                

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

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

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

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

    DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES                                                                

    Shares of the Fund may also be purchased at net asset value and without the                                     
    imposition of a contingent deferred sales charge by certain designated                                          
    retirement plans, including profit sharing, pension, 401(k) and simplified                                      
    employee pension plans ("designated plans"), subject to minimum requirements                                    

                                       3                                                                            

497
4th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 4th
    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 invested during the subsequent 13-month period in this Fund or any of                                     
    the Franklin Templeton Investments must total at least $1,000,000. Orders                                       
    for such accounts will be accepted by mail accompanied by a check or by                                         
    telephone or other means of electronic data transfer directly from the bank                                     
    or trust company, with payment by federal funds received by the close of                                        
    business on the next business day following such order.                                                         

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

    Refer to the SAI for further information.                                                                       

4.  EXCHANGE PRIVILEGE                                                                                              

(a) The following language is added at the end of the first paragraph:                                              

    Investors should review the prospectus of the fund they wish to exchange                                        
    from and the fund they wish to exchange into for all specific requirements                                      
    or limitations on exercising the exchange privilege, for example, minimum                                       
    holding periods or applicable sales charges.                                                                    

(b) 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 this                                       
    Prospectus.                                                                                                     

(c) 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."                                                                                                  

                                       4                                                                            

497
5th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 5th
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.                                                                 

                                       5                                                                            

497
6th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 6th
FRANKLIN                                                                                                            
INTERNATIONAL                                                                                                       
EQUITY FUND                                                                                                         

FRANKLIN INTERNATIONAL TRUST                                                                                        

PROSPECTUS  MARCH 1, 1994                                                                                           
AS AMENDED JULY 1, 1994                                                                                             

[FRANKLIN LOGO]                                                                                                     

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

Franklin International Trust (the "Trust") is an open-end management investment                                     
company consisting of two separate diversified series. This Prospectus pertains                                     
only to the Franklin International Equity Fund (the "Fund"), a diversified                                          
series, which seeks long-term growth of capital. Under normal conditions, the                                       
Fund invests at least 65% of its total assets in an internationally mixed                                           
portfolio of equity securities which trade on markets in countries other than                                       
the United States ("U.S.") and are (i) issued by companies domiciled in                                             
countries other than the U.S. or (ii) issued by companies that derive at least                                      
50% of either their revenues or pre-tax income from activities outside of the                                       
U.S. There can, of course, be no assurance that the Fund's objective will be                                        
achieved.                                                                                                           

Under normal market conditions, the Fund's assets are substantially invested in                                     
equity securities consisting of common and preferred stock, securities (bonds or                                    
preferred stock) convertible into common stock, warrants and securities                                             
representing underlying international securities such as American Depositary                                        
Receipts or ADRs, and European Depositary Receipts or EDRs ("Equity                                                 
Securities").                                                                                                       

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 Trust, dated March 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.                                                                                                              

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

                                       1                                                                            

497
7th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 7th
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.                                                                   

                                                                [Download Table]

CONTENTS                                                                    PAGE
                                                                                
Expense Table ............................................................     3

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

About the Fund ...........................................................     5

Investment Objective and Policies of the Fund ............................     5

Management of the Fund ...................................................    18

Distributions to Shareholders ............................................    20

Taxation of the Fund and Its Shareholders ................................    22

How to Buy Shares of the Fund ............................................    23

Purchasing Shares of the Fund in Connection with                                
  Retirement Plans Involving Tax-Deferred Investments ....................    29

Other Programs and Privileges Available to Fund Shareholders .............    30

Exchange Privilege .......................................................    32

How to Sell Shares of the Fund ...........................................    34

Telephone Transactions ...................................................    37

Valuation of Fund Shares .................................................    38

How to Get Information Regarding an Investment in the Fund ...............    40

Performance ..............................................................    40

General Information ......................................................    41

Account Registrations ....................................................    42

Important Notice Regarding Taxpayer IRS Certifications ...................    43

Portfolio Operations .....................................................    43

2 

497
8th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 8th
EXPENSE TABLE                                                                   
--------------------------------------------------------------------------------

The purpose of this table is to assist an investor in understanding the various 
costs and expenses that a shareholder will bear directly or indirectly in       
connection with an investment in the Fund. These figures are based on the       
aggregate operating expenses of the Fund (including fees set by contract) for   
the Fund's fiscal year ended October 31, 1993.                                  

                                                                [Download Table]


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

ANNUAL FUND OPERATING EXPENSES                                                  
  (as a percentage of average net assets)                                       
Management Fees ...................................................  1.00%**    
12b-1 Fees ........................................................  0.25%**,***
Other Expenses:                                                                 
   Registration Fees ......................................  0.31%              
   Custodian Fees .........................................  0.19%              
   Other ..................................................  0.52%              
                                                             -----              
Total Other Expenses ..............................................  1.02%      
                                                                     -----      
Total Fund Operating Expenses .....................................  2.27%**    
                                                                     =====      

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

**Represents the amount that would have been payable to the investment manager, 
absent a fee waiver by the investment manager, and a reimbursement of a portion 
of the amount payable for 12b-1 fees. However, the investment manager has       
voluntarily limited its management fees and reimbursed 12b-1 fees and other     
operating expenses otherwise payable by the Fund. With this reduction,          
management fees were 0.00% of the Fund's average net assets, and total operating
expenses, including such management fees, were 0.50% of the Fund's average net  
assets for the fiscal year ended October 31, 1993. This arrangement may be      
terminated by the investment manager at any time.                               

***Consistent with rules of the National Association of Securities Dealers, Inc.
(the "NASD"), it is possible that the combination of front-end sales charges and
Rule 12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same    
rules.                                                                          

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

EXAMPLE                                                                         

As required by 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                                  

                                       3                                        

497
9th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 9th
(1) a 5% annual rate of return and (2) redemption at the end of each time       
period. As noted in the table above, the Fund charges no redemption fees:       

                                                                [Download Table]


1 year      3 years    5 years     10 years
                                           
 $ 67        $113       $161         $294  

THIS EXAMPLE IS BASED ON THE AGGREGATE OPERATING EXPENSES OF THE FUND (INCLUDING
FEES SET BY CONTRACT) FOR THE FUND'S FISCAL YEAR ENDED OCTOBER 31, 1993 SHOWN   
ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, 
WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by 
the Fund and only indirectly by shareholders as a result of their investment in 
the Fund. In addition, federal regulations require the example to assume an     
annual return of 5%, but the Fund's actual return may be more or less than 5%.  

FINANCIAL HIGHLIGHTS                                                            
--------------------------------------------------------------------------------

The information for each of the two fiscal years ended October 31, 1993 and 1992
and for the fiscal period from September 20, 1991 (effective date of            
registration) to October 31, 1991 has been audited by Coopers & Lybrand,        
independent auditors, whose audit report appears in the financial statements in 
the Fund's Statement of Additional Information, a copy of which may be obtained 
as noted on the front cover of this prospectus.                                 

                                                                [Download Table]


               PER SHARE OPERATING PERFORMANCE**                
----------------------------------------------------------------

           NET ASSET                  NET REALIZED              
 YEAR      VALUES AT        NET       & UNREALIZED    TOTAL FROM
 ENDED     BEGINNING    INVESTMENT    GAIN (LOSS)     INVESTMENT
OCT. 31     OF YEAR       INCOME      ON SECURITIES   OPERATIONS
----------------------------------------------------------------
FRANKLIN INTERNATIONAL EQUITY FUND                              
                                                                
 1991+       $10.01        $.06          $   --         $ .060  
 1992         10.07         .19           (.038)          .152  
 1993         10.02         .42           2.253          2.673  

                                                                [Download Table]

               PER SHARE OPERATING PERFORMANCE**                             
------------------------------------------------------------------           

          DISTRIBUTIONS                                  NET ASSET           
 YEAR       FROM NET     DISTRIBUTIONS                   VALUES AT           
 ENDED     INVESTMENT        FROM           TOTAL          END OF      TOTAL 
OCT. 31      INCOME      CAPITAL GAINS   DISTRIBUTIONS      YEAR       RETURN
-----------------------------------------------------------------------------
FRANKLIN INTERNATIONAL EQUITY FUND                                           
                                                                             
 1991+       $   --          $  --           $  --         $10.07        .60%
 1992         (.202)            --           (.202)         10.02       1.46 
 1993         (.413)            --           (.413)         12.28      27.40 

                                                                [Download Table]

                       RATIOS/SUPPLEMENTAL DATA                      
---------------------------------------------------------------------
                                          RATIO OF NET               
          NET ASSETS       RATIO OF        INVESTMENT                
 YEAR       AT END         EXPENSES          INCOME         PORTFOLIO
 ENDED    OF PERIOD       TO AVERAGE       TO AVERAGE       TURNOVER 
OCT. 31   (IN 000'S)     NET ASSETS***     NET ASSETS         RATE   
---------------------------------------------------------------------
                                                                     
 1991+     $ 1,286            --%            4.92%*              --% 
 1992        6,944           .29             2.36             48.78  
 1993       19,217           .50             4.22             52.99  

*Annualized.                                                                    

**Selected data for a share of beneficial interest outstanding throughout the   
year.                                                                           

+For the period September 20, 1991 (effective date of registration) to October  
31, 1991.                                                                       

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

***During the periods indicated below, Franklin Advisers, Inc., the investment  
manager, reduced its management fees and reimbursed other expenses incurred by  
the Funds. Had such action not been taken, ratios of operating expenses to      
average net assets would have been as follows:                                  

                                                                [Download Table]

                                                RATIO OF 
                                                EXPENSES 
                                               TO AVERAGE
                                               NET ASSETS
                                               ----------
FRANKLIN INTERNATIONAL EQUITY                            
                                                         
  1991 ......................................    2.50%*  
  1992 ......................................    2.50    
  1993 ......................................    2.27    

4 

497
10th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 10th
ABOUT THE FUND                                                                  
--------------------------------------------------------------------------------

The Trust is an open-end management investment company which consists of two    
diversified, open-end series, commonly called mutual funds. The Trust is a      
Delaware business trust, organized on March 22, 1991 and registered under the   
Investment Company Act of 1940 (the "1940 Act"). The Fund is managed by Franklin
Advisers, Inc. (the "Manager" or "Advisers"). Templeton Investment Counsel, Inc.
("TICI" or the "Sub-adviser"), an indirect subsidiary of Templeton Worldwide,   
Inc., which is a direct, wholly owned subsidiary of Franklin Resources, Inc.    
("Resources"), serves as the Sub-adviser under a contract with the Manager      
(together, the "Fund's Advisers"). (See "Management of the Fund.")              

Shares of the Fund may be purchased (minimum investment of $100 initially and   
$25 thereafter) at the current public offering price, which is equal to the     
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge     
based upon a variable percentage (ranging from 4.50% to less than 1 .15% 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 principal investment objective is to seek long-term growth of        
capital. Under normal market conditions, the Fund seeks its objective by        
investing at least 65% of its total assets in a diverse international portfolio 
of Equity Securities which trade on markets in countries other than the U .S.   
and which are issued by companies (i) domiciled in countries other than the     
U.S., or (ii) that derive at least 50% of either their revenues or pre-tax      
income from activities outside of the U.S. Thus it is possible, although not    
anticipated, that up to 35% of the Fund's assets could be invested in U.S.      
companies. The investment objective of the Fund is a fundamental policy and may 
not be changed without the approval of a majority of the Fund's outstanding     
shares. There is, of course, no assurance that the Fund's objective will be     
achieved.                                                                       

In selecting portfolio securities, the Fund attempts to take advantage of the   
difference between economic trends and the anticipated performance of securities
and securities markets in various countries. Up to 35% of the Fund's total      
assets may be invested in fixed-income debt securities rated "Ba a" or better by
Moody's Investors Service ("Moody's") or "BBB" or better by Standard & Poor's   
Corporation ("S&P") or that are not rated but determined by management to be of 
comparable quality.                                                             

The Fund may invest in securities of issuers in the following countries:        
Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile,         
Columbia, Denmark, Finland, France, Germany, Greece, Hong Kong, India,          
Indonesia, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands,  
New Zealand, Norway, the Philippines, Portugal, Singapore, Spain, Sweden,       
Switzerland, Taiwan, Thailand, Turkey, and the United Kingdom. (See Appendix B  
to the Trust's Statement of Additional Information for a brief discussion       
regarding the countries in which the Fund expects to invest.) Normally, the Fund
will invest at least 65% of its total assets in securities traded in at least   
three foreign countries listed herein.                                          

Up to 35% of the Fund's assets may be invested in bonds, fixed-income debt      
securities and synthetic securities, as discussed below. The Fund may seek      
capital appreciation by investing in such debt securities which would occur     
through changes in relative foreign currency exchange rates, changes in relative
interest rates or improvement in the creditworthiness of an issuer. The receipt 
of income from such debt securities is incidental to the Fund's investment      
objective of growth of capital. These debt obligations consist of U.S. and      
foreign government securities and corporate debt securities, in-                

5 

497
11th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 11th
cluding Samurai and Yankee bonds, Eurobonds and depositary receipts. The Fund   
will limit its purchases of debt securities to investment grade obligations. For
long-term debt obligations this includes securities that are rated "Baa" or     
better by Moody's or "BBB" or better by S&P, or that are not rated but          
determined by management to be of comparable quality.                           

Fixed-income debt securities within the top three categories (i.e., "AAA", "AA" 
and "A" by S&P or "Aaa", "Aa" or "A" by Moody's) comprise what are known as     
high-grade bonds and are regarded as having a strong capacity to pay principal  
and interest. Medium-grade bonds (i.e., "BBB" by S &P or "Baa" by Moody's) are  
regarded as having an adequate capacity to pay principal and interest but with  
greater vulnerability to adverse economic conditions and some speculative       
characteristics. An Appendix discussing these ratings is included in the        
Statement of Additional Information.                                            

Generally, when interest rates rise, the value of the Fund's fixed-income and   
convertible investments will decline. Conversely, when rates fall, the value of 
such investments may rise. As a result, the presence of debt or convertible     
securities in the Fund's portfolio may contribute to fluctuation both in the    
value of the Fund's shares and the dividends per share paid by the Fund.        

In the event the rating on an issue held in the Fund's portfolio is lowered by a
rating service, such change will be considered by the Fund in its evaluation of 
the overall investment merits of that security but will not necessarily result  
in an automatic sale of the security.                                           

The Fund may temporarily invest cash in short-term debt instruments of U.S. or  
foreign issuers for cash management purposes or pending investment. (See        
"Investment Objective and Policies of the Fund-Short-Term Investments" below.)  

The systematic method employed by the Sub-adviser to identify opportunities in  
the equity markets may result in frequent recommendations to add or remove      
securities from the Fund's portfolio, thus increasing the portfolio turnover    
rate. High portfolio turnover increases transaction costs which must be paid by 
the Fund. High turnover may also result in the realization of net capital gains,
which are taxable when distributed to shareholders.                             

RISKS RELATED TO INVESTING IN FOREIGN SECURITIES                                

Foreign securities involve certain risks which should be considered carefully by
prospective investors in the Fund. These risks include political, social or     
economic instability in the country of the issuer, the difficulty of predicting 
international trade patterns, the possibility of the imposition of exchange     
controls, expropriation, restrictions on removal of currency or other assets,   
nationalization of assets, foreign withholding and income taxation, and foreign 
trading practices (including higher trading commissions, custodial charges and  
delayed settlements). Such securities may be subject to greater fluctuations in 
price than securities issued by U.S. corporations or issued or guaranteed by the
U.S. government, its instrumentalities or agencies. The markets on which such   
securities trade may have less volume and liquidity, and may be more volatile   
than securities markets in the U.S. In addition, there may be less publicly     
available information about a foreign company than about a U.S. domiciled       
company. Foreign companies generally are not subject to uniform accounting,     
auditing and financial reporting standards comparable to those applicable to    
U.S. domestic companies. There is generally less government regulation of       
securities exchanges, brokers and listed companies abroad than in the U.S.      
Confiscatory taxation or diplomatic developments could also affect investment in
those countries.                                                                

6 

497
12th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 12th
In many instances, foreign debt securities may provide higher yields than       
securities of domestic issuers which have similar maturities and quality. Under 
certain market conditions these investments may be less liquid than the         
securities of U.S. corporations and are certainly less liquid than securities   
issued or guaranteed by the U.S. government, its instrumentalities or agencies. 
Finally, in the event of a default of any such foreign debt obligations, it may 
be more difficult for the Fund to obtain or to enforce a judgment against the   
issuers of such securities. If a security is denominated in foreign currency,   
the value of the security to the Fund will be affected by changes in currency   
exchange rates and in exchange control regulations, and costs will be incurred  
in connection with conversions between currencies. A change in the value of any 
foreign currency against the U.S. dollar will result in a corresponding change  
in the U.S. dollar value of the Fund's securities denominated in that currency. 
Such changes will also affect the Fund's income and distributions to            
shareholders. In addition, although the Fund will receive income on foreign     
securities in such currencies, the Fund will be required to compute and         
distribute its income in U.S. dollars. Therefore, if the exchange rate for any  
such currency declines materially after the Fund's income has been accrued and  
translated into U.S. dollars, the Fund could be required to liquidate portfolio 
securities to make required distributions. Similarly, if an exchange rate       
declines between the time the Fund incurs expenses in U.S. dollars and the time 
such expenses are paid, the amount of such currency required to be converted    
into U.S. dollars in order to pay such expenses in U.S. dollars will be greater.

An example of the volatility of the international currency markets was the      
September 1992 currency crisis in Europe. The failure of the Maastricht Treaty  
to receive unanimous approval by the nations involved made a common European    
currency under the direction of a central European bank seem unachievable. This 
created exceptional volatility in international currency markets. In spite of   
this turmoil, over the 12-month period ending December 31, 1992, many currencies
were stronger against the dollar, which improved the performance of their       
underlying equity markets.                                                      

The relative performance of foreign currencies in which securities held by the  
Fund are denominated is an important factor in the Fund's overall performance.  
TICI intends to manage the Fund's exposure to various currencies to take        
advantage of different yield, risk, and return characteristics that different   
currencies, currency denominations, and countries can provide for U.S.          
investors.                                                                      

To hedge exposure to currency fluctuations or to increase income, the Fund may  
enter into forward foreign currency exchange contracts, and may buy and sell    
options, futures contracts and options on futures contracts relating to foreign 
currencies. The Fund will use forward currency exchange contracts in the normal 
course of business to lock in an exchange rate in connection with purchases and 
sales of securities denominated in foreign currencies. Other currency management
strategies allow the Sub-adviser to hedge portfolio securities, to shift        
investment exposure from one currency to another, or to attempt to profit from  
anticipated declines in the value of a foreign currency relative to the U.S.    
dollar. Some of these strategies will require the Fund to set aside liquid      
assets in a segregated custodial account to cover its obligations. (See         
"Currency Hedging Transactions" below. Options and Futures and Options on       
Futures are limited as discussed below.)                                        

7 

497
13th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 13th
Although the Fund will not invest more than 25% of its assets in any one        
industry or the government of any one country, the Fund may invest more than 25%
of its assets in the securities of issuers in one or more countries. Investors  
should consider the greater risk of such policy versus the safety that comes    
with an investment that does not involve potential geographic concentration and 
should compare the Fund with other investment vehicles before making an         
investment decision. There is, of course, no assurance that the Fund's objective
will be achieved.                                                               

Some of the countries in which the Fund invests may not permit direct           
investment. Investments in such countries may only be permitted through         
government approved investment vehicles. Investing through such vehicles may    
involve duplicative or layered fees or expenses and may, as well, be subject to 
limitations under the 1940 Act. Under the 1940 Act, the Fund may invest up to   
10% of its assets in shares of other investment companies and up to 3% of its   
assets in any one investment company as long as the investment does not         
represent more than 5% of the voting stock of the acquired investment company.  

TRADING IN OPTIONS                                                              

The Fund may purchase put and call options and write covered put and call       
options on securities and securities indices. Such options may be traded on U.S.
exchanges and, to the extent permitted by law, over-the-counter and on foreign  
exchanges. Broadly speaking, to comply with SEC asset coverage requirements, no 
more than one third of the Fund's assets will be invested in options or other   
assets which, as discussed below, must be "covered."                            

Writing Call and Put Options on Securities. The Fund may write options to       
generate additional income and to hedge its investment portfolio against        
anticipated adverse market and/or exchange rate movements. 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. All options written by the Fund will be "covered."                       

A call option written by the Fund is "covered" if the Fund owns the underlying  
security covered by the call or has an absolute and immediate right to acquire  
that security without additional cash consideration (or for additional cash     
consideration held in a segregated account by its custodian) up on 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 (i) is     
equal to or less than the exercise price of the call written or (ii) 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 that wishes to terminate its obligation 
may effect a "closing purchase transaction." This is accomplished by buying an  
option                                                                          

8 

497
14th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 14th
of the same series as the option previously written. The effect of the purchase 
is that the writer's position will be cancelled by the clearing corporation.    
However, a writer may not effect a closing purchase transaction after being     
notified of the exercise of an option. Likewise, an investor who is the holder  
of an option may liquidate its position by effecting a "closing sale            
transaction." This is accomplished by selling an option of the same series as   
the option previously purchased.                                                

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.  
There is no guarantee that either a closing purchase or a closing sale          
transaction can be effected when the Fund so desires.                           

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 attempt 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.          

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

Purchasing Put Options. The Fund may 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 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.                                                                        

Options on Stock Indices. The Fund may also purchase and write call and         
put options on stock indices in order to hedge against the risk of market or    
industry-wide stock price fluctuations or to in-                                

9 

497
15th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 15th
crease income to the Fund. Call and put options on stock indices are similar to 
options on securities except that, rather than the right to purchase or sell    
particular securities 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 options on individual securities, 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 securities.                                                          

All options written on stock indices must be covered. When the Fund writes an   
option on a stock index, it 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 option and will maintain the account     
while the option is open or will otherwise cover the transaction.               

Forward Conversions. The Fund may engage in "forward conversion" transactions.  
In a forward conversion, the Fund will purchase securities and write call       
options and purchase put options on such securities. All options written by the 
Fund will be covered. By purchasing puts, the Fund protects the underlying      
security from depreciation in value. By selling or writing calls on the same    
security, the Fund receives premiums which may offset part or all of the cost of
purchasing the puts while foregoing the opportunity for appreciation in the     
value of the underlying security. The Fund will not exercise a put it has       
purchased while a call option on the same security is outstanding. The use of   
options in connection with forward conversions is intended to hedge against     
fluctuations in the market value of the underlying security. Although it is     
generally intended in forward conversion transactions that the exercise price of
put and call options would be identical, situations might occur in which some   
option positions are acquired with different exercise prices. Therefore, the    
Fund's return may depend in part on movements in the price of the underlying    
security because of the different exercise prices of the call and put options.  
Such price movements may also affect the Fund's total return if the conversion  
is terminated prior to the expiration date of the options. In such event, the   
Fund's return may be greater or less than it would otherwise have been if it had
hedged the security only by purchasing put options.                             

Over-the-counter Options on Securities ("OTC" options). The Fund may 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 may engage in exchange   
traded options. OTC options differ from exchange traded options in certain      
material respects. OTC options are arranged directly with dealers and not, as is
the case with exchange traded options, with a clearing corporation. Thus, there 
is a risk of non-performance by the dealer. Because there is no exchange,       
pricing is typically done by reference to information from market makers.       
However, OTC options are available for a greater variety of securities and in a 
wider range of expiration dates and exercise prices than exchange traded        
options; and the writer of an OTC option is paid the premium in advance by the  
dealer.                                                                         

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             

10

497
16th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 16th
issued the option. 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 whom the Fund originally wrote  
the option.                                                                     

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

Spread and Straddle Transactions. The Fund may engage in "spread" transactions  
in which it purchases and writes a put or call option on the same underlying    
security, with the options having different exercise prices and/or expiration   
dates. All options written by the Fund will be covered. The Fund may also engage
in so-called "straddles," in which it purchases or writes combinations of put   
and call options on the same security. Because the purchase of options by the   
Fund in connection with these transactions may, under certain circumstances,    
involve a limited degree of investment leverage, the Fund will not enter into   
any spreads or straddles if, as a result, more than 5% of its net assets will be
invested at any time in such option transactions. The Fund's ability to engage  
in spread or straddle transactions may be further limited by state securities   
laws.                                                                           

FUTURES TRANSACTIONS                                                            

The Fund may purchase or sell (i) financial futures contracts; (ii) interest    
rate futures contracts; (iii) options on interest rate futures contracts; (iv)  
stock index futures contracts; and (v) options on stock index futures contracts 
(collectively, "Futures Transactions") for bona fide hedging purposes. The Fund 
may enter into such Futures Transactions on domestic exchanges and, to the      
extent such transactions have been approved by the Commodity Futures Trading    
Commission ("CFTC") for sale to customers in the U.S., on foreign exchanges. The
Fund will not engage in Futures Transactions for speculation but only as a hedge
against changes resulting from market conditions in the value of its securities 
or securities which it intends to purchase. The Fund will not enter into any    
Futures Transactions if, immediately thereafter, more than 20% of the Fund's net
assets would be represented by futures contracts or options thereon. In         
addition, the Fund will not engage in any Futures Transactions if, immediately  
thereafter, the sum of the amount of initial margin deposits on the Fund's      
futures positions and premiums paid for options on its futures contracts would  
exceed 5% of the market value of the Fund's total assets.                       

Financial Futures Contracts. Financial futures are commodity contracts that     
obligate the holder to take or make delivery of a specified quantity of a       
financial instrument, such as a U.S. Treasury security or foreign currencies,   
during a specified future period at a specified price. A "sale" of a financial  
futures contract means the acquisition of a contractual obligation to deliver   
the securities called for by the contract at a specified price on a specified   
date. A "purchase" of a financial futures contract means the acquisition of a   
contractual obligation to acquire the securities call ed for by the contract at 
a specified price on a specified date.                                          

At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The futures        
contract is valued daily thereafter and the payment of some amount of "variation
margin" may be required, reflecting any decline or increase in the contract's   
value.                                                                          

11

497
17th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 17th
To the extent the Fund enters into contracts for the purchase or sale for       
future delivery of financial futures and to the extent required by the rules of 
the SEC, the Fund will maintain, with its custodian, assets in a segregated     
account to cover its obligations with respect to such contracts, which assets   
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 contracts and the aggregate value of the initial and      
variation margin payments made by the Fund with respect to such futures         
contracts.                                                                      

Interest Rate Futures Contracts. Interest Rate Futures Contracts are futures    
contracts on debt securities. The value of these instruments changes in response
to changes in the value of the underlying debt security, which depends primarily
on prevailing interest rates.                                                   

The Fund may enter into interest rate futures contracts in order to protect its 
portfolio securities from fluctuations in interest rates without necessarily    
buying or selling the underlying fixed-income securities. For example, if the   
Fund owns bonds, and interest rates are expected to increase, it might sell     
futures contracts on debt securities having characteristics similar to those    
held in the portfolio. Such a sale would have much the same effect as selling an
equivalent value of the bonds owned by the Fund. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the value  
of the futures contracts to the Fund would increase at approximately the same   
rate, thereby keeping the net asset value of the Fund from declining as much as 
it otherwise would have.                                                        

Options on Interest Rate Futures Contracts. The Fund may also purchase put and  
call options and write covered put and call options on interest rate futures    
contracts to hedge against risks associated with shifts in interest rates.      

Stock Index Futures Contracts. A stock index futures contract obligates the     
seller to deliver (and the purchaser to take) an amount of cash equal to a      
specific dollar amount times the difference between the value of a specific     
stock index at the close of the last trading day of the contract and the price  
at which the agreement was made. Open futures contracts are valued on a daily   
basis and the Fund may be obligated to provide or receive cash reflecting any   
decline or increase in the contract's value. No physical delivery of the        
underlying stocks in the index is made in the future.                           

The Fund may sell stock index futures contracts in anticipation of or during a  
market decline in an 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 offset      
increases in the cost of common stocks that it intends to purchase.             

Options on Stock Index Futures Contracts. 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
contract give the holder the right to receive cash. Upon exercise of the        
option, the delivery of the futures position by the writer of the option to the 
holder of the option will be accompanied by delivery of the accumulated balance 
in the writer's futures margin account which represents the amount by which the 
market price of the futures contract, at exercise, exceeds, in the case of a    
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash 
equal to the difference between                                                 

12

497
18th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 18th
the exercise price of the option and the closing price of the futures contract  
on the expiration date.                                                         

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.                 

CURRENCY HEDGING TRANSACTIONS                                                   

In order to hedge against currency exchange rate risks, the Fund may enter into 
forward currency exchange contracts and currency futures contracts and options  
on such futures contracts, as well as purchase put or call options and write    
covered put and call options on currencies traded in U.S. or foreign markets.   

A forward currency exchange contract involves an obligation to purchase or sell 
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time 
of the contract. These contracts are traded in the interbank market conducted   
directly between currency traders (usually large commercial banks). A currency  
futures contract is a standardized contract for the future delivery of a        
specified amount of currency at a future date at a price set at the time of the 
contract. The Fund may enter into currency futures contracts traded on regulated
commodity exchanges, including non-U.S. exchanges.                              

The Fund may either accept or make delivery of the currency specified at the    
maturity of a forward or futures contract or, prior to maturity, enter into a   
closing transaction involving the purchase or sale of an offsetting contract.   
Closing transactions with respect to forward contracts are usually effected with
the currency trader who is a party to the original forward contract. Closing    
transactions with respect to futures contracts and options thereon are effected 
on the exchange on which the contract was entered into (or on a linked          
exchange).                                                                      

The Fund may enter into forward currency exchange contracts and currency futures
contracts in several circumstances. For example, when the Fund enters into a    
contract for the purchase or sale of a security denominated in a foreign        
currency (or options contracts with respect to such futures contracts), or when 
the Fund anticipates the receipt in a foreign currency of dividends or interest 
payments on such a security that it holds, it may desire to "lock in" the U.S.  
dollar price of the security or the U.S. dollar equivalent of such dividend or  
interest payment, as the case may be. In addition, when the Sub-adviser         
believes that the currency of a particular country may suffer a substantial     
decline against the U.S. dollar, it may enter into a forward or futures contract
to sell, for a fixed amount of U.S. dollars, the amount of that currency        
approximating the value of some or all of the Fund's portfolio securities       
denominated in such currency. In addition, the Fund may engage in cross-hedging 
transactions by using forward contracts in one currency to hedge against        
fluctuations in value of securities denominated in a different currency when    
there is a pattern of correlation between the two currencies.                   

The Fund may attempt to accomplish objectives similar to those described above  
with respect to forward and futures contracts for currency by means of          
purchasing put or call options and writing, on a covered basis, put and call    
options on currencies traded on exchanges. A put option can give the Fund the   
right to sell a currency at the exercise price on or before the expiration of   
the option. A call option can give the purchaser of the option the right to     
purchase a currency at the exercise price on or before the expiration of the    
option. The purchase or writing of a foreign currency option may constitute an  
effective hedge against foreign exchange rate fluctuations. As with other kinds 

13

497
19th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 19th
of option transactions, however, the writing of a foreign currency option will  
constitute only a partial hedge, up to the amount of the premium received, and  
the Fund could be required to purchase or sell currencies at disadvantageous    
exchange rates, thereby incurring losses. Likewise, with respect to foreign     
currency options purchased by the Fund, the Fund may forfeit the entire amount  
of the premium plus related transaction costs if exchange rates move in a manner
adverse to the Fund's position. The Fund may use foreign currency options to    
cross-hedge, which involves writing or purchasing options on one currency to    
hedge against changes in exchange rates for a different currency with a pattern 
of correlation to the first currency. Foreign currency options to be written or 
purchased by the Fund will be traded on U.S. or foreign exchanges or            
over-the-counter.                                                               

The Fund will not enter into such forward currency exchange contracts or        
currency futures contracts or purchase or write such options or maintain a net  
exposure to such contracts where the completion of the contracts would obligate 
the Fund to deliver an amount of currency other than U.S. dollars in excess of  
the value of the Fund's portfolio securities or other assets denominated in that
currency or, in the case of cross-hedging, in a currency closely correlated to  
that currency.                                                                  

RISKS OF OPTIONS AND FUTURES CONTRACTS AND RELATED OPTIONS                      

The purchase and sale of futures contracts and options thereon, as well as the  
purchase and writing of options on securities and securities indices and        
currencies, involve risks different from those involved with direct investments 
in securities. While utilization of options, futures contracts and similar      
instruments may be advantageous to the Fund, the Fund's ability to hedge        
effectively all or a portion of its securities through such transactions and to 
increase income to the Fund through the use of options on securities and        
securities indices depends on the degree to which price movements in the        
underlying index, securities or currencies correlate with price movements in the
relevant portion of the Fund's securities. Perfect correlation is generally not 
attainable. 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, securities or currencies underlying the hedging instrument and the   
hedged securities which would result in a loss on both such securities and the  
hedging instrument. In addition, it is not possible to hedge fully or perfectly 
against currency fluctuations affecting the value of securities denominated in  
foreign currencies because the value of such securities is also likely to       
fluctuate as a result of independent factors not related to currency            
fluctuations. Therefore, perfect correlation between the Fund's futures         
positions and portfolio positions will be impossible to achieve. Accordingly,   
successful use by the Fund of options on stock indices, financial and currency  
futures contracts and related options, and currency options will be subject to  
Advisers' and the Sub-adviser's ability to predict correctly movements in the   
direction of the securities and currency markets generally or of a particular   
segment. If Advisers or the Sub-adviser is not successful in employing such     
instruments in managing the Fund's investments, the Fund's performance will be  
worse than if it did not employ such strategies. In addition, the Fund will pay 
commissions and other costs in connection with such investments, which may      
increase the Fund's expenses and reduce the return. In writing options on       
futures, the Fund's loss is potentially unlimited and may exceed the amount of  
the premium  received.                                                          

14

497
20th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 20th
In certain cases the options and futures markets provide investment or risk     
management opportunities that are not available from direct investments in      
securities. In addition, some strategies can be performed more effectively and  
at lower cost by utilizing the options and futures markets rather than          
purchasing or selling portfolio securities. However, there are risks involved in
these transactions as discussed above.                                          

Positions in stock index options, stock index futures contracts, financial      
futures contracts, foreign currency futures contracts, related options on       
futures and options on currencies 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, futures contract or option thereon 
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 could have
an adverse impact on the Fund's ability to effectively hedge its securities or  
foreign currency exposure. The Fund will enter into options or futures positions
only if TICI believes that a liquid secondary market for such options or futures
contracts exist.                                                                

In the case of OTC options on securities 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 the Fund, on a covered call option, cannot     
effect a closing transaction, it cannot sell the underlying security until the  
option expires or the option is exercised. Therefore, when the Fund writes an   
OTC call option, it may not be able to sell the underlying security even though 
it might otherwise be advantageous to do so. Likewise, the Fund may be unable   
to sell the securities it has pledged to secure OTC put options while it is     
obligated as a put writer. Similarly, when the Fund is a purchaser of such put  
or call option, the Fund might find it difficult to terminate its position on a 
timely basis in the absence of a secondary market.                              

The risk of loss in trading foreign futures contracts and foreign options can be
substantial. Investors should be aware of the following:                        

(1) Participation in foreign futures contracts and foreign options transactions 
involves the execution and clearing of trades on, or subject to, the rules of a 
foreign board of trade.                                                         

(2) Neither the CFTC, the National Futures Association nor any domestic exchange
regulates activities of any foreign boards of trade, including the execution,   
delivery and clearing of transactions, or has the power to compel enforcement of
the rules of a foreign board of trade or any applicable foreign laws. Generally,
the foreign transaction will be governed by applicable foreign law. This is true
even if the exchange is formally linked to a domestic market so that a position 
taken on the market may be liquidated by a transaction on another market.       
Moreover, such laws or regulations will vary, depending on the foreign country  
in which the foreign futures or foreign options transaction occurs.             

(3) For these reasons, if the Fund trades foreign futures or foreign options    
contracts, it might not be afforded certain of the protective measures provided 
by the Commodity Exchange Act, the CFTC's regulations and the rules of the      
National Futures Association and any domestic exchange, including the right to  
use reparations proceedings before the Commission and arbitration proceedings   
provided by the National Futures Association or any domestic                    

15

497
21st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 21st
futures exchange. In particular, funds received from the Fund for foreign       
futures or foreign options transactions may not be provided the same protections
as funds received in respect of transactions on U.S. futures exchanges.         

(4) The price of any foreign futures or foreign options contract and, therefore,
the potential profit and loss thereon, may be affected by any variance in the   
foreign exchange rate between the time a particular order is placed and the time
it is liquidated, offset or exercised.                                          

The Fund's investment in options, futures contracts, forward contracts, options 
on stock indices and futures contracts, and foreign currencies and securities   
may be limited by the requirements of the Internal Revenue Code of 1986, as     
amended (the "Code"), for qualification as a regulated investment company.      
These securities require the application of complex and special tax rules and   
elections, more information about which is included in the Statement of         
Additional Information.                                                         

The Fund's investment in options, futures contracts and forward contracts,      
options on futures contracts and stock indices, including transactions involving
actual or deemed short sales or foreign exchange gains or losses, may give rise 
to taxable income, gain or loss and will be subject to special tax treatment    
under certain mark-to-market and straddle rules, the effect of which may be to  
accelerate income to the Fund, defer Fund losses, cause adjustments in the      
holding periods of Fund securities, convert capital gains and losses into       
ordinary income and losses, convert long-term capital gains into short-term     
capital gains, and convert short-term capital losses into long-term capital     
losses. These rules could, therefore, affect the amount, timing and character of
distributions to shareholders. Certain elections may be available to the Fund to
mitigate some of the unfavorable consequences of the provisions described in    
this paragraph. These investments and transactions are discussed in the         
Statement of Additional Information.                                            

For further discussion regarding the Fund's investments in options, futures and 
options on futures, see the Statement of Additional Information.                

SECURITIES WARRANTS                                                             

The Fund may invest up to 10% of its net assets in warrants, including such     
warrants that are not listed on an exchange. A warrant is typically a long-term 
option issued by a corporation which gives the holder the privilege of buying a 
specified number of shares of the underlying common stock at a specified        
exercise price at any time on or before an expiration date. Stock index warrants
entitle the holder to receive, upon exercise, an amount in cash determined by   
reference to fluctuations in the level of a specified stock index. If the Fund  
does not exercise or dispose of a warrant prior to its expiration, it will      
expire worthless.                                                               

SYNTHETIC CONVERTIBLES                                                          

The Fund may invest up to 35% of its assets in "synthetic convertible"          
securities. A synthetic convertible is created by combining distinct securities 
which together possess the two principal characteristics of a true convertible, 
that is, fixed income and the right to acquire the underlying equity security.  
This combination is achieved by investing in nonconvertible fixed-income        
securities and in warrants or stock or stock index call options which grant the 
holder the right to purchase a specified quantity of securities within a        
specified period of time at a specified price or to receive cash in the case of 
stock index options. Synthetic convertible securities are not considered to be  
Equity Securities for purposes  of the Fund's 65% investment policy.            

Synthetic convertible securities differ from the true convertible security in   
several respects. The value of a synthetic convertible is the sum of the values 

16

497
22nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 22nd
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond         
differently to market fluctuations. Further, although the Fund expects normally 
to create synthetic convertibles whose two components represent one issuer, the 
character of a synthetic convertible allows the Fund to combine components      
representing distinct issuers, or to combine a fixed-income security with a     
call option on a stock index, when it is determined that such a combination     
would better promote the Fund's investment objectives. In addition, the         
component parts of a synthetic convertible security may be purchased            
simultaneously or separately; and the holder of a synthetic convertible faces   
the risk that the price of the stock, or the level of the market index          
underlying the convertibility component, will decline.                          

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 33% of the
value of the Fund's total assets at the time of the most recent loan, and       
further provided that the borrower deposits and maintains at least 102% cash    
collateral for the benefit of the Fund. The lending of securities is a common   
practice in the securities industry. The Fund engages in security loan          
arrangements with the primary objective of increasing the Fund's income either  
through investing the cash collateral in short-term interest bearing obligations
or by receiving a loan premium from the borrower. Under the securities loan     
agreement, the Fund 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.                                                      

BORROWING                                                                       

As a fundamental policy, the Fund will not borrow money or mortgage or pledge   
any of its assets, except that borrowings and the pledging of assets therefor to
meet redemption requests and for other temporary or emergency purposes may be   
made from banks in an amount up to 10% of total asset value. While borrowings   
exceed 5% of the Fund's total assets, it will not make any additional           
investments.                                                                    

Illiquid Investments. The Fund reserves the right to invest up to 10% of its net
assets in illiquid securities (a term which means securities that cannot be     
disposed of within seven days in the normal course of business at approximately 
the amount at which the Fund has valued the securities). It is the current      
policy of the Fund, however (which may be changed without the approval of the   
Fund's shareholders), to limit any such investments (including illiquid Equity  
Securities, repurchase agreements of more than seven days duration, OTC options,
illiquid real estate investment trusts, securities of issuers with less than    
three years continuous operation and other securities which are not readily     
marketable) to 5% of the Fund's net assets. The Board of Trustees has authorized
the Fund to invest in restricted securities where such investments are          
consistent with the Fund's investment objective and has authorized such         
securities to be considered to be liquid and thus not within the foregoing 10%  
limit, to the extent the Sub-adviser or the Manager, as the case may be,        
determines on a daily basis that there is a liquid institutional or other market
for such securities. Notwithstanding the determinations of the Manager and the  
Sub-adviser in this regard, the Board of Trustees remains responsible for such  
determinations and considers appropriate action to maximize the Fund's liquidity
and its ability to meet redemption demands if a security should become illiquid 
subsequent to its purchase. To the extent the Fund invests in                   

17

497
23rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 23rd
restricted securities that are deemed liquid, the general level of illiquidity  
in the Fund may be increased if qualified institutional buyers become           
uninterested in purchasing these securities or the market for these securities  
contracts. (See "Investment Objectives, Policies and Restrictions - Other       
Investment Policies" in the Statement of Additional Information.)               

SHORT-TERM INVESTMENTS                                                          

Occasionally, in order to honor redemptions, pending investment of proceeds from
new sales of Fund shares or to satisfy other short-term needs, the Fund may hold
cash (U.S. dollars, foreign currencies or multinational currency units) and/or  
invest a portion of its assets in high quality money market instruments. In any 
period of market weakness or of uncertain market or economic conditions, the    
Fund may establish a temporary defensive position by investing in high quality  
money market instruments if the Manager or Sub-adviser anticipates that         
developments in any market may seriously jeopardize the value of most Equity    
Securities in such market. Any decision to substantially withdraw from the      
equity market is reviewed by the Board of Trustees. Money market instruments in 
which the Fund may invest include, but are not limited to, the following        
instruments of U.S. or foreign issuers: government securities; commercial       
paper; bank certificates of deposit; bankers' acceptances; and repurchase       
agreements secured by any of the foregoing. It is impossible to predict when or 
for how long the Fund would employ defensive strategies. All such securities    
will be rated "A1" or "A2" by S&P or "P1" or "P2" by Moody's or, if not rated,  
determined by the Fund's Advisers to be of comparable quality.                  

REPURCHASE AGREEMENTS                                                           

For cash management or other short-term purposes as listed above, 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. However, the Fund intends to enter into repurchase  
agreements only with government securities dealers recognized by the Federal    
Reserve Board or with member banks of the Federal Reserve System. Under the 1940
Act, a repurchase agreement is deemed to be the loan of money by the Fund to the
seller, collateralized by the underlying security. The U.S. government security 
subject to resale (the collateral) will be held pursuant to a written agreement,
and the Fund's custodian will take title to, or actual delivery of, the         
security.                                                                       

The Fund is subject to a number of additional investment restrictions, some of  
which may be changed only with the approval of shareholders, which limit its    
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the Statement of           
Additional Information.                                                         

MANAGEMENT OF THE FUND                                                          
--------------------------------------------------------------------------------

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

18

497
24th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 24th
Franklin Advisers, Inc. serves as the Fund's investment manager. Advisers is a  
wholly owned subsidiary of 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) with aggregate assets of over $75 billion. Under a management agreement,
the Manager also serves as investment manager and adviser to the Trust's        
Franklin Pacific Growth Fund.                                                   

TICI is an indirect subsidiary of Templeton Worldwide, Inc., which, operating   
through its subsidiaries, is a major investment management organization with    
approximately $28.4 billion of assets currently under management and a long     
history of global investing. Under a sub-advisory agreement, TICI al so serves  
as sub-adviser to the Trust's Franklin Pacific Growth Fund.                     

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.                  

Pursuant to the sub-advisory agreement between Advisers and TICI, and subject to
the overall policies, control, direction and review of the Board of Trustees and
to the instructions and supervision of Advisers, TICI is responsible for        
recommending an optimal geographic equity allocation, for providing advice with 
respect to the Fund's investments and, subject to the Board's and Advisers'     
direction and supervision, for determining which securities will be purchased,  
retained or sold, as well as for execution of portfolio transactions.           
Investments may be shifted among the world's various capital markets and among  
different types of securities in accordance with ongoing analysis of trends and 
developments affecting such markets and securities.                             

Under the management agreement with the Fund, for the services provided and     
expenses assumed by it the Manager is entitled to receive a fee, computed and   
payable monthly, based upon the Fund's average net assets. The management fee is
higher than the management fees paid by most mutual funds, although the Board   
of Trustees believes it to be comparable to fees paid by many international     
funds having similar investment objectives and policies.                        

Under the sub-advisory agreement with the Manager, for its sub-advisory fee TICI
is entitled to receive from the Manager an amount equal to approximately 50% of 
the fees paid by the Fund to the Manager (subject to certain adjustments). The  
sub-advisory fees paid by the Manager have no effect on the fees payable by the 
Fund to the Manager.                                                            

During the fiscal year ended October 31, 1993, the Manager voluntarily agreed to
waive payment of its management fee and assume responsibility for other expenses
related to the operations of the Fund. Had such action not been taken, fees     
totaling 1.00% of the average daily net assets of the Fund would have accrued   
to Advisers. Total operating expenses, including management fees, would have    
represented 2.27% of the average net assets of the Fund. This action by Advisers
may be terminated by Advisers at any time.                                      

Further information on the services provided by Advisers and TICI and the fees  
payable by the Fund for these services is included in the Statement of          
Additional Information under "Investment Advisory and Other Services."          

Among the responsibilities of Advisers and TICI under their respective          
agreements are the selection                                                    

19

497
25th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 25th
of brokers and dealers through which transactions in the Fund's portfolio       
securities for which each is responsible are effected. Advisers and TICI seek 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, Advisers and TICI will   
consider the furnishing of quotations and of other market services, research,   
statistical and other data for Advisers and TICI and their affiliates, as well  
as the sale of shares of the Fund, as factors in selecting a broker. Further    
information is included under "Policies Regarding Brokers Used on Portfolio     
Transactions" in the Statement of Additional Information.                       

Except as noted above and in the Statement of Additional Information under      
"Investment Advisory and Other Services", the Fund's service contractors bear   
all expenses in connection with the performance of their services, except that  
the Distributor is reimbursed for expenses incurred under the Plan of           
Distribution (as described below). Similarly, the Fund bears the expenses       
incurred in its operation. For the fiscal year ended October 31, 1993, the      
Fund's total expenses per share were 0.50% of the average net assets, after fee 
waivers and expenses reimbursed by the Manager totalling 1.77% of the average   
net assets. (See the Statement of Additional Information - "Investment Advisory 
and Other Services" for further information describing the Fund's expenses.)    

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 pursuant to Rule 12b-1 under the 1940 Act (the      
"Plan"), whereby it may reimburse Distributors or others for all expenses       
actually incurred by Distributors or others in the promotion and distribution of
the Fund's shares, including, but not limited to, the printing of prospectuses  
and reports used for sales purposes, expenses of preparing sales literature and 
related expenses, advertisements, and other distribution-related expenses,      
including a prorated portion of Distributor's overhead expenses attributed to   
the distribution of Fund shares, as well as any distribution or service fees    
paid to securities dealers or their firms or others which have executed a       
servicing with the Fund, Distributors or its affiliates. The maximum amount     
which the Fund may pay under the Plan (and which may be reallowed to securities 
dealers participating in the sale of shares) for such distribution expenses is  
0.25% per annum of the average daily net assets, payable on a quarterly basis.  
All expenses of distribution and marketing in excess of 0.25% per annum are     
borne by Distributors 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 t he 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 divi-                                                                    

20

497
26th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 26th
dends may be distributed. Thus, the amount of dividends paid per share may vary 
with each distribution.                                                         

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

DISTRIBUTION DATE                                                               

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

In order to be entitled to a dividend, an investor must have acquired Fund      
shares prior to the close of business on the record date. An investor           
considering purchasing Fund shares shortly before the 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 its 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 a 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.                                                 

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                            

21

497
27th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 27th
also decline. In this way, shareholders participate in any change in the value  
of the securities owned by the Fund.                                            

DISTRIBUTION IN CASH                                                            

A shareholder may elect to receive income dividends, or both income dividends   
and capital gain distribution in cash. By completing the "Special Payment       
Instructions for Distributions" of the Shareholder Application, a shareholder   
may direct the selected distributions to another fund in the Franklin Group of  
Funds(R) or the Templeton Group of Funds, to another person, or directly to a   
checking account. If the bank at which the account is maintained is a member of 
the Automated Clearing House, the payments may be made automatically by         
electronic funds transfer. If this last option is requested, the shareholder    
should allow at least 15 days for initial processing. Dividends which may be    
paid in the interim period will be sent to the address of record. Additional    
information regarding automated funds transfers may be obtained from Franklin's 
Shareholder Services Department. Dividend and capital gain distributions are    
eligible for investment in another fund in the Franklin Group of Funds or the   
Templeton Group at net asset value.                                             

Shareholders may be able to change their distribution options by telephone. See 
the section titled "Telephone Transactions."                                    

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.                                                                    

Each separate series of the Trust is treated as a separate entity for federal   
income tax purposes. 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 income and meeting        
certain other requirements relating to the sources of its income and            
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.                                                                   

Foreign securities, which meet the definition in the Code of a Passive Foreign  
Investment Company ("PFIC"), may subject the Fund to an income tax and interest 
charge with respect to such investment. To the extent possible, the Fund will   
avoid such treatment by not investing in PFIC securities or by adopting other   
tax strategies for any PFIC securities it does purchase.                        

For federal income tax purposes, any income dividends which a 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 i n 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.                                                                   

22

497
28th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 28th
Redemptions and exchanges of Fund shares are taxable events on which a          
shareholder may realize a gain or a 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 paid in purchasing 
shares of the Fund will not be included in the federal tax basis of such shares 
sold or exchanged within ninety (90) days of their purchase (for purposes of    
determining gain or loss with respect to such shares) if the sales proceeds are 
reinvested in the Fund or in another fund in the Franklin/Templeton Group and a 
sales charge which would otherwise apply to the reinvestment is reduced or      
eliminated. Any portion of such sales charge excluded from the tax basis of the 
shares sold will be added to the tax basis of the shares acquired in the        
reinvestment. Shareholders should consult with their tax advisors concerning the
tax rules applicable to the redemption or exchange of Fund shares.              

For corporate shareholders, it is anticipated that only a small portion, if any,
of the Fund's dividends during the current fiscal year will qualify for the     
corporate dividends-received deduction because of the Fund's principal          
investment objective of investing in foreign equity securities and non-equity   
domestic investments. To the extent that the Fund pays dividends which qualify  
for this deduction, the availability of the deduction is subject to certain     
holding period and debt financing restrictions imposed under the Code on the    
corporation claiming the deduction.                                             

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

Shareholders who are not U.S. persons for purposes of federal income taxation   
should consult with their financial or tax advisors regarding the applicability 
of U.S. withholding or other taxes 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" 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. 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 providing for    
regular periodic investments. 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 (i) after the         
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund, or (ii) after receipt of an order by mail from the shareholder     
directly in proper form (which generally means a completed Shareholder          
Application accompanied                                                         

23

497
29th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 29th
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.                                                         

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------------
                                                              TOTAL SALES CHARGE                      
                                        --------------------------------------------------------------
                                                               AS A PERCENTAGE      DEALER CONCESSION 
SIZE OF TRANSACTION                      AS A PERCENTAGE        OF NET AMOUNT        AS A PERCENTAGE  
AT OFFERING PRICE                       OF OFFERING PRICE          INVESTED         OF OFFERING PRICE*
-------------------------------------   -----------------      ---------------      ------------------
                                                                                                      

 Less than $100,000 .................         4.50%                   4.71%                4.00%      
 $100,000 but less than $250,000 ....         3.75%                   3.90%                3.25%      
 $250,000 but less than $500,000 ....         2.75%                   2.83%                2.50%      
 $500,000 but less than $1,000,000 ..         2.25%                   2.30%                2.00%      
 $1,000,000 through $2,500,000 ......         1.00%                   1.01%*               1.00%      
------------------------------------------------------------------------------------------------------

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

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

The size of a transaction which determines the applicable sales charge on the   
purchase of Fund shares is determined by adding the amount of the shareholder's 
current purchase plus the cost or current value (whichever is higher) of a      
shareholder's existing investment in one or more of the many funds in the       
Franklin Group of Funds 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 II 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) (hereinafter the products in subparagraphs (i) and (ii) are referred 
to as the "Franklin Group") and (c) the open-end U.S. registered investment     
companies in the Templeton Group of Funds except Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and  
Templeton Variable Products Series Fund (the "Templeton Group"). Purchases under
a Letter of Intent for more than $2,500,000 will be at a 1.15% (1% effective    
July, 1994) sales charge until cumulative purchases reach $2,500,000 and at the 
incremental sales charge on amounts in excess of $2,500,000. Purchases pursuant 
to the Rights of Accumulation will be at the applicable sales charge of 1.15%   
(1% effective July, 1994) or more until the additional purchase, plus the value 
of the account or the amount previously invested, less redemptions, exceeds     
$2,500,000, in which event the sales charge                                     

24

497
30th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 30th
on the excess will be calculated as stated above. Sales charge reductions based 
upon purchases in more than one of the funds in the Franklin Group or Templeton 
Group (the "Franklin/Templeton Group") will 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 NASD. None of the aforementioned additional 
compensation is paid for by the Fund or its shareholders.                       

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 in vestment authority) may be 
considered in determining whether a reduced sales charge is available, even     
though there may be a number of beneficiaries of the account. In addition, an   
investment in the Fund may qualify for a reduction in the sales charge under the
following programs:                                                             

1. Rights of Accumulation. The cost or current value (whichever is higher) of an
existing investment 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 a 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                                

25

497
31st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 31st
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 the sales charge. Any redemptions made by the shareholder during  
the 13-month period will be subtracted from the amount of the purchases for     
purposes of determining whether the terms of the Letter of Intent have been     
completed. If the Letter of Intent is not completed within the 13-month period, 
there will be an upward adjustment of the sales charge as specified below,      
depending upon the amount actually purchased (less redemptions) during the      
period. An investor who executes a Letter of Intent prior to the change in the  
sales charge structure for the Fund will be entitled to complete the Letter at  
the lower of (i) the new sales charge structure; or (ii) the sales charge       
structure in effect at the time the Letter was filed with the Fund.             

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

26

497
32nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 32nd
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 the Fund's 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 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 
other company(ies) in the Franklin Group of Funds or the Templeton Group totals 
at least $1,000,000. Employee benefit plans not qualified under Section 401 of  
the Code may be afforded the same privilege if they meet the above requirements 
as well as the uniform criteria for qualified groups previously described under 
"Group Purchases" which enable Distributors to realize economies of scale in    
its sales efforts and sales related expenses. If investments by employee benefit
plans at net asset value are made through a dealer who has executed a dealer    
agreement with Distributors, Distributors or one of its affiliates may make a   
payment, out of their own resources, to such dealer in an amount not to exceed  
0.25% of the amount invested. Please contact Franklin's Institutional Sales     
Department for additional information.                                          

27

497
33rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 33rd
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 the 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 another       
company or companies 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 0.2 5% of the amount invested. Contact        
Franklin's Institutional Sales Department for additional information.           

Shares of the Fund may be purchased at net asset value by persons who have      
redeemed, within the previous 120 days, their shares of the Fund or another fund
in the Franklin Group of Funds or the Templeton Group which were purchased with 
a sales charge. An investor may reinvest an amount not exceeding the redemption 
proceeds. Shares of the Fund redeemed in connection with an exchange into       
another fund (see "Exchange Privilege") are not considered "redeemed" for this  
privilege. In order to exercise this privilege, a written order for the purchase
of shares of the Fund must be received by the Fund or the Fund's Shareholder    
Services Agent within 120 days after the redemption. However, the 120 days 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, which may charge the          
shareholder a fee for this service. The redemption is a taxable transaction but 
reinvestment without a sales charge may affect the amount of gain or loss       
recognized and the tax basis of the shares reinvested. If there has been a loss 
on the redemption, the loss may be disallowed if a reinvestment in the same fund
is made within a 30-day period. Information regarding the possible tax          
consequences of such a reinvestment is included in the tax section of this      
Prospectus and the Statement of Additional Information.                         

Shares of the Fund may also be purchased at net asset value by (1) officers,    
trustees or directors and full-time employees of the Trust or any fund in the   
Franklin Group of Funds or the Templeton Group, the Manager, Sub-adviser 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                                                                   

28

497
34th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 34th
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.                                                         

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 institutions. The Fund may be 
used as an investment vehicle for an already existing retirement plan, or       
Franklin Trust Company may provide the plan documents and trustee or custodian  
services. A plan document must be adopted in order for a plan to be in          
existence.                                                                      

Franklin Trust Company, an affiliate of Distributors, can serve as custodian or 
trustee for various types of retirement plans. The brochures for each of the    
plans sponsored by Franklin contain important information regarding             
eligibility, contribution limits and IRS requirements.                          

The Franklin IRA is an individual retirement account in which the contributions,
which are for the most part still deductible for the majority of wage earners,  
accumulate on a tax-deferred basis until withdrawn. Pursuant to the Code,       
individuals who are not active participants (and who do not have a spouse who is
an active participant) in an employer or joint employer/union-maintained        
retirement plan may deduct their full amount of IRA contribution, the lesser of 
$2,000 or 100% of compensation. For taxpayers who are active participants (or   
whose spouse is an active participant) in such a retirement plan, the IRA       
deduction is gradually phased out to the extent that their adjusted gross       
incomes exceed certain specified limits.                                        

For taxpayers filing a joint return, even if one spouse received less than $250 
in compensation for the year, two IRAs, with an aggregate contribution not      
exceeding the lesser of 100% of compensation or $2,250, may be established for  
both spouses, provided that no more than $2,000 be contributed to either one.   

29

497
35th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 35th
The Franklin IRA Rollover account is designed to maintain the tax-deferred      
status of lump-sum or qualifying partial distributions from an                  
employer-sponsored retirement plan which are eligible for rollover treatment.   

The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction    
Simplified Employee Pension Plan (SAR-SEP) are for use by small employers       
(generally 25 or fewer employees) who want to make deductible retirement        
contributions to an employee's IRA in an amount to be determined annually at    
the discretion of the employer up to the lesser of $30,000 or 15% of            
compensation per employee. The SAR-SEP allows employees to defer a pre-taxed    
portion of their salary to an IRA through their employer in an amount determined
by the employee. 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  
educational and certain non-profit institutions (501(c)(3) organizations). 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% or $9,500. Franklin Trust Company may provide billing information 
and other support services for the employer.                                    

The Franklin Business Retirement Plans 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, a fixed contribution rate must be elected by the employer at 
the outset. The Money Purchase Pension Plan may be used in conjunction with a   
Profit Sharing Plan to achieve a combined contribution rate of 25%, up to 15% in
the Profit Sharing Plan and a fixed contribution rate of 10% in the Money       
Purchase Pension Plan.                                                          

Franklin 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 to be filed with the IRS.                                                

Liquidations of any Franklin retirement 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                                                                

30

497
36th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 36th
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 un certificated form     
(also known as "plan balance") minimizes the risk of loss or theft of a share   
certificate. A lost, stolen or destroyed certificate cannot be replaced without 
obtaining a sufficient indemnity bond. The cost of such a bond, which is        
generally borne by the shareholder, can be 2% or more of the value of the lost, 
stolen or destroyed certificate. A certificate will be issued if requested in   
writing by the shareholder or by the securities dealer.                         

CONFIRMATIONS                                                                   

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

AUTOMATIC INVESTMENT PLAN                                                       

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

The market value of the Fund's shares is subject to fluctuation. Before         
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit nor 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.                                                          

31

497
37th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 37th
Liquidation of shares may reduce or possibly exhaust the shares in the          
shareholder's account, to the extent withdrawals exceed shares earned through   
dividends and distributions, particularly in the event of a market decline. If  
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other        
redemptions, a liquidation to make a withdrawal payment is a sale for federal   
income tax purposes. Because the amount withdrawn under the plan may be more    
than the shareholder's actual yield or income, part of the payment may be a     
return of the shareholder's investment.                                         

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

INSTITUTIONAL ACCOUNTS                                                          

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

EXCHANGE PRIVILEGE                                                              
--------------------------------------------------------------------------------

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

EXCHANGES BY MAIL                                                               

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

EXCHANGES BY TELEPHONE                                                          

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

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

32

497
38th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 38th
Privilege is available only for uncertificated shares or those which have       
previously been deposited in the shareholder's account. The Fund and Investor   
Services will employ reasonable procedures to confirm that instructions         
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."                                                       

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

EXCHANGES THROUGH SECURITIES DEALERS                                            

As is the case with all purchases and redemptions of the Fund's shares, the     
Shareholder Services Agent will accept exchange orders by telephone or other    
means of electronic transmission from securities dealers who execute a dealer or
similar agreement with Distributors. 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 returned to Investor Services. 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 a 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 a 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 original fund for at 
least six months prior to executing the exchange. When an investor requests the 
exchange of the total value of the Fund account, declared but unpaid income     
dividends and capital gain distributions will be transferred to the fund being  
exchanged into and will be invested at net asset value. Because the exchange is 
considered a redemption and purchase of shares, the shareholder may realize a   
gain or loss for federal income tax purposes. Backup withholding and information
reporting may also apply. Information regarding the possible tax consequences of
such an exchange is included in the tax section in this Prospectus and in the   
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. Exchanges will be effected upon receipt of written instructions       
signed by all account owners and accompanied by any outstanding share           
certificates properly endorsed.                                                 

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

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 invest this money initially in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment op-                   

33

497
39th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 39th
portunities 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.                        

RETIREMENT ACCOUNTS                                                             

The equivalent of an exchange involving retirement accounts (including IRAs)    
between the Franklin Group of Funds and the Templeton Group can be accomplished 
through a trustee-to-trustee (or custodian-to-custodian) transfer and requires  
the completion of additional documentation before it can be effected. Please    
call 1-800/527-2020 for further information and forms.                          

TIMING ACCOUNTS                                                                 

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

RESTRICTIONS ON EXCHANGES                                                       

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

Effective September 1, 1994, the Fund will amend its policy in regard to        
Timing Accounts, to reflect the following:                                      

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

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

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

HOW TO SELL SHARES OF THE FUND                                                  
------------------------------------------------------------------------------- 

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

REDEMPTIONS BY MAIL                                                             

Send a written request in proper form, signed by all registered owners, to      
Investor Services at the address shown on the back cover of this Prospectus     
(accompanied by any share certificates which have been issued, 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 the Shareholder Services      
Agent. Redemption requests                                                      

34

497
40th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 40th
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's ability to contact a shareholder promptly when necessary will speed  
the processing of the redemption.                                               

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

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

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

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

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

(5) the Fund or Investor Services believes that a signature guarantee would     
protect against potential claims based on the transfer instructions,    
 including, for example, when (a) the current address of one or more joint
owners of an acount 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 (i) national or state banks, savings    
associations, savings and loan associations, trust companies, savings banks,    
industrial loan companies and credit unions; (ii) national securities exchanges,
registered securities associations and clearing agencies; (iii) securities      
broker/dealers which are members of a national securities exchange or a clearing
agency or which have minimum net capital of $100,0 00; or (iv) institutions that
participate in the Securities Transfer Agent Medallion Program ("STAMP") or     
other recognized signature guarantee medallion program. A notarized signature is
not sufficient for the request to be in proper form.                            

Where shares to be redeemed are represented by share certificates and the       
redemption proceeds exceed $50,000, 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                                                       

35

497
41st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 41st
pages from the partnership agreement identifying the general partners or a      
certification for a partnership agreement.                                      

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

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

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

REDEEMING SHARES THROUGH SECURITIES DEALERS                                     

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

36

497
42nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 42nd
of shares or dollars, will help speed processing of the redemption. The         
seven-day period within which the proceeds of the shareholder's redemption will 
be sent will begin when the Fund receives all documents required to complete    
("settle") the repurchase in proper form. The redemption proceeds will not earn 
dividends or interest during the time between receipt of the dealer's repurchase
order and the date the redemption is processed upon receipt of all documents    
necessary to settle the repurchase. Thus, it is in a shareholder's best         
interest to have the required documentation completed and forwarded to the Fund 
as soon as possible. The shareholder's dealer may charge a fee for handling the 
order. The Statement of Additional Information contains more information on the 
redemption of shares.                                                           

MISCELLANEOUS INFORMATION                                                       

The Fund may delay the mailing of the redemption check, or a portion thereof,   
until the Fund's depository bank has made fully available for withdrawal 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 broker may call Franklin's Retirement Plans Department
to obtain the necessary forms.                                                  

OTHER                                                                           

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

TELEPHONE TRANSACTIONS                                                          
--------------------------------------------------------------------------------

Shareholders of the Fund and their investment representative of record, if any, 
may execute various transactions by calling the Fund's Shareholder Services     
Agent at 1-800/632-2301.                                                        

All shareholders may: (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.                                                                    

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 sending a confirmation         
statement on redemptions to the                                                 

37

497
43rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 43rd
address of record each time account activity is initiated by telephone. So long 
as the Fund and Investor Services follow instructions communicated by telephone 
which were reasonably believed to be genuine at the time of their receipt,      
neither they nor their affiliates will be liable for any loss to the shareholder
caused by an unauthorized transaction. The Fund or Investor Services may only be
liable for losses due to an unauthorized or fraudulent instruction if the Fund  
or Investor Services failed to follow reasonable procedures to detect such      
unauthorized instructions. Shareholders are, of course, under no obligation to  
apply for telephone transaction privileges. In any instance where the Fund or   
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 Trust Company ("FTC") or Templeton Funds Trust Company ("TFTC")        
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 these         
retirement accounts, a Franklin/Templeton Transfer Authorization Form must be on
file in order to transfer retirement plan assets between a Franklin fund and a  
Templeton fund within the same plan type. Changes to dividend option s must also
be made in writing.                                                             

To obtain further information regarding distribution or transfer procedures,    
including any required forms, FTC retirement account shareholders may call      
1-800/527-2020 (toll free), and TFTC retirement account shareholders may call   
1-800/354-9191 (press "2") (also toll free).                                    

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    
registered investment representative for assistance, or to send written         
instructions to the Fund as detailed elsewhere in the prospectus.               

Neither the Fund nor 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 char ge 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 quota-                           

38

497
44th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 44th
tions are readily available are valued at the last quoted sale price of the day 
or, if there is no such reported sale, at the mean between the most recent      
quoted bid and ask prices. Over-the-counter portfolio securities for which      
market quotations are readily available are valued at the mean between the most 
recent bid and ask prices as obtained from one or more dealers that make markets
in the securities. Portfolio securities which are traded both in the            
over-the-counter market and on a stock exchange are valued according to the     
broadest and most representative market as determined by the Manager. If the    
Fund should have an open option position as to a security, the valuation of the 
contract is at the average of the bid and ask prices. 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 and such valuation is believed to fairly reflect the contract's  
market value, the options are valued at the mean between the current closing bid
and ask prices. Other securities for which market quotations are readily        
available are valued at the current market price, which may be obtained from a  
pricing service, based on a variety of factors, including recent trades,        
institutional size trading in similar types of securities (considering yield,   
risk and maturity) and/or developments related to specific issues. Securities   
and other assets for which market prices are not readily available are valued at
fair value as determined following procedures approved by the Board of Trustees.
All money market instruments with a maturity of more than 60 days are valued at 
current market, as discussed above. All money market instruments with a maturity
of 60 days or less are valued at their amortized cost, which the Board of       
Trustees has determined in good faith constitutes fair value for purposes of    
complying with the 1940 Act. This valuation method will continue to be used     
until such time as the Trustees determine that it does not constitute fair value
for such purposes. With the approval of Trustees, the Fund may utilize a pricing
service, bank or broker/dealer to perform any of the above described functions. 

Securities denominated in foreign currencies and traded on foreign exchanges or 
in foreign markets will be valued in a similar manner and their value translated
into U.S. dollars at the bid price of their respective currency denomination    
against U.S. dollars last quoted by a major bank or, if no such quotation is    
available, at the rate of exchange determined in accordance with policies       
established in good faith by the Board of Trustees. Because the value of        
securities denominated in foreign currencies must be translated into U.S.       
dollars, fluctuations in the value of such currencies in relation to the U.S.   
dollar will affect the net asset value of Fund shares even though there has not 
been any change in the values of such securities.                               

Because foreign securities markets may close prior to the time the Fund         
determines its net asset value, events affecting the value of portfolio         
securities occurring between the time prices are determined and the time the    
Fund calculates its net asset value will not be reflected in the Fund's         
calculation of net asset value unless Advisers or the Sub-adviser, under        
supervision of the Board of Trustees, determines that the particular event would
materially affect the Fund's net asset value. The Fund's portfolio securities   
listed on foreign exchanges may trade on days other than the Fund's normal      
business days, such as Saturdays. As a result, the net asset value of the Fund  
may be significantly affected by such trading on days when shareholders have no 
access to the Fund.                                                             

39

497
45th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 45th
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND                      
--------------------------------------------------------------------------------

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

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

To assist shareholders and brokers 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:                                               

                                                                [Download Table]


                                              HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME           TELEPHONE NO.       (MONDAY THROUGH FRIDAY)          
----------------------    --------------      ---------------------------------
                                                                               

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 8.00 p.m.           

PERFORMANCE                                                                     
--------------------------------------------------------------------------------

Advertisements, sales literature and communications to shareholders may contain 
various measures of each Fund's performance, including current yield, various   
expressions of total return and current distribution rate. The Fund 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 in come 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                                                                        

40

497
46th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 46th
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 and reinvestment of income dividends.    
When there has been a change in the sales charge structure, the historical      
performance figures will be restated to reflect the new rate. The investment    
results of the Fund, like all other investment companies, will fluctuate over   
time; thus, performance figures should not be considered to represent what an   
investment may earn in the future or what the Fund's yield, distribution rate or
total return may be in any future period. Additional information is contained in
the Fund's annual report, which is available without charge upon request.       

GENERAL INFORMATION                                                             
--------------------------------------------------------------------------------

The Trust is a Delaware business trust, organized on March 22, 1991. The Trust  
is authorized to issue an unlimited number of shares of beneficial interest,    
with a par value of $.01 per share, in various series. All shares have one vote,
and, when issued for the consideration described in the prospectus, are fully   
paid, non-assessable, and redeemable. Currently, the Trust issues shares in two 
series or funds. Additional series may be added in the future by the Board of   
Trustees. Shares of each fund vote separately as to issues affecting that fund  
or the Trust, unless otherwise permitted by the 1940 Act. Shares have           
non-cumulative voting rights, which means that holders of more than 50% of the  
shares voting for the election of trustees can elect 100% of the trustees if    
they choose to do so, 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. Delaware corporate law does not require corporations registered as    
management investment companies under the 1940 Act to hold routine annual       
meetings of shareholders, and the Fund does not intend to hold such routine     
annual meetings. The Fund may, however, hold a meeting for such purposes as     
changing fundamental investment restrictions, approving a new management        
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by a majority of the Board of  
Trustees or by shareholders holding at least ten percent of the shares entitled 
to vote at the meeting. Shareholders may receive assistance in communicating    
with other shareholders in connection with the election or removal of trustees  
such as that provided in Section 16(c) of the 1940 Act.                         

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

41

497
47th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 47th
holder. More information is included in the Statement of Additional 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 require 
court action to obtain release of the funds until the minor has reached the     
legal age of majority. The account should be registered in the name of one      
"Adult" as custodian for the benefit of the "Minor" under the Uniform Transfer  
or Gifts to Minors Act.                                                         

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

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

Except as indicated, a shareholder may transfer an account in the Fund carried  
in "street" or "nominee" name by the shareholder's broker to a comparably       
registered Fund account maintained by another broker/dealer. Both the delivering
and receiving brokers 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 broker. To effect the transfer, a shareholder should   
instruct the broker to transfer the account to a receiving broker/dealer and    
sign any documents required by the broker(s) to evidence consent to the         
transfer. Under current procedures, the account transfer may be processed by the
delivering broker and the Fund after the Fund receives authorization in proper  
form from the shareholder's delivering broker/ 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 his 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.      

42

497
48th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 48th
Any questions regarding an intended registration should be answered by the      
securities dealer handling the investment, or by calling Franklin's Fund        
Information Department.                                                         

IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS                          
--------------------------------------------------------------------------------

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

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

Marc S. Joseph                                                                  
Vice President and Portfolio Manager                                            
Templeton Investment Counsel, Inc.                                              

Mr. Joseph holds a Doctor of Jurisprudence degree from Harvard Law School. He   
earned a Master of Business Administration degree from Harvard Business School  
and a Bachelor of Science degree in computer science from William and Mary.     
Prior to joining Templeton, Mr. Joseph was a vice president with Pacific        
Financial Research and management consultant at McKinsey Co. He started managing
the International Equity Fund since joining Templeton in September 1993.        

Mark R. Beveridge                                                               
Vice President and Portfolio Manager                                            
Templeton Investment Counsel, Inc.                                              

Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of Business 
Administration degree in finance from the University of Miami. He joined        
Templeton in 1985 and started managing the Fund in January 1994.                

Gary Clemmons                                                                   
Portfolio Manager                                                               
Templeton Investment Counsel, Inc.                                              

Mr. Clemmons is a Chartered Financial Analyst and holds a Master of Business    
Administration degree from the University of Wisconsin at Madison. He earned his
Bachelor of Science degree in Earth Science from the University of Nevada at    
Reno. Mr. Clemmons was a research analyst for Structured Asset Management. He   
joined Templeton in 1990.                                                       

43  

497
49th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 49th
   SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN PACIFIC GROWTH FUND

FRANKLIN INTERNATIONAL TRUST
DATED MARCH 1, 1994 
AS AMENDED NOVEMBER 4, 1994 

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

1. EXPENSE TABLE                                                                

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

2. MANAGEMENT OF THE FUND                                                       

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

3. HOW TO BUY SHARES OF THE FUND                                                

(a) The following is added at the end of the first paragraph:                   

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 three   
paragraphs:                                                             

                                                        [Enlarge/Download Table]


                                                                                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*,*** 
---------------------------------------------------------------------------------------------------------------------
                                                                                                                     

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)**    


 *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."                        

 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 funds
    in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included
for these aggregation purposes are (a) the mutual funds in the Franklin 
Group of Funds except Franklin Valuemark Funds and Franklin Government  
Securities Trust (the "Franklin Funds"), (b) other investment products  
    underwritten by Distributors or its affiliates (although certain investments
    may not have the same schedule of sales charges and/or may not be subject to
reduction)                                                              

 1

497
50th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 50th
and (c) the U.S. mutual funds in the Templeton Group of Funds except    
 Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc.,
    Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). (Franklin Funds and Templeton Funds are        
 collectively referred to as the "Franklin Templeton Funds.") Sales charge
reductions based upon aggregate holdings of (a), (b) and (c) above      
   ("Franklin Templeton Investments") may be effective only after notification
to Distributors that the investment qualifies for a discount. References
   throughout the Prospectus, for purposes of aggregating assets or describing
the exchange privilege, refer to the above descriptions.                

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

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

PURCHASES AT NET ASSET VALUE                                            

Shares of the Fund may be purchased without the imposition of either a  
 front-end sales charge ("net asset value") or a contingent deferred sales
   charge by (1) officers, directors, trustees, and full-time employees of the
Trust, 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 information                    

2 

497
51st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 51st
may be obtained from Shareholder Services at 1-800/632-2301. See        
"Distributions in Cash" under "Distributions to Shareholders."          

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

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

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

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES.                       

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

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

3 

497
52nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 52nd
    the subsequent 13-month period in this Fund or any of the Franklin Templeton
    Investments must total at least $1,000,000. Orders for such accounts will be
 accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with  
payment by federal funds received by the close of business on the next  
business day following such order.                                      

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

Refer to the SAI for further information.                               

4.  EXCHANGE PRIVILEGE                                                          

(a) 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 this
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.                         

4 

497
53rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 53rd
FRANKLIN                                                                        
PACIFIC                                                                         
GROWTH FUND                                                                     

PROSPECTUS    MARCH 1, 1994                                                     
AS AMENDED NOVEMBER 4, 1994                                                     

[FRANKLIN LOGO]                                                                 

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

Franklin International Trust (the "Trust") is an open-end management investment 
company consisting of two diversified separate series. Each series of the Trust 
in effect represents a separate fund with its own investment objective and      
policies, with varying possibilities for income or capital appreciation, and    
subject to varying market risks. Through the different series, the Trust        
attempts to satisfy different investment objectives.                            

This Prospectus pertains only to the Franklin Pacific Growth Fund (the "Fund"), 
a diversified series, which seeks long-term growth of capital. Under normal     
market conditions, the Fund invests at least 65% of its total assets in equity  
securities which trade on markets in the Pacific Rim and are (i) issued by      
companies domiciled in the Pacific Rim or (ii) issued by companies that derive  
at least 50% of either their revenues or pre-tax income from activities in the  
Pacific Rim. There can, of course, be no assurance that the Fund's objective    
will be achieved.                                                               

Under normal market conditions, the Fund's assets are substantially invested in 
equity securities consisting of common and preferred stock, securities (bonds or
preferred stock) convertible into common stock, warrants and securities         
representing underlying international securities such as American Depositary    
Receipts, or ADRs ("Equity Securities").                                        

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.                                                                      

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

A Statement of Additional Information concerning the Trust, dated March 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/                         

1         

497
54th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 54th
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.                               

                                                                [Download Table]

CONTENTS                                          PAGE
                                                      
Expense Table....................................    2

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

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

Investment Objective and                              
 Policies of the Fund............................    5

Management of the Fund...........................   19

Distributions to Shareholders....................   21

Taxation of the Fund                                  
 and Its Shareholders............................   22

How to Buy Shares of the Fund....................   23

Purchasing Shares of the Fund                         
 in Connection with Retirement Plans                  
 Involving Tax-Deferred Investments..............   29

Other Programs and Privileges                         
 Available to Fund Shareholders..................   30

Exchange Privilege...............................   32

How to Sell Shares of the Fund...................   34

Telephone Transactions...........................   37

Valuation of Fund Shares.........................   38

How to Get Information Regarding                      
 an Investment in the Fund.......................   39

Performance......................................   40

General Information..............................   41

Account Registrations............................   42

Important Notice Regarding                            
 Taxpayer IRS Certifications.....................   43

Portfolio Operations.............................   43

EXPENSE TABLE                                                                   
--------------------------------------------------------------------------------

The purpose of this table is to assist an investor in understanding the various 
costs and expenses that a shareholder will bear directly or indirectly in       
connection with an investment in the Fund. These figures are based on aggregate 
operating expenses of the Fund (including fees set by contract) for the Fund's  
fiscal year ended October 31, 1993.                                             

                                                                [Download Table]

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

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

2           

497
55th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 55th
                                                                [Download Table]
                                                                               
ANNUAL FUND OPERATING EXPENSES                                                 
 (as a percentage of average net assets)                                       
Management Fees...........................................          1.00%**    
12b-1 Fees................................................          0.25%**,***
Other Expenses:                                                                
Registration Fees................................... 0.41%                     
Custodian Fees...................................... 0.21%                     
Other............................................... 0.44%                     
                                                     -----                     
Total Other Expenses......................................          1.06%      
                                                                    -----      
Total Fund Operating Expenses.............................          2.31%**    
                                                                    =====      

**Represents the amount that would have been payable to the investment manager, 
absent a fee waiver by the investment manager and a reimbursement of the amount 
payable for 12b-1 fees. However, the investment manager has voluntarily limited 
its management fees and reimbursed 12b-1 fees and other operating expenses      
otherwise payable by the Fund. With this reduction, management fees were 0.00%  
of the Fund's average net assets, and total operating expenses, including such  
management fees, were 0.50% of the Fund's average net assets for the fiscal year
ended October 31, 1993. This arrangement may be terminated by the investment    
manager at any time.                                                            

***Consistent with rules of the National Association of Securities Dealers, Inc.
(the "NASD"), 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, it is estimated that this would take a substantial number of    
years.                                                                          

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

EXAMPLE                                                                         

As required by 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 table above, 
the Fund charges no redemption fees:                                            

                                                                [Download Table]

1 YEAR          3 YEARS          5 YEARS         10 YEARS
                                                         
  $67            $114             $163             $298  

THIS EXAMPLE IS BASED ON THE AGGREGATE OPERATING EXPENSES OF THE FUND (INCLUDING
FEES SET BY CONTRACT) FOR THE FISCAL YEAR ENDED OCTOBER 31, 1993 SHOWN ABOVE AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY 
BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund  
and only indirectly by shareholders as a result of their investment in the Fund.
In addition, federal regulations require the example to assume an annual return 
of 5%, but the Fund's actual return may be more or less than 5%.                

3   

497
56th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 56th
FINANCIAL HIGHLIGHTS                                                            
--------------------------------------------------------------------------------

The information for each of the two fiscal years ended October 31, 1993 and 1992
and for the fiscal period from September 20, 1991 (effective date of            
registration) to October 31, 1991 has been audited by Coopers & Lybrand,        
independent auditors, whose audit report appears in the financial statements in 
the Fund's Statement of Additional Information, a copy of which may be obtained 
as noted on the front cover of this prospectus.                                 

                                                        [Enlarge/Download Table]

                       PER SHARE OPERATING PERFORMANCE**                                    
--------------------------------------------------------------------------------------------
               NET                   NET                                                    
             ASSETS              REALIZED &     TOTAL      DISTRI-    DISTRI-               
             VALUES      NET     UNREALIZED     FROM       BUTIONS    BUTIONS               
 YEAR       AT BEGIN-   INVEST-    GAIN        INVEST-     FROM NET    FROM                 
 ENDED       NING        MENT    (LOSS)ON       MENT      INVESTMENT  CAPITAL     TOTAL     
OCT. 31     OF YEAR     INCOME   SECURITIES   OPERATIONS    INCOME     GAINS   DISTRIBUTIONS
--------------------------------------------------------------------------------------------
                                                                                            
FRANKLIN PACIFIC GROWTH FUND                                                                
1991+       $10.01      $.06       $ --        $ .060        $ --       $ --       $   --   
1992         10.07       .14         .836        .976        (.146)       --        (.146)  
1993         10.90       .19        3.825       4.015        (.193)     (.282)      (.475)  

                                                                [Download Table]

     PER SHARE                                                                  
     OPERATING                                                                  
   PERFORMANCE**                           RATIOS/SUPPLEMENTAL DATA             
--------------------             -----------------------------------------------
                                                            RATIO               
              NET                             RATIO OF      OF NET              
             ASSET               NET ASSETS   EXPENSES    INVESTMENT            
  YEAR       VALUES               AT END     TO AVERAGE    INCOME      PORTFOLIO
 ENDED       AT END     TOTAL    OF PERIOD      NET       TO AVERAGE   TURNOVER 
OCT. 31     OF YEAR    RETURN++  (IN 000'S)   ASSETS***   NET ASSETS     RATE   
--------------------------------------------------------------------------------
                                                                                
FRANKLIN PACIFIC GROWTH FUND                                                    
1991+       $10.07      .60%      $ 1,165         --%        5.01%        --%   
1992         10.90     9.77         5,724        .29         1.80       62.96   
1993         14.44    38.46        22,619        .50         2.03       47.52   

*Annualized.                                                                    

**Selected data for a share of beneficial interest outstanding throughout the   
year.                                                                           
For the period September 20, 1991 (effective date of registration) to October   
31, 1991.                                                                       
Total return measures the change in value of an investment over the periods     
indicated. It does not include the maximum 4.5% initial sales charge and assumes
reinvestment of dividends and capital gains at net asset value.                 

***During the periods indicated below, Franklin Advisers, Inc., the investment  
manager, reduced its management fees and reimbursed other expenses incurred by  
the Funds. Had such action not been taken, ratios of operating expenses to      
average net assets would have been as follows:                                  

                                                                [Download Table]

                                       RATIO OF 
                                       EXPENSES 
                                      TO AVERAGE
                                      NET ASSETS
                                      ----------
                                                
FRANKLIN PACIFIC GROWTH                         
  1991+...............................  2.50%*  
  1992................................  2.50    
  1993................................  2.31    

ABOUT THE FUND                                                                  
--------------------------------------------------------------------------------

The Trust is an open-end management investment company which consists of two    
diversified, open-end series, commonly called mutual funds. The Trust is a      
Delaware business trust, organized on March 22, 1991, and registered under the  
Investment Company Act of 1940 (the "1940 Act"). The Fund is managed by Franklin
Advisers, Inc. (the "Manager" or "Advisers") and up until December 31, 1992     
received portfolio advice and management assistance from Barclays de Zoete Wedd 
Investment Management Inc. ("BZWIM"). Since January 1, 1993, Templeton          
Investment Counsel, Inc. ("TICI" or the "Sub-adviser"), an indirect subsidiary  
of Templeton Worldwide, Inc., which is a direct, wholly owned subsidiary of     
Franklin Resources, Inc. ("Resources"), has served as the sub-adviser under a   
contract with the Manager (together, the "Fund's Advisers") providing services  
similar to those provided by BZWIM and with no increase in fees to shareholders.
(See "Management of the Fund.")                                                 

Shares of the Fund may be purchased (minimum investment of $100 initially and   
$25 thereafter) at the current public offering price, which is equal to the     
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge     
based upon a variable percent-                                                  

4     

497
57th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 57th
age (ranging from 4.50% to less than 1.15% 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 principal investment objective is to seek to provide long-term growth
of capital. Under normal market conditions, the Fund invests at least 65% of its
total assets in Equity Securities which trade on markets in the Pacific Rim, and
which are (i) issued by companies domiciled in the Pacific Rim or (ii) issued by
companies that derive at least 50% of either their revenues or pre-tax income   
from activities in the Pacific Rim. The investment objective of the Fund is a   
fundamental policy and may not be changed without the approval of a majority of 
the Fund's outstanding shares. There is, of course, no assurance that the Fund's
objective will be achieved.                                                     

For purposes of the Fund's 65% investment policy, the countries in the Pacific  
Rim are Australia, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand,   
Singapore and Thailand. (Appendix B to the Trust's Statement of Additional      
Information contains a brief discussion regarding the countries in which the    
Fund expects to invest.)                                                        

The Fund may invest up to 35% of its assets in the securities of issuers        
domiciled outside of the Pacific Rim. The investments may consist of: (i)       
securities of issuers in countries that are not located in the Pacific Rim but  
are linked by tradition, economic markets, cultural similarities or geography to
the countries in the Pacific Rim; and (ii) securities of issuers located        
elsewhere in the world which have operations in the Pacific Rim or which stand  
to benefit from political and economic events in the Pacific Rim. For example,  
the Fund may invest in a company outside of the Pacific Rim when the Sub-adviser
believes at the time of investment that the value of the company's securities   
may be enhanced by conditions or developments in the Pacific Rim even though the
company's production facilities are located outside of the Pacific Rim.         

Up to 35% of the Fund's total assets may be invested in fixed-income debt       
securities rated "Baa" or better by Moody's Investors Service ("Moody's") or    
"BBB" or better by Standard & Poor's Corporation ("S&P") or that are not rated  
but determined by management to be of comparable quality.                       

Normally, the Fund invests at least 65% of its total assets in securities traded
in at least three foreign countries, including the countries listed herein.     

Up to 35% of the Fund's assets may be invested in bonds, fixed-income debt      
securities and synthetic securities, as discussed below. The Fund may seek      
capital appreciation by investing in such debt securities which would occur     
through changes in relative foreign currency exchange rates, changes in relative
interest rates or improvement in the creditworthiness of an issuer. The receipt 
of income from such debt securities is incidental to the Fund's investment      
objective of growth of capital. These debt obligations consist of U.S. and      
foreign government securities and corporate debt securities, including Samurai  
and Yankee bonds, Eurobonds and depository receipts. The issuers of such debt   
securities may or may not be domiciled in the Pacific Rim. The Fund will limit  
its purchases of debt securities to investment grade obligations. For long-term 
debt obligations, this includes securities that are rated "Baa" or better by    
Moody's or "BBB" or better by S&P, or that are not rated but determined by      
management to be of comparable quality.                                         

Fixed-income debt securities within the top three categories (i.e., "AAA", "AA" 
and "A" by S&P or "Aaa", "Aa" or "A" by Moody's) comprise what are known as     
high-grade bonds and are regarded as having a strong capacity to pay principal  
and interest. Medium-                                                           

5   

497
58th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 58th
grade bonds (i.e., "BBB" by S&P or "Baa" by Moody's) are regarded as having an  
adequate capacity to pay principal and interest but with greater vulnerability  
to adverse economic conditions and some speculative characteristics. An Appendix
discussing these ratings is included in the Statement of Additional Information.

Generally, when interest rates rise, the value of the Fund's fixed-income and   
convertible investments will decline. Conversely, when rates fall, the value of 
such investments may rise. As a result, the presence of debt or convertible     
securities in the Fund's portfolio may contribute to fluctuation both in the    
value of the Fund's shares and the dividends per share paid by the Fund.        

In the event the rating on an issue held in the Fund's portfolio is lowered by a
rating service, such change will be considered by the Fund in its evaluation of 
the overall investment merits of that security but will not necessarily result  
in an automatic sale of the security.                                           

The Fund may temporarily invest cash in short-term debt instruments of U.S. or  
foreign issuers for cash management purposes or pending investment. (See        
"Investment Objective and Policies of the Fund - Short-Term Investments" below.)

The systematic method employed by the Sub-adviser to identify opportunities in  
the equity markets may result in frequent recommendations to add or remove      
securities from the Fund's portfolio, thus increasing the portfolio turnover    
rate. High portfolio turnover increases transaction costs which must be paid by 
the Fund. High turnover may also result in the realization of net capital gains,
which are taxable when distributed to shareholders.                             

RISKS RELATED TO INVESTING IN FOREIGN SECURITIES                                

Foreign securities involve certain risks which should be considered carefully by
prospective investors in the Fund. These risks include political, social or     
economic instability in the country of the issuer, the difficulty of predicting 
international trade patterns, the possibility of the imposition of exchange     
controls, expropriation, restrictions on removal of currency or other assets,   
nationalization of assets, foreign withholding and income taxation, and foreign 
trading practices (including higher trading commissions, custodial charges and  
delayed settlements). Such securities may be subject to greater fluctuations in 
price than securities issued by U.S. corporations or issued or guaranteed by the
U.S. government, its instrumentalities or agencies. The markets on which such   
securities trade may have less volume and liquidity, and may be more volatile   
than securities markets in the U.S. In addition, there may be less publicly     
available information about a foreign company than about a U.S. domiciled       
company. Foreign companies generally are not subject to uniform accounting,     
auditing and financial reporting standards comparable to those applicable to    
U.S. domestic companies. There is generally less government regulation of       
securities exchanges, brokers and listed companies abroad than in the U.S.      
Confiscatory taxation or diplomatic developments could also affect investment in
those countries.                                                                

In many instances, foreign debt securities may provide higher yields than       
securities of domestic issuers which have similar maturities and quality. Under 
certain market conditions, these investments may be less liquid than the        
securities of U.S. corporations and are certainly less liquid than securities   
issued or guaranteed by the U.S. government, its instrumentalities or agencies. 
Finally, in the event of a default of any such foreign debt obligations, it may 
be more difficult for the Fund to obtain or to enforce a judgment against the   
issuers of such securities. If a security is denominated in foreign currency,   
the value of the security to the Fund will be affected by changes in currency   
exchange rates and in exchange con-                                             

6     

497
59th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 59th
trol regulations, and costs will be incurred in connection with conversions     
between currencies. A change in the value of any foreign currency against the   
U.S. dollar will result in a corresponding change in the U.S. dollar value of   
the Fund's securities denominated in that currency. Such changes will also      
affect the Fund's income and distributions to shareholders. In addition,        
although the Fund will receive income on foreign securities in such currencies, 
the Fund will be required to compute and distribute its income in U.S. dollars. 
Therefore, if the exchange rate for any such currency declines materially after 
the Fund's income has been accrued and translated into U.S. dollars, the Fund   
could be required to liquidate portfolio securities to make required            
distributions. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount 
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater.                                       

An example of the volatility of the international currency markets was the      
September 1992 currency crisis in Europe. The failure of the Maastricht Treaty  
to receive unanimous approval by the nations involved made a common European    
currency under the direction of a central European bank seem unachievable. This 
created exceptional volatility in international currency markets. In spite of   
this turmoil, over the 12-month period ending December 31, 1992, many currencies
were stronger against the dollar, which improved the performance of their       
underlying equity markets.                                                      

The relative performance of foreign currencies in which securities held by the  
Fund are denominated is an important factor in the Fund's overall performance.  
TICI intends to manage the Fund's exposure to various currencies to take        
advantage of different yield, risk, and return characteristics that different   
currencies, currency denominations, and countries can provide for U.S.          
investors.                                                                      

To hedge exposure to currency fluctuations or to increase income, the Fund may  
enter into forward foreign currency exchange contracts, and may buy and sell    
options, futures contracts and options on futures contracts relating to foreign 
currencies. The Fund will use forward currency exchange contracts in the normal 
course of business to lock in an exchange rate in connection with purchases and 
sales of securities denominated in foreign currencies. Other currency management
strategies allow the Sub-adviser to hedge portfolio securities, to shift        
investment exposure from one currency to another, or to attempt to profit from  
anticipated declines in the value of a foreign currency relative to the U.S.    
dollar. Some of these strategies will require the Fund to set aside liquid      
assets in a segregated custodial account to cover its obligations. (See         
"Currency Hedging Transactions" below. Options and Futures and Options on       
Futures are limited as discussed below.)                                        

Although the Fund will not invest more than 25% of its assets in any one        
industry or the government of any one country, the Fund may invest more than 25%
of its assets in the securities of issuers in one or more countries. Investors  
should consider the greater risk of such policy versus the safety that may come 
with an investment that involves a wider range of geographic localities and     
countries. Accordingly, an investor should compare the Fund with other          
investment vehicles before making an investment decision. There is, of course,  
no assurance that the Fund's objective will be achieved.                        

Some of the countries in which the Fund invests may not permit direct           
investment. Investments in such countries may only be permitted through         
government approved investment vehicles. Investing through such vehicles may    
involve duplicative or layered fees or expenses and may, as well, be subject to 
limitations                                                                     

7   

497
60th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 60th
under the 1940 Act. Under the 1940 Act, the Fund may invest up to 10% of its    
assets in shares of other investment companies and up to 3% of its assets in any
one investment company as long as the investment does not represent more than 5%
of the voting stock of the acquired investment company.                         

TRADING IN OPTIONS                                                              

The Fund may purchase put and call options and write covered put and call       
options on securities and securities indices. Such options may be traded on U.S.
exchanges and, to the extent permitted by law, over-the-counter and on foreign  
exchanges. Broadly speaking, to comply with SEC asset coverage requirements, no 
more than one third of the Fund's assets will be invested in options or other   
assets which, as discussed below, must be "covered."                            

Writing Call and Put Options on Securities. The Fund may write options to       
generate additional income and to hedge its investment portfolio against        
anticipated adverse market and/or exchange rate movements. 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. All options written by the Fund will be "covered."                       

A call option written by the Fund is "covered" if the Fund owns the underlying  
security covered by the call or has an absolute and immediate right to acquire  
that security without additional cash consideration (or for additional cash     
consideration held in a segregated account by its custodian) upon conversion or 
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 (i) is     
equal to or less than the exercise price of the call written or (ii) 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 that wishes to terminate its obligation may effect a    
"closing purchase transaction." This is accomplished by buying an option of the 
same series as the option previously written. The effect of the purchase is that
the writer's position will be cancelled by the clearing corporation. However, a 
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may 
liquidate its position by effecting a "closing sale transaction." This is       
accomplished by selling an option of the same series as the option previously   
purchased.                                                                      

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                                 

8     

497
61st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 61st
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. There is no guarantee that either a      
closing purchase or a closing sale transaction can be effected when the Fund so 
desires.                                                                        

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 attempt 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.             

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

Purchasing Put Options. The Fund may 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 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.                                                                        

Options on Stock Indices. The Fund may also purchase and write call and put     
options on stock indices in order to hedge against the risk of market or        
industry-wide stock price fluctuations or to increase income to the Fund. Call  
and put options on stock indices are similar to options on securities except    
that, rather than the right to purchase or sell particular securities 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 options on  
individual securities, 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 securities.    

All options written on stock indices must be covered. When the Fund writes an   
option on a stock index, it will establish a segregated account containing cash 
or high quality, fixed-income securities with                                   

9     

497
62nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 62nd
its custodian in an amount at least equal to the market value of the option and 
will maintain the account while the option is open or will otherwise cover the  
transaction.                                                                    

Forward Conversions. The Fund may engage in "forward conversion" transactions.  
In a forward conversion, the Fund will purchase securities and write call       
options and purchase put options on such securities. All options written by the 
Fund will be covered. By purchasing puts, the Fund protects the underlying      
security from depreciation in value. By selling or writing calls on the same    
security, the Fund receives premiums which may offset part or all of the cost of
purchasing the puts while foregoing the opportunity for appreciation in the     
value of the underlying security. The Fund will not exercise a put it has       
purchased while a call option on the same security is outstanding. The use of   
options in connection with forward conversions is intended to hedge against     
fluctuations in the market value of the underlying security. Although it is     
generally intended in forward conversion transactions that the exercise price of
put and call options would be identical, situations might occur in which some   
option positions are acquired with different exercise prices. Therefore, the    
Fund's return may depend in part on movements in the price of the underlying    
security because of the different exercise prices of the call and put options.  
Such price movements may also affect the Fund's total return if the conversion  
is terminated prior to the expiration date of the options. In such event, the   
Fund's return may be greater or less than it would otherwise have been if it had
hedged the security only by purchasing put options.                             

Over-the-counter Options on Securities ("OTC" options). The Fund may 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 may engage in exchange   
traded options. OTC options differ from exchange traded options in certain      
material respects. OTC options are arranged directly with dealers and not, as is
the case with exchange traded options, with a clearing corporation. Thus, there 
is a risk of non-performance by the dealer. Because there is no exchange,       
pricing is typically done by reference to information from market makers.       
However, OTC options are available for a greater variety of securities and in a 
wider range of expiration dates and exercise prices than exchange traded        
options; and the writer of an OTC option is paid the premium in advance by the  
dealer.                                                                         

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 the  
option. 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 whom the Fund originally wrote the option.       

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

Spread and Straddle Transactions. The Fund may engage in "spread" transactions  
in which it purchases and writes a put or call option on the same underlying    
security, with the options having different exercise prices and/or expiration   
dates. All options written by the Fund will be covered. The Fund may also engage
in so-called "straddles," in which it purchases                                 

10    

497
63rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 63rd
or writes combinations of put and call options on the same security. Because the
purchase of options by the Fund in connection with these transactions may, under
certain circumstances, involve a limited degree of investment leverage, the Fund
will not enter into any spreads or straddles if, as a result, more than 5% of   
its net assets will be invested at any time in such option transactions. The    
Fund's ability to engage in spread or straddle transactions may be further      
limited by state securities laws.                                               

FUTURES TRANSACTIONS                                                            

The Fund may purchase or sell (i) financial futures contracts; (ii) interest    
rate futures contracts; (iii) options on interest rate futures contracts; (iv)  
stock index futures contracts; and (v) options on stock index futures contracts 
(collectively, "Futures Transactions") for bona fide hedging purposes. The Fund 
may enter into such Futures Transactions on domestic exchanges and, to the      
extent such transactions have been approved by the Commodity Futures Trading    
Commission ("CFTC") for sale to customers in the U.S., on foreign exchanges. The
Fund will not engage in Futures Transactions for speculation but only as a hedge
against changes resulting from market conditions in the value of its securities 
or securities which it intends to purchase. The Fund will not enter into any    
Futures Transactions if, immediately thereafter, more than 20% of the Fund's net
assets would be represented by futures contracts or options thereon. In         
addition, the Fund will not engage in any Futures Transactions if, immediately  
thereafter, the sum of the amount of initial margin deposits on the Fund's      
futures positions and premiums paid for options on its futures contracts would  
exceed 5% of the market value of the Fund's total assets.                       

Financial Futures Contracts. Financial futures are commodity contracts that     
obligate the holder to take or make delivery of a specified quantity of a       
financial instrument, such as a U.S. Treasury security or foreign currencies,   
during a specified future period at a specified price. A "sale" of a financial  
futures contract means the acquisition of a contractual obligation to deliver   
the securities called for by the contract at a specified price on a specified   
date. A "purchase" of a financial futures contract means the acquisition of a   
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date.                                            

At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The futures        
contract is valued daily thereafter and the payment of some amount of "variation
margin" may be required, reflecting any decline or increase in the contract's   
value.                                                                          

To the extent the Fund enters into contracts for the purchase or sale for future
delivery of financial futures and to the extent required by the rules of the    
SEC, the Fund will maintain, with its custodian, assets in a segregated account 
to cover its obligations with respect to such contracts, which assets 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 contracts and the aggregate value of the initial and      
variation margin payments made by the Fund with respect to such futures         
contracts.                                                                      

Interest Rate Futures Contracts. Interest Rate Futures Contracts are futures    
contracts on debt securities. The value of these instruments changes in response
to changes in the value of the underlying debt security, which depends primarily
on prevailing interest rates.                                                   

The Fund may enter into interest rate futures contracts in order to protect its 
portfolio securities from fluctuations in interest rates without necessarily    
buying or selling the underlying fixed-income se-                               

11    

497
64th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 64th
curities. For example, if the Fund owns bonds, and interest rates are expected  
to increase, it might sell futures contracts on debt securities having          
characteristics similar to those held in the portfolio. Such a sale would have  
much the same effect as selling an equivalent value of the bonds owned by the   
Fund. If interest rates did increase, the value of the debt securities in the   
portfolio would decline, but the value of the futures contracts to the Fund     
would increase at approximately the same rate, thereby keeping the net asset    
value of the Fund from declining as much as it otherwise would have.            

Options on Interest Rate Futures Contracts. The Fund may also purchase put and  
call options and write covered put and call options on interest rate futures    
contracts to hedge against risks associated with shifts in interest rates.      

Stock Index Futures Contracts. A stock index futures contract obligates the     
seller to deliver (and the purchaser to take) an amount of cash equal to a      
specific dollar amount times the difference between the value of a specific     
stock index at the close of the last trading day of the contract and the price  
at which the agreement was made. Open futures contracts are valued on a daily   
basis, and the Fund may be obligated to provide or receive cash reflecting any  
decline or increase in the contract's value. No physical delivery of the        
underlying stocks in the index is made in the future.                           

The Fund may sell stock index futures contracts in anticipation of or during a  
market decline in an 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 offset      
increases in the cost of common stocks that it intends to purchase.             

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

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.                 

CURRENCY HEDGING TRANSACTIONS                                                   

In order to hedge against currency exchange rate risks, the Fund may enter into 
forward currency exchange contracts and currency futures contracts and options  
on such futures contracts, as well as purchase put or call options and write    
covered put and call options on currencies traded in U.S. or foreign markets.   

A forward currency exchange contract involves an obligation to purchase or sell 
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time 
of the contract. These contracts are traded in the interbank market con-        

12    

497
65th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 65th
ducted directly between currency traders (usually large commercial banks). A    
currency futures contract is a standardized contract for the future delivery of 
a specified amount of currency at a future date at a price set at the time of   
the contract. The Fund may enter into currency futures contracts traded on      
regulated commodity exchanges, including non-U.S. exchanges.                    

The Fund may either accept or make delivery of the currency specified at the    
maturity of a forward or futures contract or, prior to maturity, enter into a   
closing transaction involving the purchase or sale of an offsetting contract.   
Closing transactions with respect to forward contracts are usually effected with
the currency trader who is a party to the original forward contract. Closing    
transactions with respect to futures contracts and options thereon are effected 
on the exchange on which the contract was entered into (or on a linked          
exchange).                                                                      

The Fund may enter into forward currency exchange contracts and currency futures
contracts in several circumstances. For example, when the Fund enters into a    
contract for the purchase or sale of a security denominated in a foreign        
currency (or options contracts with respect to such futures contracts), or when 
the Fund anticipates the receipt in a foreign currency of dividends or interest 
payments on such a security that it holds, it may desire to "lock in" the U.S.  
dollar price of the security or the U.S. dollar equivalent of such dividend or  
interest payment, as the case may be. In addition, when the Sub-adviser believes
that the currency of a particular country may suffer a substantial decline      
against the U.S. dollar, it may enter into a forward or futures contract to     
sell, for a fixed amount of U.S. dollars, the amount of that currency           
approximating the value of some or all of the Fund's portfolio securities       
denominated in such currency. In addition, the Fund may engage in cross-hedging 
transactions by using forward contracts in one currency to hedge against        
fluctuations in value of securities denominated in a different currency when    
there is a pattern of correlation between the two currencies.                   

The Fund may attempt to accomplish objectives similar to those described above  
with respect to forward and futures contracts for currency by means of          
purchasing put or call options and writing, on a covered basis, put and call    
options on currencies traded on exchanges. A put option can give the Fund the   
right to sell a currency at the exercise price on or before the expiration of   
the option. A call option can give the purchaser of the option the right to     
purchase a currency at the exercise price on or before the expiration of the    
option. The purchase or writing of a foreign currency option may constitute an  
effective hedge against foreign exchange rate fluctuations. As with other kinds 
of option transactions, however, the writing of a foreign currency option will  
constitute only a partial hedge, up to the amount of the premium received, and  
the Fund could be required to purchase or sell currencies at disadvantageous    
exchange rates, thereby incurring losses. Likewise, with respect to foreign     
currency options purchased by the Fund, the Fund may forfeit the entire amount  
of the premium plus related transaction costs if exchange rates move in a manner
adverse to the Fund's position. The Fund may use foreign currency options to    
cross-hedge, which involves writing or purchasing options on one currency to    
hedge against changes in exchange rates for a different currency with a pattern 
of correlation to the first currency. Foreign currency options to be written or 
purchased by the Fund will be traded on U.S. or foreign exchanges or            
over-the-counter. The Fund will not enter into such forward currency exchange   
contracts or currency futures contracts or purchase or write such options or    
maintain a net exposure to such contracts where the completion                  

13    

497
66th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 66th
of the contracts would obligate the Fund to deliver an amount of currency other 
than U.S. dollars in excess of the value of the Fund's portfolio securities or  
other assets denominated in that currency or, in the case of cross-hedging, in a
currency closely correlated to that currency.                                   

RISKS OF OPTIONS AND FUTURES CONTRACTS AND RELATED OPTIONS                      

The purchase and sale of futures contracts and options thereon, as well as the  
purchase and writing of options on securities and securities indices and        
currencies, involve risks different from those involved with direct investments 
in securities. While utilization of options, futures contracts and similar      
instruments may be advantageous to the Fund, the Fund's ability to hedge        
effectively all or a portion of its securities through such transactions and to 
increase income to the Fund through the use of options on securities and        
securities indices depends on the degree to which price movements in the        
underlying index, securities or currencies correlate with price movements in the
relevant portion of the Fund's securities. Perfect correlation is generally not 
attainable. 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, securities or currencies underlying the hedging instrument and the   
hedged securities which would result in a loss on both such securities and the  
hedging instrument. In addition, it is not possible to hedge fully or perfectly 
against currency fluctuations affecting the value of securities denominated in  
foreign currencies because the value of such securities is also likely to       
fluctuate as a result of independent factors not related to currency            
fluctuations. Therefore, perfect correlation between the Fund's futures         
positions and portfolio positions will be impossible to achieve. Accordingly,   
successful use by the Fund of options on stock indices, financial and currency  
futures contracts and related options, and currency options will be subject to  
Advisers' and the Sub-adviser's ability to predict correctly movements in the   
direction of the securities and currency markets generally or of a particular   
segment. If Advisers or the Sub-adviser is not successful in employing such     
instruments in managing the Fund's investments, the Fund's performance will be  
worse than if it did not employ such strategies. In addition, the Fund will pay 
commissions and other costs in connection with such investments, which may      
increase the Fund's expenses and reduce the return. In writing options on       
futures, the Fund's loss is potentially unlimited and may exceed the amount of  
the premium received.                                                           

In certain cases the options and futures markets provide investment or risk     
management opportunities that are not available from direct investments in      
securities. In addition, some strategies can be performed more effectively and  
at lower cost by utilizing the options and futures markets rather than          
purchasing or selling portfolio securities. However, there are risks involved in
these transactions as discussed above.                                          

Positions in stock index options, stock index futures contracts, financial      
futures contracts, foreign currency futures contracts, related options on       
futures and options on currencies 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, futures contract or option thereon 
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 could have
an adverse impact on the Fund's ability to effectively hedge its securities or  
foreign currency exposure. The Fund will enter into options or futures positions
only if                                                                         

14    

497
67th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 67th
TICI believes that a liquid secondary market for such options or futures        
contracts exist.                                                                

In the case of OTC options on securities 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 the Fund, on a covered call option, cannot     
effect a closing transaction, it cannot sell the underlying security until the  
option expires or the option is exercised. Therefore, when the Fund writes an   
OTC call option, it may not be able to sell the underlying security even though 
it might otherwise be advantageous to do so. Likewise, the Fund may be unable to
sell the securities it has pledged to secure OTC put options while it is        
obligated as a put writer. Similarly, when the Fund is a purchaser of such put  
or call option, the Fund might find it difficult to terminate its position on a 
timely basis in the absence of a secondary market.                              

The risk of loss in trading foreign futures contracts and foreign options can be
substantial. Investors should be aware of the following:                        

(1) Participation in foreign futures contracts and foreign options transactions 
involves the execution and clearing of trades on, or subject to, the rules of a 
foreign board of trade.                                                         

(2) Neither the CFTC, the National Futures Association nor any domestic exchange
regulates activities of any foreign boards of trade, including the execution,   
delivery and clearing of transactions, or has the power to compel enforcement of
the rules of a foreign board of trade or any applicable foreign laws. Generally,
the foreign transaction will be governed by applicable foreign law. This is true
even if the exchange is formally linked to a domestic market so that a position 
taken on the market may be liquidated by a transaction on another market.       
Moreover, such laws or regulations will vary, depending on the foreign country  
in which the foreign futures or foreign options transaction occurs.             

(3) For these reasons, if the Fund trades foreign futures or foreign options    
contracts, it might not be afforded certain of the protective measures provided 
by the Commodity Exchange Act, the CFTC's regulations and the rules of the      
National Futures Association and any domestic exchange, including the right to  
use reparations proceedings before the Commission and arbitration proceedings   
provided by the National Futures Association or any domestic futures exchange.  
In particular, funds received from the Fund for foreign futures or foreign      
options transactions may not be provided the same protections as funds received 
in respect of transactions on U.S. futures exchanges.                           

(4) The price of any foreign futures or foreign options contract and, therefore,
the potential profit and loss thereon, may be affected by any variance in the   
foreign exchange rate between the time a particular order is placed and the time
it is liquidated, offset or exercised.                                          

The Fund's investment in options, futures contracts, forward contracts, options 
on stock indices and futures contracts, and foreign currencies and securities   
may be limited by the requirements of the Internal Revenue Code of 1986, as     
amended (the "Code"), for qualification as a regulated investment company. These
securities require the application of complex and special tax rules and         
elections, more information about which is included in the Statement of         
Additional Information.                                                         

15    

497
68th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 68th
The Fund's investment in options, futures contracts and forward contracts,      
options on futures contracts and stock indices, including transactions involving
actual or deemed short sales or foreign exchange gains or losses, may give rise 
to taxable income, gain or loss and will be subject to special tax treatment    
under certain mark-to-market and straddle rules, the effect of which may be to  
accelerate income to the Fund, defer Fund losses, cause adjustments in the      
holding periods of Fund securities, convert capital gains and losses into       
ordinary income and losses, convert long-term capital gains into short-term     
capital gains, and convert short-term capital losses into long-term capital     
losses. These rules could, therefore, affect the amount, timing and character of
distributions to shareholders. Certain elections may be available to the Fund to
mitigate some of the unfavorable consequences of the provisions described in    
this paragraph. These investments and transactions are discussed in the         
Statement of Additional Information.                                            

For a further discussion regarding the Fund's investments in options, futures   
and options on futures, see the Statement of Additional Information.            

SECURITIES WARRANTS                                                             

The Fund may invest up to 10% of its net assets in warrants, including such     
warrants that are not listed on an exchange. A warrant is typically a long-term 
option issued by a corporation which gives the holder the privilege of buying a 
specified number of shares of the underlying common stock at a specified        
exercise price at any time on or before an expiration date. Stock index warrants
entitle the holder to receive, upon exercise, an amount in cash determined by   
reference to fluctuations in the level of a specified stock index. If the Fund  
does not exercise or dispose of a warrant prior to its expiration, it will      
expire worthless.                                                               

SYNTHETIC CONVERTIBLES                                                          

The Fund may invest up to 35% of its assets in "synthetic convertible"          
securities. A synthetic convertible is created by combining distinct securities 
which together possess the two principal characteristics of a true convertible, 
that is, fixed income and the right to acquire the underlying equity security.  
This combination is achieved by investing in nonconvertible fixed-income        
securities and in warrants or stock or stock index call options which grant the 
holder the right to purchase a specified quantity of securities within a        
specified period of time at a specified price or to receive cash in the case of 
stock index options. Synthetic convertible securities are not considered to be  
Equity Securities for purposes of the Fund's 65% investment policy.             

Synthetic convertible securities differ from the true convertible security in   
several respects. The value of a synthetic convertible is the sum of the values 
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond         
differently to market fluctuations. Further, although the Fund expects normally 
to create synthetic convertibles whose two components represent one issuer, the 
character of a synthetic convertible allows the Fund to combine components      
representing distinct issuers or to combine a fixed-income security with a call 
option on a stock index, when it is determined that such a combination would    
better promote the Fund's investment objectives. In addition, the component     
parts of a synthetic convertible security may be purchased simultaneously or    
separately, and the holder of a synthetic convertible faces the risk that the   
price of the stock, or the level of the market index underlying the             
convertibility component, will decline.                                         

16    

497
69th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 69th
LOANS OF PORTFOLIO SECURITIES                                                   

As approved by the Board of Trustees and subject to the following conditions,   
the Fund may lend its portfolio securities to qualified securities dealers or   
other institutional investors, provided that such loans do not exceed 33-1/3 of 
the value of the Fund's total assets at the time of the most recent loan. The   
borrower must deposit with the Fund's custodian collateral with an initial      
market value of at least 102% of the initial market value of the securities     
loaned, including any accrued interest, with the value of the collateral and    
loaned securities marked-to-market daily to maintain collateral coverage of at  
least 100%. Such collateral shall consist of cash, securities issued by the U.S.
Government, its agencies or instrumentalities, or irrevocable letters of credit.
The lending of securities is a common practice in the securities industry. The  
Fund engages in security loan arrangements with the primary objective of        
increasing the Fund's income either through investing the cash collateral in    
short-term interest bearing obligations or by receiving a loan premium from the 
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of 
credit, there are risks of delay in recovery and loss of rights in the          
collateral should the borrower of the security fail financially.                

BORROWING                                                                       

As a fundamental policy, the Fund will not borrow money or mortgage or pledge   
any of its assets, except that borrowings and the pledging of assets therefor to
meet redemption requests and for other temporary or emergency purposes may be   
made from banks in an amount up to 10% of total asset value. While borrowings   
exceed 5% of the Fund's total assets, it will not make any additional           
investments.                                                                    

Illiquid Investments. The Fund reserves the right to invest up to 10% of its net
assets in illiquid securities (a term which means securities that cannot be     
disposed of within seven days in the normal course of business at approximately 
the amount at which the Fund has valued the securities). It is the current      
policy of the Fund, however (which may be changed without the approval of the   
Fund's shareholders), to limit any such investments (including illiquid Equity  
Securities, repurchase agreements of more than seven days duration, OTC options,
illiquid real estate investment trusts, securities of issuers with less than    
three years continuous operation and other securities which are not readily     
marketable) to 5% of the Fund's net assets. The Board of Trustees has authorized
the Fund to invest in restricted securities where such investments are          
consistent with the Fund's investment objective and has authorized such         
securities to be considered to be liquid and thus not within the foregoing 10%  
limit, to the extent the Sub-adviser or the Manager, as the case may be,        
determines on a daily basis that there is a liquid institutional or other market
for such securities. Notwithstanding the determinations of the Manager and the  
Sub-adviser in this regard, the Board of Trustees remains responsible for such  
determinations and considers appropriate action to maximize the Fund's liquidity
and its ability to meet redemption demands if a security should become illiquid 
subsequent to its purchase. To the extent the Fund invests in restricted        
securities that are deemed liquid, the general level of illiquidity in the Fund 
may be increased if qualified institutional buyers become uninterested in       
purchasing these securities or the market for these securities contracts. (See  
"Investment Objectives, Policies and Restrictions - Other Investment Policies"  
in the Statement of Additional Information.)                                    

SHORT-TERM INVESTMENTS                                                          

Occasionally, in order to honor redemptions, pending investment of proceeds from
new sales of Fund                                                               

17  

497
70th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 70th
shares or to satisfy other short-term needs, the Fund may hold cash (U.S.       
dollars, foreign currencies or multinational currency units) and/or invest a    
portion of its assets in high quality money-market instruments. In any period   
of market weakness or of uncertain market or economic conditions, the Fund may  
establish a temporary defensive position by investing in high quality           
money-market instruments if the Manager or Sub-adviser anticipates that         
developments in any market may seriously jeopardize the value of most Equity    
Securities in such market. Any decision to substantially withdraw from the      
equity market is reviewed by the Board of Trustees. Money-market instruments in 
which the Fund may invest include, but are not limited to, the following        
instruments of U.S. or foreign issuers: government securities, commercial       
paper, bank certificates of deposit, bankers' acceptances, and repurchase       
agreements secured by any of the foregoing. It is impossible to predict when or 
for how long the Fund would employ defensive strategies. All such securities    
will be rated "A-1" or "A-2" by S&P or "P-1" or "P-2" by Moody's or, if not     
rated, determined by the Fund's Advisers to be of comparable quality.           

REPURCHASE AGREEMENTS                                                           

For cash management or other short-term purposes as listed above, the Fund may  
engage in repurchase transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed-upon price and date.
The transaction requires the collateralization of the seller's obligation by the
transfer of securities with an initial market value, including accrued interest,
equal to at least 102% of the dollar amount invested by the Fund in each        
agreement, with the value of the underlying security marked to market daily to  
maintain coverage of at least 100%. A default by the seller might cause the Fund
to experience a loss or delay in the liquidation of the collateral securing the 
repurchase agreement. The Fund might also incur disposition costs in liquidating
the collateral. The Fund, however, intends to enter into repurchase agreements  
only with government securities dealers recognized by the Federal Reserve Board 
or with member banks of the Federal Reserve System. Under the 1940 Act, a       
repurchase agreement is deemed to be the loan of money by the Fund to the       
seller, collateralized by the underlying security. The U.S. government security 
subject to resale (the collateral) will be held pursuant to a written agreement,
and the Fund's custodian will take title to, or actual delivery of, the         
security.                                                                       

The Fund is subject to a number of additional investment restrictions, some of  
which may be changed only with the approval of shareholders, which limit its    
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the Statement of Additional
Information.                                                                    

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

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

A decline in the stock market of any country in which the Fund is invested may  
also be reflected in declines in the Fund's share price. Changes in currency    
valuations will also affect the price of Fund shares. History reflects both     
decreases and increases in worldwide stock markets and currency valuations, and 
these may reoccur unpredictably in the future.                                  

18    

497
71st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 71st
MANAGEMENT OF THE FUND                                                          
--------------------------------------------------------------------------------

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

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

TICI is an indirect subsidiary of Templeton Worldwide, Inc., which, operating   
through its subsidiaries, is a major investment management organization with    
approximately $28.4 billion of assets currently under management and a long     
history of global investing. Under a sub-advisory agreement, TICI also serves as
sub-adviser to the Trust's Franklin International Equity Fund.                  

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.                  

Pursuant to the sub-advisory agreement between Advisers and TICI, and subject to
the overall policies, control, direction and review of the Board of Trustees and
to the instructions and supervision of Advisers, TICI is responsible for        
recommending an optimal geographic equity allocation, for providing advice with 
respect to the Fund's investments and, subject to the Board's and Advisers'     
direction and supervision, for determining which securities will be purchased,  
retained or sold, as well as for execution of portfolio transactions.           
Investments may be shifted among the world's various capital markets and among  
different types of securities in accordance with ongoing analysis of trends and 
developments affecting such markets and securities.                             

Under the management agreement with the Fund, for the services provided and     
expenses assumed by it the Manager is entitled to receive a fee, computed and   
payable monthly, based upon the Fund's average net assets. The management fee is
higher than the management fees paid by most mutual funds, although the Board of
Trustees believes it to be comparable to fees paid by many international funds  
having similar investment objectives and policies.                              

Under the sub-advisory agreement with the Manager, for its sub-advisory fee TICI
is entitled to receive from the Manager an amount equal to approximately 50% of 
the fees paid by the Fund to the Manager (subject to certain adjustments). The  
sub-advisory fees paid by the Manager have no effect on the fees payable by the 
Fund to the Manager.                                                            

During the fiscal year ended October 31, 1993, the Manager voluntarily agreed to
waive payment of its management fee and assume responsibility for other expenses
related to the operations of the Fund. Had such action not been taken, fees     
totaling 1.00% of the average daily net assets of the Fund would have accrued to
Advisers. Total operating expenses, including management fees, would have       
represented 2.31% of the average net assets of the Fund. This action by Advisers
to limit its management fees and assume responsibility for payment              

19    

497
72nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 72nd
of expenses related to the operations of the Fund may be terminated by Advisers 
at any time.                                                                    

Further information on the services provided by the Fund's Advisers and the fees
payable by the Fund for these services is included in the Statement of          
Additional Information under "Investment Advisory and Other Services."          

Among the responsibilities of the Fund's Advisers under their respective        
agreement are the selection of brokers and dealers through which transactions in
the Fund's portfolio securities for which each is responsible are effected. The 
Fund's Advisers seek 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 
Fund's Advisers will consider the furnishing of quotations and of other market  
services, research, statistical and other data for the Fund's Advisers and their
affiliates, as well as the sale of shares of the Fund, as factors in selecting a
broker. Further information is included under "Policies Regarding Brokers Used  
on Portfolio Transactions" in the Statement of Additional Information.          

Except as noted above and in the Statement of Additional Information under      
"Investment Advisory and Other Services", the Fund's service contractors bear   
all expenses in connection with the performance of their services, except that  
the Distributor is reimbursed for expenses incurred under the Plan of           
Distribution (as described below). Similarly, the Fund bears the expenses       
incurred in its operation. For the fiscal year ended October 31, 1993, the      
Fund's total expenses per share were 0.50% of the average net assets, after fee 
waivers and expenses reimbursed by the Manager totalling 1.81% of the average   
net assets. (See the Statement of Additional Information - "Investment Advisory 
and Other Services" for further information describing the Fund's expenses.)    

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

PLAN OF DISTRIBUTION                                                            

The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1    
under the 1940 Act. Under the Plan, the Fund may reimburse Distributors or      
others for all expenses incurred by Distributors or others in the promotion and 
distribution of the Fund's shares. Such expenses may include, but are not       
limited to, the printing of prospectuses and reports used for sales purposes,   
expenses of preparing and distributing sales literature and related expenses,   
advertisements, and other distribution-related expenses, including a prorated   
portion of Distributor's overhead expenses attributable to the distribution of  
Fund shares, as well as any distribution or service fees paid to securities     
dealers or theirs 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 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, Advisers, or other parties on     
behalf of the Fund, Distributors, Advisers, 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.                                                           

20    

497
73rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 73rd
DISTRIBUTIONS TO SHAREHOLDERS                                                   
--------------------------------------------------------------------------------

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

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

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

DISTRIBUTION DATE                                                               

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

In order to be entitled to a dividend, an investor must have acquired Fund      
shares prior to the close of business on the record date. An investor           
considering purchasing Fund shares shortly before the 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 a 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.                                                 

21    

497
74th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 74th
DISTRIBUTIONS IN CASH                                                           

A shareholder may elect to receive income dividends or both income dividends and
any capital gain distributions in cash. By completing the "Special Payment      
Instructions for Distributions" section of the Shareholder Application included 
with this Prospectus, a shareholder may direct the selected distributions to    
another fund in the Franklin Group of Funds(R) or the Templeton Group, to       
another person, or directly to a checking account. If the bank at which the     
account is maintained is a member of the Automated Clearing House, the payments 
may be made automatically by electronic funds transfer. If this last option is  
requested, the shareholder should allow at least 15 days for initial processing.
Dividends which may be paid in the interim period will be sent to the address of
record. Additional information regarding automated funds transfers may be       
obtained from Franklin's Shareholder Services Department. Dividend and capital  
gain distributions are eligible for investment in another Franklin fund at net  
asset value.                                                                    

TAXATION OF THE FUND AND ITS SHAREHOLDERS                                       
--------------------------------------------------------------------------------

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

Each separate series of the Trust is treated as a separate entity for federal   
income tax purposes. 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 income and meeting certain
other requirements relating to the sources of its income and diversification of 
its assets, the Fund will not be liable for federal income or excise taxes.     

Foreign securities, which meet the definition in the Code of a Passive Foreign  
Investment Company ("PFIC"), may subject the Fund to an income tax and interest 
charge with respect to such investment. To the extent possible, the Fund will   
avoid such treatment by not investing in PFIC securities or by adopting other   
tax strategies for any PFIC securities it does purchase.                        

For federal income tax purposes, any income dividends which a 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.                                                                   

Redemptions and exchanges of Fund shares are taxable events on which a          
shareholder may realize a gain or a 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 paid in purchasing 
shares of the Fund will not be included in the federal tax basis of such shares 
sold or exchanged within ninety (90) days of their purchase (for purposes of    
determining gain or loss                                                        

22    

497
75th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 75th
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.                                          

For corporate shareholders, it is anticipated that only a small portion, if any,
of the Fund's dividends during the current fiscal year will qualify for the     
corporate dividends-received deduction because of the Fund's principal          
investment objective of investing in foreign Equity Securities and non-equity   
domestic investments. To the extent that the Fund pays dividends which qualify  
for this deduction, the availability of the deduction is subject to certain     
holding period and debt financing restrictions imposed under the Code on the    
corporation claiming the deduction.                                             

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

Shareholders who are not U.S. persons for purposes of federal income taxation   
should consult with their financial or tax advisors regarding the applicability 
of U.S. withholding or other taxes 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."                                   

23    

497
76th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 76th
Set forth below is a table of total sales charges or underwriting commissions   
and dealer concessions.                                                         

                                                        [Enlarge/Download Table]

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

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

On purchases in excess of $2,500,000, the sales charge is 1.00% of the offering 
price on the first $2,500,000, plus 0.58% on the next $2,500,000 (with a dealer 
concession of 0.5%), plus 0.29% on the excess over $5,000,000 (with a dealer    
concession of 0.25%). Sales charges on purchases of $1,000,000 or more are paid 
to the securities dealer, if any, involved in the trade, who may therefore be   
deemed an "underwriter" under the Securities Act of 1933, as amended.           

The size of a transaction which determines the applicable sales charge on the   
purchase of Fund shares is determined by adding the amount of the shareholder's 
current purchase plus the cost or current value (whichever is higher) of a      
shareholder's existing investment in one or more of the many funds in the       
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these 
purposes are (a) the open-end investment companies in the Franklin Group (except
Franklin Valuemark Funds and Franklin Government Securities Trust) (the         
"Franklin Group of Funds"); (b) other investment products in the Franklin Group 
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to        
reduction) (the products in subparagraphs (a) and (b) are referred to as the    
"Franklin Group"); and (c) the open-end U.S. registered investment companies in 
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton   
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton  
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a  
Letter of Intent for more than $2,500,000 will be at a 1.00% sales charge until 
cumulative purchases reach $2,500,000 and at the incremental sales charge on the
excess of $2,500,000. Purchases pursuant to the Rights of Accumulation will be  
at the applicable sales charge of 1.00% or more until the additional purchase,  
plus the value of the account or the amount previously invested, less           
redemptions, exceeds $2,500,000, in which event the sales charge on the excess  
will be calculated as stated above. Sales charge reductions based upon purchases
in more than one of the funds in the Franklin Group or Templeton Group (the     
"Franklin/Templeton Group") may be effective only after notification to         
Distributors that the investment qualifies for a discount.                      

Distributors or its affiliates, at their expense, may also provide additional   
compensation to dealers in connection with sales of shares of the Fund and other
funds in the Franklin Group of Funds or the Templeton Group. Compensation may   
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees,                                          

24    

497
77th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 77th
seminars for the public, advertising, sales campaigns and/or shareholder        
services and programs regarding one or more of the Franklin Group of Funds or   
the Templeton Group and other dealer-sponsored programs or events. In some      
instances, this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell significant amounts of such   
shares. Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives   
and members of their families to locations within or outside of the United      
States for meetings or seminars of a business nature. Dealers may not use sales 
of the Fund's shares to qualify for this compensation to the extent such may be 
prohibited by the laws of any state or any self-regulatory agency, such as the  
National Association of Securities Dealers, Inc. None of the aforementioned     
additional compensation is paid for by the Fund or its shareholders.            

Certain officers and Trustees of the 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 or current value (whichever is higher) of   
existing investments in the Franklin/Templeton Group may be combined with the   
amount of the current purchase in determining the sales charge to be paid.      

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

25    

497
78th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 78th
period, there will be an upward adjustment of the sales charge as specified     
below, depending upon the amount actually purchased (less redemptions) during   
the period. An investor who executes a Letter of Intent prior to the change in  
the sales charge structure for the Fund will be entitled to complete the Letter 
at the lower of (i) the new sales charge structure; or (ii) the sales charge    
structure in effect at the time the Letter was filed with the Fund.             

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

26    

497
79th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 79th
sales charge is based upon the aggregate dollar value of shares previously      
purchased and still owned by the group, plus the amount of the current purchase.
For example, if members of the group had previously invested and still held     
$80,000 of Fund shares and now were investing $25,000, the sales charge would be
3.75%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.                                         

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

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

PURCHASES AT NET ASSET VALUE                                                    

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

Shares of the Fund may be purchased at net asset value by trust companies and   
bank trust departments for funds over which they exercise exclusive             
discretionary investment authority and which are held in a fiduciary, agency,   
advisory, custodial or similar capacity. Such purchases are subject to minimum  
requirements with respect to the 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                   

27    

497
80th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 80th
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 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, which 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 included in  
the Statement of Additional Information and in the "Taxation of the Fund and Its
Shareholders" section of this Prospectus and the Statement of Additional        
Information.                                                                    

Shares of the Fund may be purchased at net asset value by investors who have,   
within the past 60 days, redeemed an investment in a registered management      
investment company which charges a contingent deferred sales charge and which   
has investment objectives similar to those of the Fund.                         

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

Shares of the Fund may be purchased at net asset value by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin  
Group of Funds or the Templeton Group (including former participants of the     
Franklin/Templeton Profit Sharing 401(k) plan). In order to exercise this       
privilege a written order for the purchase                                      

28    

497
81st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 81st
of shares of the Fund must be received by Franklin/Templeton Trust Company      
("FTTC"), the Fund or Investor Services, within 120 days after the plan         
distribution. A prospectus outlining the investment objectives and policies of a
fund in which the shareholder wishes to invest may be obtained by calling toll  
free at 1-800/DIAL BEN (1-800/342-5236).                                        

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

GENERAL                                                                         

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

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

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

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

The Franklin IRA is an individual retirement account in which the contributions,
annually limited to the lesser of $2,000 or 100% of an individual's earned      
compensation, accumulate on a tax-deferred basis until withdrawn. Under the     
current tax law, individuals who (or whose spouses) are covered by a company    
retirement plan (termed "active 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 incomes exceed 
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.                                 

29    

497
82nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 82nd
A Franklin Rollover IRA account is designed to maintain the tax-deferred status 
of a qualifying distribution from an employer-sponsored retirement plan, such as
a 401(k) plan or qualified pension plan. Additionally, if the eligible          
distribution is directly transferred to a rollover IRA account, the distribution
will be exempt from 20% mandatory federal withholding, a new withholding law    
enacted in 1993.                                                                

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

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

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%).                  

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

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

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

OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS                    
--------------------------------------------------------------------------------

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).                  

30    

497
83rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 83rd
SHARE CERTIFICATES                                                              

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

CONFIRMATIONS                                                                   

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

AUTOMATIC INVESTMENT PLAN                                                       

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

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

SYSTEMATIC WITHDRAWAL PLAN                                                      

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                                           

31    

497
84th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 84th
may be paid in the interim will be sent to the address of record. Liquidation of
shares may reduce or possibly exhaust the shares in the shareholder's account,  
to the extent withdrawals exceed shares earned through dividends and            
distributions, particularly in the event of a market decline. If the withdrawal 
amount exceeds the total plan balance, the account will be closed and the       
remaining balance will be sent to the shareholder. As with other redemptions, a 
liquidation to make a withdrawal payment is a sale for federal income tax       
purposes. Because the amount withdrawn under the plan may be more than the      
shareholder's actual yield or income, part of the payment may be a return of the
shareholder's investment.                                                       

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

INSTITUTIONAL ACCOUNTS                                                          

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

EXCHANGE PRIVILEGE                                                              
--------------------------------------------------------------------------------

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

EXCHANGES BY MAIL                                                               

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

EXCHANGES BY TELEPHONE                                                          

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

32      

497
85th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 85th
The Telephone Exchange Privilege allows a shareholder to effect exchanges from  
the Fund into an identically registered account in one of the other available   
funds in the Franklin Group of Funds or the Templeton Group. The Telephone      
Exchange Privilege is available only for uncertificated shares or those which   
have previously been deposited in the shareholder's account. The Fund and       
Investor Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."                                                       

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

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

EXCHANGES THROUGH SECURITIES DEALERS                                            

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

ADDITIONAL INFORMATION REGARDING EXCHANGES                                      

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

33    

497
86th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 86th
with the Fund's investment objectives exist immediately. Subsequently, this     
money will be withdrawn from such short-term money market instruments and       
invested in portfolio securities in as orderly a manner as is possible when     
attractive investment opportunities arise.                                      

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

RETIREMENT ACCOUNTS                                                             

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

TIMING ACCOUNTS                                                                 

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

RESTRICTIONS ON EXCHANGES                                                       

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

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

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

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

HOW TO SELL SHARES OF THE FUND                                                  
--------------------------------------------------------------------------------

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

REDEMPTIONS BY MAIL                                                             

Send a written request, signed by all registered owners, to Investor Services,  
at the address shown on the back cover of this Prospectus, and any share        
certificates which have been issued for the shares being redeemed, properly     
endorsed and in order for transfer. The shareholder will then receive from the  
Fund the value of the shares based upon the net asset value per share next      
computed after the written request in proper form is received by the Shareholder
Services Agent. Redemption requests received after the time at which the net    
asset value is calcu-                                                           

34    

497
87th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 87th
lated (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 Service's ability to contact a shareholder promptly when    
necessary will speed the processing of the redemption.                          

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

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

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

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

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

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

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

Where shares to be redeemed are represented by share certificates and the       
redemption proceeds exceed $50,000, 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      

35    

497
88th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 88th
the general partners or a certification for a partnership agreement.            

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

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

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

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

REDEMPTIONS BY TELEPHONE                                                        

Shareholders who complete the Franklin/Templeton Telephone Redemption           
Authorization Agreement (the "Agreement"), included with this Prospectus may    
redeem shares of the Fund by telephone, subject to the Restricted Account       
exception noted under "Telephone Transactions - Restricted Accounts."           
INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT 
THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND       
INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS
GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN 
CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION         
PROCEDURES."                                                                    

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

REDEEMING SHARES THROUGH SECURITIES DEALERS                                     

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

36    

497
89th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 89th
and the dealer's name. Details of the dealer-ordered trade, such as trade date, 
confirmation number, and the amount of shares or dollars, will help speed       
processing of the redemption. The seven-day period within which the proceeds of 
the shareholder's redemption will be sent will begin when the Fund receives all 
documents required to complete ("settle") the repurchase in proper form. The    
redemption proceeds will not earn dividends or interest during the time between 
receipt of the dealer's repurchase order and the date the redemption is         
processed upon receipt of all documents necessary to settle the repurchase.     
Thus, it is in a shareholder's best interest to have the required documentation 
completed and forwarded to the Fund as soon as possible. The shareholder's      
dealer may charge a fee for handling the order. The Statement of Additional     
Information contains more information on the redemption of shares.              

ADDITIONAL INFORMATION REGARDING REDEMPTIONS                                    

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

RETIREMENT ACCOUNTS                                                             

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 Agreement as described under "How to Sell 
Shares of the Fund - Redemptions by Telephone" will be able to redeem shares of 
the Fund.                                                                       

VERIFICATION PROCEDURES                                                         

The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:         
recording all telephone calls requesting account activity by telephone,         
requiring that the caller provide certain personal and/or account information   
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirma-         

37    

497
90th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 90th
tion statement on redemptions to the address of record each time account        
activity is initiated by telephone. So long as the Fund and Investor Services   
follow instructions communicated by telephone which were reasonably believed to 
be genuine at the time of their receipt, neither they nor their affiliates will 
be liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept         
telephone transaction privileges. In any instance where the Fund or Investor    
Services is not reasonably satisfied that instructions received by telephone are
genuine, the requested transaction will not be executed, and neither the Fund   
nor Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.                                            

RESTRICTED ACCOUNTS                                                             

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

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

GENERAL                                                                         

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

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

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

VALUATION OF FUND SHARES                                                        
--------------------------------------------------------------------------------

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

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                                                            

38    

497
91st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 91st
within the range of the most recent bid and ask prices as obtained from one or  
more dealers that make markets in the securities. Portfolio securities which are
traded both in the over-the-counter market and on a stock exchange are valued   
according to the broadest and most representative market as determined by the   
Manager. Portfolio securities underlying actively traded call options are valued
at their market price as determined above. The current market value of any      
option held by the Fund is its last sales price on the relevant exchange prior  
to the time when assets are valued. Lacking any sales that day or if the last   
sale price is outside the bid and ask prices, the options are valued within the 
range of the current closing bid and ask prices if such valuation is believed to
fairly reflect the contract's market value. Other securities for which market   
quotations are readily available are valued at the current market price, which  
may be obtained from a pricing service, based on a variety of factors, including
recent trades, institutional size trading in similar types of securities        
(considering yield, risk and maturity) and/or developments related to specific  
issues. Securities and other assets for which market prices are not readily     
available are valued at fair value as determined following procedures approved  
by the Board of Trustees. All money market instruments with a maturity of more  
than 60 days are valued at current market, as discussed above. All money market 
instruments with a maturity of 60 days or less are valued at their amortized    
cost, which the Board of Trustees has determined in good faith constitutes fair 
value for purposes of complying with the 1940 Act. This valuation method will   
continue to be used until such time as the trustees determine that it does not  
constitute fair value for such purposes. With the approval of trustees, the Fund
may utilize a pricing service, bank or securities dealer to perform any of the  
above described functions.                                                      

Securities denominated in foreign currencies and traded on foreign exchanges or 
in foreign markets will be valued in a similar manner and their value translated
into U.S. dollars at the bid price of their respective currency denomination    
against U.S. dollars last quoted by a major bank or, if no such quotation is    
available, at the rate of exchange determined in accordance with policies       
established in good faith by the Board of Trustees. Because the value of        
securities denominated in foreign currencies must be translated into U.S.       
dollars, fluctuations in the value of such currencies in relation to the U.S.   
dollar will affect the net asset value of Fund shares even though there has not 
been any change in the values of such securities.                               

Because foreign securities markets may close prior to the time the Fund         
determines its net asset value, events affecting the value of portfolio         
securities occurring between the time prices are determined and the time the    
Fund calculates its net asset value will not be reflected in the Fund's         
calculation of net asset value unless Advisers or the Sub-adviser, under        
supervision of the Board of Trustees, determines that the particular event would
materially affect the Fund's net asset value. The Fund's portfolio securities   
listed on foreign exchanges may trade on days other than the Fund's normal      
business days, such as Saturdays. As a result, the net asset value of the Fund  
may be significantly affected by such trading on days when shareholders have no 
access to the Fund.                                                             

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.                                                                     

39    

497
92nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 92nd
From a touch-tone phone, shareholders may obtain current price, yield or        
performance information specific to a fund in the Franklin Group of Funds(R) by 
calling the automated Franklin TeleFACTS system (day or night) at               
1-800/247-1753. Information about the Fund may be accessed by entering Fund Code
90 followed by the # sign, when requested to do so by the automated operator.   

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:                                               

                                                        [Enlarge/Download Table]

                                                    HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME              TELEPHONE NO.          (MONDAY THROUGH FRIDAY)          
-------------------------------------------------------------------------------------
                                                                                     
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.           


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

PERFORMANCE                                                                     
--------------------------------------------------------------------------------

Advertisements, sales literature and communications to shareholders may contain 
various measures of each Fund's performance, including current yield, various   
expressions of total return and current distribution rate. The Fund 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 dis-         

40      

497
93rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 93rd
tribution rate, which may be quoted to shareholders. The current distribution   
rate is computed by dividing the total amount of dividends per share paid by the
Fund during the past 12 months by a current maximum offering price. Under       
certain circumstances, such as when there has been a change in the amount of    
dividend payout or a fundamental change in investment policies, it might be     
appropriate to annualize the dividends paid during the period such policies were
in effect, rather than using the dividends during the past 12 months. The       
current distribution rate differs from the current yield computation because it 
may include distributions to shareholders from sources other than dividends and 
interest, such as premium income from option writing and short-term capital     
gain, and is calculated over a different period of time.                        

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

GENERAL INFORMATION                                                             
--------------------------------------------------------------------------------

REPORTS TO SHAREHOLDERS                                                         

The Fund's fiscal year ends October 31. Annual Reports containing audited       
financial statements of the Trust, including the auditors' report, and          
Semi-Annual Reports containing unaudited financial statements are automatically 
sent to shareholders. Additional copies may be obtained, without charge, upon   
request to the Trust at the telephone number or address set forth on the cover  
page of this Prospectus.                                                        

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

ORGANIZATION                                                                    

The Trust is a Delaware business trust, organized on March 22, 1991. The Trust  
is authorized to issue an unlimited number of shares of beneficial interest,    
with a par value of $.01 per share, in various series. All shares have one vote,
and, when issued for the consideration described in the prospectus, are fully   
paid, non-assessable, and redeemable. Currently, the Trust issues shares in two 
series or funds. Additional series may be added in the future by the Board of   
Trustees.                                                                       

VOTING RIGHTS                                                                   

Shares of each fund vote separately as to issues affecting that fund or the     
Trust, unless otherwise permitted by the 1940 Act. Shares have non-cumulative   
voting rights, which means that holders of more than 50% of the shares voting   
for the election of trustees can elect 100% of the trustees if they choose to do
so, 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. Delaware corporate
law does not require corporations registered as management investment companies 
under the 1940 Act to hold routine annual meetings of shareholders, and the Fund
does not intend to hold such routine annual meetings. The Fund may, however,    
hold a meeting for such purposes as changing fundamental investment             
restrictions, approving a new management agreement or any other matters which   
are required to be acted on by shareholders under the 1940 Act. A meeting may   
also be called by a majority of the Board of Trustees or by shareholders of a   
Fund holding at least ten percent of the shares                                 

41    

497
94th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 94th
entitled to vote at the meeting. Shareholders may receive assistance in         
communicating with other shareholders in connection with the election or removal
of trustees such as that provided in Section 16(c) of the 1940 Act.             

REDEMPTION BY THE FUND                                                          

The Fund reserves the right to redeem, at net asset value, shares of any        
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)  
for a period of at least six months, provided advance notice is given to the    
shareholder. More information is included in the 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 require 
court action to obtain release of the funds until the minor has reached the     
legal age of majority. The account should be registered in the name of one      
"Adult" as custodian for the benefit of the "Minor" under the Uniform Transfer  
or Gifts to Minors Act.                                                         

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

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

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

The Fund may conclusively accept instructions from an owner or the owner's      
nominee listed in publicly available nominee lists, regardless of whether the   

42    

497
95th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 95th
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an         
investor's account, the investor will be deemed to have authorized the use of   
electronic instructions on the account, including, without limitation, those    
initiated through the services of the NSCC, to have adopted as instruction and  
signature any such electronic instructions received by the Fund and the         
Shareholder Services Agent, and to have authorized them to execute the          
instructions without further inquiry. At the present time, such services which  
are available, or which are anticipated to be made available in the near future,
include the "NSCC's Networking," "Fund/SERV," and "ACATS" systems.              

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

IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS                          
--------------------------------------------------------------------------------

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

The Fund reserves the right to (1) refuse to open an account for any person     
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the         
shareholder is in fact incorrect or upon the failure of a shareholder who has   
completed an "awaiting TIN" certification to provide the Fund with a certified  
social security or 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: William T. Howard, Jr., Mark Beveridge and Gary Clemons.  

BIOGRAPHICAL INFORMATION                                                        

William T. Howard, Jr.                                                          
Vice President and Portfolio Manager                                            
Templeton Investment Counsel, Inc.                                              

Mr. Howard is a Chartered  Financial  Analyst and holds a Master of Business    
Administration  degree from Emory University. He earned his Bachelor of Arts    
degree from Rhodes College.  Prior to joining Templeton,  Mr. Howard was a      
portfolio manager and  analyst  with the State of  Tennessee  Consolidated      
Retirement  System.  He started  managing  the Fund upon  joining Templeton in  
1993.                                                                           

Mark R. Beveridge                                                               
Vice President and Portfolio Manager                                            
Templeton Investment Counsel, Inc.                                              

Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of Business 
Administration degree in finance from the University of Miami. He joined        
Templeton in 1985 and started managing the Fund in January 1994.                

43  

497
96th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 96th
Gary Clemmons                                                                   
Portfolio Manager                                                               
Templeton Investment Counsel, Inc.                                              

Mr. Clemmons is a Chartered Financial Analyst and holds a Master of Business    
Administration degree from the University of Wisconsin at Madison. He earned    
his Bachelor of Science degree in Earth Science from the University of Nevada   
at Reno. Mr. Clemmons was a research analyst for Structured Asset Management.   
He joined Templeton in 1990.                                                    

44  

497
97th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 97th
   SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN INTERNATIONAL TRUST

FRANKLIN INTERNATIONAL EQUITY FUND
FRANKLIN PACIFIC GROWTH FUND
DATED MARCH 1, 1994 

1. The caption  "Purchases and Redemptions  Through  Securities  Dealers" is    
changed to be a subcaption under "Additional Information Regarding Fund Shares."

2. The following substitutes for the subsection "Purchases at Net Asset Value"  
under "Additional Information Regarding Fund Shares":                           

ADDITIONAL INFORMATION REGARDING PURCHASES                                

Special Net Asset Value Purchases. As discussed in each Fund's 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 Funds
   at net asset value (without a front-end or 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 will 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 fixed-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 fixed-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 Funds, as described in the Prospectuses. 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 a 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 a 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 Prospectuses, five percent (5%) of the amount of the  
total intended purchase will be reserved in shares of a 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
  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 ap-                                                

497
98th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 98th
 plied to the purchase of additional shares at the offering price applicable
to a single purchase or the dollar amount of the total purchases. If the  
 total purchases, less redemptions, are less than the amount specified under
the Letter, the investor will remit to Distributors an amount equal to the
  difference in the dollar amount of sales charge actually paid and the amount
of sales charge which would have applied to the aggregate purchases if the
  total of such purchases had been made at a single time. Upon such remittance
 the reserved shares held for the investor's account will be deposited to an
account in the name of the investor or delivered to the investor or to the
  investor's order. If within 20 days after written request such difference in
   sales charge is not paid, the redemption of an appropriate number of reserved
shares to realize such difference will be made. In the event of a total   
 redemption of the account prior to fulfillment of the Letter of Intent, the
additional sales charge due will be deducted from the proceeds of the     
redemption, and the balance will be forwarded to the investor.            

   If a Letter of Intent is executed on behalf of a benefit plan (such plans are
described under "Purchases at Net Asset Value" in the Prospectuses), 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.                   

3. 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.                        

497
99th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 99th
FRANKLIN                                                                        
INTERNATIONAL                                                                   
TRUST                                                            [FRANKLIN LOGO]

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

497
100th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 100th
FRANKLIN                                                                        
INTERNATIONAL                                                                   
TRUST                                                            [FRANKLIN LOGO]

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

CONTENTS                                           PAGE                         

About the Funds and the Trust                                                   
(See also each Prospectus                                                     
"About the Fund")................................    1                        

The Funds' Investment Objectives,                                               
Policies and Restrictions (See also                                           
each Prospectus "Investment Objective                                         
and Policies of the Fund").......................    2                        

Officers and Trustees.............................   10                         

Investment Advisory and Other Services                                          
(See also each Prospectus                                                     

"Management of the Fund")........................   13                        

The Funds' Policies Regarding                                                   
Brokers Used on Portfolio Transactions...........   14                        

Additional Information Regarding Fund Shares                                    
(See also each Prospectus "How to                                             
Buy Shares of the Fund", "How to Sell                                         
Shares of the Fund",                                                          
and "Valuation of Fund Shares")..................   16                        

Purchases and Redemptions                                                       
Through Securities Dealers.......................   16                        

Additional Information Regarding                                                
Taxation (See also each Prospectus                                            
"Taxation of the Fund and Its                                                 
Shareholders")...................................   17                        

The Funds' Underwriter............................   20                         

General Information...............................   22                         

Appendix..........................................   26                         

Financial Statements..............................   27                         

ABOUT THE FUNDS AND THE TRUST                                                   
--------------------------------------------------------------------------------

Franklin International Trust (the "Trust") is an open-end management investment 
company consisting of two separate series or funds: the Franklin International  
Equity Fund (the "International Fund") and the Franklin Pacific Growth Fund (the
"Pacific Fund" and together, the "Funds").                                      

The International Fund is a diversified, open-end management series, the        
objective of which is to seek long-term growth of capital. Under normal         
conditions, the International Fund invests at least 65% of its total assets in  
an internationally mixed portfolio of equity securities which trade on markets  
in countries other than the United States ("U.S.") and which (i) are issued by  
companies domiciled in countries other than the U.S. or (ii) are issued by      
companies that derive at least 50% of either their revenues or pre-tax income   
from activities outside of the U.S. Generally, the International Fund's assets  
are invested primarily in common and preferred stock, securities (bonds or      
preferred stock) convertible into common stock, warrants and securities         
representing underlying international securities such as American Depository    
Receipts and European Depository Receipts.                                      

The Pacific Fund is a diversified, open-end management fund, the objective of   
which is to seek long-term growth of capital. Under normal conditions, the      
Pacific Fund invests at least 65% of its total assets in equity securities which
trade on markets in the Pacific Rim, that is (i) issued by companies domiciled  
in the Pacific Rim or (ii) issued by companies that derive at least 50% of      
either their revenues or pre-tax income from activities in the Pacific Rim.     
Securities in which the Pacific Fund may invest include common and preferred    
stock, securities (bonds or preferred stock) convertible into common stock,     
warrants and securities representing underlying international securities such as
American Depository Receipts.                                                   

Prospectuses for each Fund, dated March 1, 1994, as may be amended from time to 
time, which provide the basic information you should know before investing in   
either Fund, may be obtained without charge from the Trust at the address listed
above or from the Funds' principal underwriter, Franklin/Templeton Distributors,
Inc., 777 Mariners Island Blvd., P.O. Box 777, San Mateo, California 94403-7777.

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

1 

497
101st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 101st
Franklin International Trust is an open-end management investment company,      
commonly called a "mutual fund," and registered as such under the Investment    
Company Act of 1940, as amended (the "1940 Act"). The Trust has two series of   
shares of beneficial interest, one series representing shares of beneficial     
interest in the International Fund and the other series representing shares of  
beneficial interest in the Pacific Fund.                                        

Each Fund is managed by Franklin Advisers,  Inc. (the "Manager" or "Advisers")  
and by Templeton  Investment  Counsel,  Inc. ("Sub-adviser" or "TICI")          
(together, the "Funds' Advisers").                                              

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES                                   
--------------------------------------------------------------------------------

As noted in their respective Prospectuses, each Fund's principal investment     
objective is to seek long-term growth of capital. That is, each Fund seeks to   
purchase securities with the potential to increase in value, so that shares of  
each Fund will in turn increase in value.                                       

Foreign Investments. Each Fund invests in securities of foreign issuers.        
Investing in the securities of foreign issuers involves certain special         
considerations, including those set forth below, which are not typically        
associated with investing in U.S. issuers. Since investments in the securities  
of foreign issuers may involve currencies of foreign countries, and since each  
Fund may temporarily hold funds in bank deposits in foreign currencies during   
completion of investment programs, a Fund may be affected favorably or          
unfavorably by changes in currency rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies.      

Since foreign companies are not subject to uniform accounting, auditing and     
financial reporting practices and requirements comparable to those applicable to
U.S. companies, there may be less publicly available information about a foreign
company than about a U.S. company. Volume and liquidity in most foreign bond    
markets are less than in the U.S., and securities of many foreign companies are 
less liquid and more volatile than securities of comparable U.S. companies.     
Fixed commissions on foreign securities exchanges are generally higher than     
negotiated commissions on U.S. exchanges, although each Fund endeavors to       
achieve the most favorable net results on their portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,   
brokers, dealers and listed companies than in the U.S., thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for    
portfolio securities.                                                           

Foreign markets also have different clearance and settlement procedures, and in 
certain markets there have been times when settlements have been unable to keep 
pace with the volume of securities transactions, making it difficult to conduct 
such transactions. Such delays in settlement could result in temporary periods  
when a portion of the assets of each Fund is uninvested and no return is earned 
thereon. The inability of each Fund to make intended security purchases due to  
settlement problems could cause a Fund to miss attractive investment            
opportunities. Losses to each Fund due to subsequent declines in the value of   
portfolio securities, or losses arising out of a Fund's inability to fulfill a  
contract to sell such securities, could result in potential liability to the    
Fund. In addition, with respect to certain foreign countries, there is the      
possibility of expropriation or confiscatory taxation, political or social      
instability, or diplomatic developments which could affect a Fund's investments 
in those countries. Moreover, individual foreign economies may differ favorably 
or unfavorably from the U.S. economy in such respects as growth of gross        
national product, rate of inflation, capital reinvestment, resource             
self-sufficiency and balance of payments position.                              

As noted in each Fund's prospectus, on occasion each Fund may invest more than  
25% of its assets in the securities of issuers in one industrialized country    
which, in the view of the Sub-adviser, poses no unique investment risk.         
Consistent with this policy, each Fund may invest up to 30% of its assets in    
securities issued by Hong Kong companies. However, neither Fund will invest more
than 25% of its assets in any one industry or securities issued by any foreign  
government.                                                                     

Forward Foreign Currency Exchange Contracts. Each Fund may enter into forward   
foreign currency exchange contracts in several circumstances, as indicated in   
the Funds' Prospectuses. Additionally, when the Funds' Advisers believe that the
currency of a particular foreign country may suffer a substantial decline       
against the U.S. dollar, a Fund may enter into a forward contract to sell, for a
fixed amount of dollars, the amount of foreign currency approximating the value 
of some or all of a Fund's portfolio securities denominated in such foreign     
currency. The precise matching of the forward contract amounts and the value of 
the securities involved is not generally possible because the future value of   
such securities in foreign currencies changes as a consequence of market        
movements in the value of those securities between the date on which the        
contract is entered into and the date it matures. Using forward contracts to    
protect the value of a Fund's portfolio securities against a decline in the     
value of a currency does not                                                    

2   

497
102nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 102nd
eliminate fluctuations in the underlying prices of the securities. It simply    
establishes a rate of exchange which each Fund can achieve at some future point 
in time. The precise projection of short-term currency market movements is not  
possible, and short-term hedging provides a means of fixing the dollar value of 
only a portion of each Fund's foreign assets.                                   

Each Fund may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a       
different currency if the Funds' Advisers determine that there is a pattern of  
correlation between the two currencies. Each Fund may also purchase and sell    
forward contracts (to the extent they are not deemed "commodities") for         
non-hedging purposes when the Funds' Advisers anticipate that the foreign       
currency will appreciate or depreciate in value, but securities denominated in  
that currency do not present attractive investment opportunities and are not    
held in a Fund's portfolio.                                                     

The Funds' custodian will place cash or liquid high grade debt securities (i.e.,
securities rated in one of the top three ratings categories by Moody's Investors
Service ("Moody's") or Standard & Poor's Corporation ("S&P") or, if unrated,    
deemed by the Funds' Advisers to be of comparable credit quality) into a        
segregated account of each Fund in an amount equal to the value of the Fund's   
total assets committed to the consummation of forward foreign currency exchange 
contracts requiring each Fund to purchase foreign currencies. If the value of   
the securities placed in the segregated account declines, additional cash or    
securities is placed in the account on a daily basis so that the value of the   
account equals the amount of each Fund's commitments with respect to such       
contracts. The segregated account is marked-to-market on a daily basis. Although
the contracts are not presently regulated by the Commodity Futures Trading      
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
these contracts. In such event, a Fund's ability to utilize forward foreign     
currency exchange contracts may be restricted.                                  

Each Fund generally will not enter into a forward contract with a term of       
greater than one year.                                                          

While each Fund will enter into forward contracts to reduce currency exchange   
rate risks, transactions in such contracts involve certain other risks. Thus,   
while each Fund may benefit from such transactions, unanticipated changes in    
currency prices may result in a poorer overall performance for each Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect   
correlation between each Fund's portfolio holdings of securities denominated in 
a particular currency and forward contracts entered into by the Fund. Such      
imperfect correlation may cause a Fund to sustain losses which will prevent the 
Fund from achieving a complete hedge or expose the Fund to risk of foreign      
exchange loss.                                                                  

Writing and Purchasing Currency Call and Put Options. Each Fund may write       
covered put and call options and purchase put and call options on foreign       
currencies for the purpose of protecting against declines in the dollar value of
portfolio securities and against increases in the dollar cost of securities to  
be acquired. Each Fund may use options on currency to cross-hedge, which        
involves writing or purchasing options on one currency to hedge against changes 
in exchange rates for a different currency with a pattern of correlation. In    
addition, a Fund may purchase call options on currency for non-hedging purposes 
when the Fund's Advisers anticipate that the currency will appreciate in value, 
but the securities denominated in that currency do not present attractive       
investment opportunities and are not included in a Fund's portfolio.            

A call option written by a Fund obligates the Fund to sell specified currency to
the holder of the option at a specified price at any time before the expiration 
date. A put option written by a Fund would obligate the Fund to purchase        
specified currency from the option holder at a specified time before the        
expiration date. The writing of currency options involves a risk that a Fund    
will, upon exercise of the option, be required to sell currency subject to a    
call at a price that is less than the currency's market value or be required to 
purchase currency subject to a put at a price that exceeds the currency's market
value.                                                                          

A Fund may terminate its obligations under a call or put option by purchasing an
option identical to the one it has written. Such purchases are referred to as   
"closing purchase transactions." A Fund would also be able to enter into closing
sale transactions in order to realize gains or minimize losses on options       
purchased by the Fund.                                                          

A Fund would normally purchase call options in anticipation of an increase in   
the dollar value of the currency in which securities to be acquired by the Fund 
are denominated. The purchase of a call option would entitle a Fund, in return  
for the premium paid, to purchase specified currency at a specified price during
the option period. A Fund would ordinarily realize a gain if, during the option 
period, the value of such currency exceeded the sum of the exercise price, the  
premium paid and transaction costs; otherwise the Fund would realize either no  
gain or a loss on the purchase of the call option.                              

3   

497
103rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 103rd
A Fund would normally purchase put options in anticipation of a decline in the  
dollar value of currency in which securities in its portfolio are denominated   
("protective puts"). The purchase of a put option would entitle a Fund, in      
exchange for the premium paid, to sell specific currency at a specified price   
during the option period. The purchase of protective puts is designed merely to 
offset or hedge against a decline in the dollar value of a Fund's portfolio     
securities due to currency exchange rate fluctuations. A Fund would ordinarily  
realize a gain if, during the option period, the value of the underlying        
currency decreased below the exercise price sufficiently to more than cover the 
premium and transaction costs; otherwise the Fund would realize either no gain  
or a loss on the purchase of the put option. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the 
value of the underlying currency.                                               

OPTIONS ON SECURITIES AND SECURITIES INDICES                                    

Writing Covered Options. Each Fund may write (sell) covered call and put options
on any securities in which it may invest. Each Fund may purchase and write such 
options on securities that are listed on domestic or foreign securities         
exchanges or traded in the over-the-counter market. All call options written by 
each Fund are covered, which means that each Fund will own the securities       
subject to the option so long as the option is outstanding. The purpose of      
writing covered call options is to realize greater income than would be realized
on portfolio securities transactions alone. However, in writing covered call    
options for additional income, a Fund may forego the opportunity to profit from 
an increase in the market price of the underlying security.                     

All put options written by a Fund will be covered, which means that each Fund   
will have deposited with its custodian cash, U.S. government securities or other
high-grade debt securities (i.e., securities rated in one of the top three      
categories by Moody's or S&P or, if unrated, deemed by the Funds' Advisers to be
of comparable credit quality) with a value at least equal to the exercise price 
of the put option. The purpose of writing such options is to generate additional
income for each Fund. However, in return for the option premium, each Fund      
accepts the risk that it may be required to purchase the underlying securities  
at a price in excess of the securities market value at the time of purchase.    

Each Fund may terminate its obligations under a written call or put option by   
purchasing an option identical to the one it has written. Such purchases are    
referred to as "closing purchase transactions."                                 

Purchasing Options. Each Fund may purchase put and call options on any          
securities in which it may invest or options on any securities index based on   
securities in which it may invest. A Fund would also be able to enter into      
closing sale transactions in order to realize gains or minimize losses on       
options it has purchased.                                                       

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 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 its obligation to purchase the underlying security at the exercise      
price, which will usually exceed the then market value of the underlying        
security.                                                                       

A Fund would normally purchase call options in anticipation of an increase in   
the market value of securities of the type in which it may invest. The purchase 
of a call option would entitle the Fund, in return for the premium paid, to     
purchase specified securities at a specified price during the option period. A  
Fund would ordinarily realize a gain if, during the option period, the value of 
such securities exceeded the sum of the exercise price, the premium paid and    
transaction costs. Otherwise the Fund would realize either no gain or a loss on 
the purchase of the call option.                                                

Risks Associated With Options Transactions. There is no assurance that a liquid 
secondary market on a domestic or foreign options exchange will exist for any   
particular exchange-traded option or at any particular time. If a Fund is unable
to effect a closing purchase transaction with respect to covered options it has 
written, the Fund will not be able to sell the underlying securities or dispose 
of assets held in a segregated account until the options expire or are          
exercised. Similarly, if a Fund is unable to effect a closing sale transaction  
with respect to options it has purchased, it would have to exercise the options 
in order to realize any profit and will incur transaction costs upon the        
purchase or sale of underlying securities.                                      

Reasons for the absence of a liquid secondary market on an exchange include the 
following: (i) there may be insufficient trading interest in certain options;   

4   

497
104th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 104th
(ii) restrictions may be imposed by an exchange on opening transactions or      
closing transactions or both; (iii) trading halts, suspensions or other         
restrictions may be imposed with respect to particular classes or series of     
options; (iv) unusual or unforeseen circumstances may interrupt normal          
operations on an exchange; (v) the facilities of an exchange or the Options     
Clearing Corporation (the "OCC") may not at all times be adequate to handle     
current trading volume; or (vi) one or more exchanges could, for economic or    
other reasons, decide or be compelled at some future date to discontinue the    
trading of options (or a particular class or series of options), in which event 
the secondary market on that exchange (or in that class or series of options)   
would cease to exist, although outstanding options on that exchange that had    
been issued by the OCC as a result of trades on that exchange would continue to 
be exercisable in accordance with their terms.                                  

Each Fund may purchase and sell both options that are traded on U.S. and foreign
exchanges and options traded over-the-counter with broker-dealers who make      
markets in these options. The ability to terminate over-the-counter options is  
more limited than with exchange-traded options and may involve the risk that    
broker/dealers participating in such transactions will not fulfill their        
obligations. Until such time as the staff of the Securities and Exchange        
Commission (the "SEC") changes its position, each Fund will treat purchased     
over-the-counter options and all assets used to cover written over-the-counter  
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid       
securities may be calculated with reference to a formula approved by the staff  
of the SEC.                                                                     

Special Risks Associated With Options on Currency. An exchange-traded options   
position may be closed out only on an options exchange which provides a         
secondary market for an option of the same series. Although each Fund will      
generally purchase or write only those options for which there appears to be an 
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option or at any particular time. For 
some options, no secondary market on an exchange may exist. In such event, it   
might not be possible to effect closing transactions in particular options, with
the result that a Fund would have to exercise its options in order to realize   
any profit and would incur transaction costs upon the sale of underlying        
securities pursuant to the exercise of put options. If a Fund as a covered call 
option writer is unable to effect a closing purchase transaction in a secondary 
market, it will not be able to sell the underlying currency (or security        
denominated in that currency) until the option expires or it delivers the       
underlying currency upon exercise.                                              

There is no assurance that higher than anticipated trading activity or other    
unforeseen events might not, at times, render certain of the facilities of the  
OCC inadequate, and thereby result in the institution by an exchange of special 
procedures which may interfere with the timely execution of customers' orders.  

Each Fund may purchase and write over-the-counter options to the extent         
consistent with its limitation on investments in restricted securities, as      
described in its Prospectus. Trading in over-the-counter options is subject to  
the risk that the other party will be unable or unwilling to close-out options  
purchased or written by a Fund.                                                 

The amount of the premiums which each Fund may pay or receive may be adversely  
affected as new or existing institutions, including other investment companies, 
engage in or increase their option purchasing and writing activities.           

Futures Contracts and Options on Futures Contracts. To hedge against changes in 
interest rates, securities prices or currency exchange rates, each Fund may     
purchase and sell various kinds of futures contracts. Each Fund may also enter  
into closing purchase and sale transactions with respect to any such contracts  
and options. The futures contracts may be based on various securities (such as  
U.S. government securities), securities indices, foreign currencies and other   
financial instruments and indices. Each Fund will engage in futures and related 
options transactions only for bona fide hedging or other appropriate risk       
management purposes as defined below. All futures contracts entered into by each
Fund are traded on U.S. exchanges or boards of trade that are licensed and      
regulated by the CFTC or on foreign exchanges.                                  

Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an     
agreed price during a designated month (or to deliver the final cash settlement 
price, in the case of a contract relating to an index or otherwise not calling  
for physical delivery at the end of trading in the contract).                   

When interest rates are rising or securities prices are falling, each Fund can  
seek, through the sale of futures contracts, to offset a decline in the value of

5   

497
105th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 105th
its current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better   
rates or prices than might later be available in the market when it affects     
anticipated purchases. Similarly, a Fund can sell futures contracts on a        
specified currency to protect against a decline in the value of such currency   
and its portfolio securities which are denominated in such currency. Each Fund  
can purchase futures contracts on foreign currency to fix the price in U.S.     
dollars of a security denominated in such currency that a Fund has acquired or  
expects to acquire.                                                             

Although futures contracts by their terms generally call for the actual delivery
or acquisition of underlying 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 such delivery. The contractual obligation is     
offset 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 the cash value of the  
index underlying the contractual obligations. A Fund may incur brokerage fees   
when it purchases or sells futures contracts.                                   

Positions taken in the futures markets are not normally held to maturity, but   
are instead liquidated through offsetting transactions which may result in a    
profit or a loss. While each Fund's futures contracts on securities or currency 
will usually be liquidated in this manner, a Fund may instead make or take      
delivery of the underlying securities or currency whenever it appears           
economically advantageous for it to do so. A clearing corporation associated    
with the exchange on which futures on securities or currency are traded         
guarantees that, if still open, the sale or purchase will be performed on the   
settlement date.                                                                

Hedging Strategies With Futures. Hedging by use of futures contracts seeks to   
establish with more certainty than would otherwise be possible with respect to  
the effective price, rate of return or currency exchange rate on portfolio      
securities or securities that a Fund owns or proposes to acquire. A Fund may,   
for example, take a "short" position in the futures market by selling futures   
contracts in order to hedge against an anticipated rise in interest rates or a  
decline in market prices of foreign currency rates that would adversely affect  
the dollar value of the Fund's portfolio securities. Such futures contracts may 
include contracts for the future delivery of securities held by a Fund or       
securities with characteristics similar to those of a Fund's portfolio          
securities. Similarly, a Fund may sell futures contracts on currency in which   
its portfolio securities are denominated or in one currency to hedge against    
fluctuations in the value of securities denominated in a different currency if  
there is an established historical pattern of correlation between the two       
currencies. If, in the opinion of the Funds' Advisers, there is a sufficient    
degree of correlation between price trends for a Fund's portfolio securities and
futures contracts based on other financial instruments, securities indices or   
other indices, a Fund may also enter into such futures contracts as part of its 
hedging strategy. Although under some circumstances prices of securities in a   
Fund's portfolio may be more or less volatile than prices of such futures       
contracts, the Funds' Advisers will attempt to estimate the extent of this      
difference in volatility based on historical patterns and to compensate for it  
by having each Fund enter into a greater or fewer number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting   
each Fund's securities portfolio. When hedging of this character is successful, 
any depreciation in the value of the portfolio securities will substantially be 
offset by appreciation in the value of the futures position. On the other hand, 
any unanticipated appreciation in the value of a Fund's portfolio securities    
would be substantially offset by a decline in the value of the futures position.

On other occasions, a Fund may take a "long" position by purchasing such futures
contracts. This would be done, for example, when a Fund anticipates the         
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable  
market to be less favorable than prices or rates that are currently available.  

The CFTC and U.S. commodities 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 Funds do not believe that these trading and positions limits  
will have an adverse impact on its strategies for hedging its securities.       

Options on Futures Contracts. The acquisition of put and call options on futures
contracts will give each Fund the right (but not the obligation), for a         
specified price, to sell or to purchase, respectively, the underlying futures   
contract at any time during the option period. As the purchaser of an option on 
a futures contract, a Fund obtains the benefit of the futures                   

6   

497
106th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 106th
position if prices move in a favorable direction but limits its risk of loss in 
the event of an unfavorable price movement to the loss of the premium and       
transaction costs.                                                              

The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call   
option, a Fund becomes obligated, in exchange for the premium, to sell a futures
contract, which may have a value higher than the exercise price. Conversely, the
writing of a put option on a futures contract generates a premium which may     
partially offset an increase in the price of securities that a Fund intends to  
purchase. However, a Fund becomes obligated to purchase a futures contract,     
which may have a value lower than the exercise price. Thus, the loss incurred by
a Fund in writing options on futures is potentially unlimited and may exceed the
amount of the premium received. Each Fund will incur transaction costs in       
connection with the writing of options on futures.                              

The holder or writer of an option on a futures contract may terminate its       
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. Each Fund's     
ability to establish and close out positions on such options will be subject to 
the development and maintenance of a liquid market.                             

Each Fund may use options on futures contracts solely for bona fide hedging or  
other appropriate risk management purposes as defined below.                    

Other Considerations. Each Fund will engage in futures and related options      
transactions only for bona fide hedging or other appropriate risk management    
purposes in accordance with CFTC regulations which permit principals of an      
investment company registered under the 1940 Act to engage in such transactions 
without registering as commodity pool operators. "Appropriate risk management   
purposes" means activities in addition to bona fide hedging which the CFTC deems
appropriate for operators of entities, including registered investment          
companies, that are excluded from the definition of commodity pool operator.    
Each Fund is not permitted to engage in speculative futures trading. Each Fund  
will determine that the price fluctuations in the futures contracts and options 
on futures used for hedging purposes are substantially related to price         
fluctuations in securities held by a Fund or which it expects to purchase.      
Except as stated below, each Fund's futures transactions will be entered into   
for traditional hedging purposes - that is, futures contracts will be sold to   
protect against a decline in the price of securities it intends to purchase (or 
the currency will be purchased to protect a Fund against an increase in the     
price of the securities (or the currency in which they are denominated)). As    
evidence of this hedging intent, each Fund expects that on 75% or more of the   
occasions on which it takes a long futures (or option) position involving the   
purchase of futures contracts, the Fund will have purchased, or will be in the  
process of purchasing, equivalent amounts of related securities (or assets      
denominated in the related currency) in the cash market at the time when the    
futures (or option) position is closed out. However, in particular cases when it
is economically advantageous for a Fund to do so, a long futures position may be
terminated (or an option may expire) without the corresponding purchase of      
securities or other assets. In the alternative, a CFTC regulation permits each  
Fund to elect to comply with a different test, under which (i) each Fund's long 
futures positions will be used as part of its portfolio management strategy and 
will be incidental to its activities in the underlying cash market and (ii) the 
aggregate initial margin and premiums required to establish such positions will 
not exceed 5% of the liquidation value of the Fund's investment portfolio (a)   
after taking into account unrealized profits and losses on any such contracts   
into which the Fund has entered and (b) excluding the in-the-money amount with  
respect to any option that is in-the-money at the time of purchase.             

Each Fund will engage in transactions in futures contracts and related options  
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code for maintaining its qualification as a regulated          
investment company for federal income tax purposes. (See "Taxation of the Fund  
and Its Shareholders" in each Fund's Prospectus.)                               

Each Fund will not purchase or sell futures contracts or purchase or sell       
related options, except for closing purchase or sale transactions, if           
immediately thereafter the sum of the amount of margin deposits on each Fund's  
outstanding futures and related options positions and the amount of premiums    
paid for outstanding options on futures would exceed 5% of the market value of  
the Fund's total assets. These transactions involve brokerage costs, require    
margin deposits and, in the case of contracts and options obligating a Fund to  
purchase securities or currencies, require the Fund to segregate assets to cover
such contracts and options.                                                     

While transactions in futures contracts and options on futures may reduce       
certain risks, such transactions themselves entail certain other risks. Thus,   
while each Fund may benefit from the use of futures and options on futures,     
unanticipated changes in interest rates, securities prices or currency exchange 

7 

497
107th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 107th
rates may result in a poorer overall performance for each Fund than if it had   
not entered into any futures contracts or options transactions. In the event of 
an imperfect correlation between a future position and portfolio position which 
is intended to be protected, the desired protection may not be obtained and the 
Fund may be exposed to risk of loss.                                            

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

Perfect correlation between each Fund's futures positions and portfolio         
positions may be difficult to achieve because no futures contracts based on     
corporate fixed-income securities are currently available. In addition, it is   
not possible to hedge fully or perfectly against currency fluctuations affecting
the value of securities denominated in foreign currencies because the value of  
such securities is likely to fluctuate as a result of independent factors not   
related to currency fluctuations.                                               

OTHER INVESTMENT POLICIES                                                       

Securities which are acquired by a Fund outside the U.S. and which are publicly 
traded in the U.S. or on a foreign securities exchange or in a foreign          
securities market are not considered by the Fund to be illiquid assets, so long 
as the Fund acquires and holds the securities with the intention of reselling   
the securities in the foreign trading market, the Fund reasonably believes it   
can readily dispose of the securities for cash in the U.S. or foreign market,   
and current market quotations are readily available. Investments may be in      
securities of foreign issuers, whether located in developed or undeveloped      
countries.                                                                      

Investments in foreign securities where delivery takes place outside the U.S.   
will have to be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any     
dividend or interest income) and laws limiting the amount and types of foreign  
investments. Changes of governmental administrations or of economic or monetary 
policies, in the U.S. or abroad, or changed circumstances in dealings between   
nations, or currency convertibility or exchange rates could result in investment
losses for each Fund. Investments in foreign securities may also subject each   
Fund to losses due to nationalization, expropriation or differing accounting    
practices and treatments. Moreover, investors should recognize that foreign     
securities are often traded with less frequency and volume, and therefore may   
have greater price volatility, than is the case with many U.S. securities.      
Notwithstanding the fact that each Fund generally intends to acquire the        
securities of foreign issuers where there are public trading markets,           
investments by either Fund in the securities of foreign issuers may tend to     
increase the risks with respect to the liquidity of a Fund's portfolio and a    
Fund's ability to meet a large number of shareholder redemption requests should 
there be economic or political turmoil in a country in which a Fund has a       
substantial portion of its assets invested or should relations between the U.S. 
and foreign countries deteriorate markedly. Furthermore, the reporting and      
disclosure requirements applicable to foreign issuers may differ from those     
applicable to domestic issuers, and there may be difficulties in obtaining or   
enforcing judgments against foreign issuers.                                    

Loans of Portfolio Securities. As discussed in each Prospectus, the Funds may   
engage in loans of their portfolio securities. Up to one third of either Fund's 
portfolio securities may be loaned to qualified borrowers who deposit and       
maintain with the Fund cash collateral with a value at least equal to the value 
of the securities loaned.                                                       

Repurchase Transactions. Each Fund may enter into repurchase agreements. A      
repurchase agreement is an agreement in which the seller of a security agrees to
repurchase the security sold at a mutually agreed upon time and price. Under the
1940 Act, a repurchase agreement is deemed to be the loan of money by the Fund  
to the seller, collateralized by the underlying security. The 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 a Fund invest in         
repurchase agreements for more than one year. However, the securities which are 
subject                                                                         

8 

497
108th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 108th
to repurchase agreements may have maturity dates in excess of one year from the 
effective date of the repurchase agreements. The transaction requires the       
initial collateralization of the seller's obligation by securities with a market
value, including accrued interest, equal to at least 102% of the dollar amount  
invested by the Fund, with the value marked-to-market daily to maintain 100%    
coverage. A default by the seller might cause the Fund to experience a loss or  
delay in the liquidation of the collateral securing the repurchase agreement.   
Each Fund might also incur disposition costs in liquidating the collateral. Each
Fund will make payment for such securities only upon physical delivery or       
evidence of book entry transfer to the account of their custodian bank. Each    
Fund may not enter into a repurchase agreement with more than seven days        
duration if, as a result, the market value of each Fund's net assets, together  
with investments in other securities deemed to be not readily marketable, would 
be invested in such repurchase agreements in excess of each Fund's policy on    
investments in illiquid securities.                                             

Each Fund reserves the right to invest up to 10% of its net assets in illiquid  
securities. It is the current policy of each Fund, however (which may be changed
without the approval of either Fund's shareholders), to limit any such          
investments to 5% of each Fund's net assets. Generally an "illiquid security" is
any security that cannot be disposed of promptly and in the ordinary course of  
business at approximately the amount at which the Fund has valued the           
instrument. Subject to this limitation, the Board of Trustees has authorized    
each 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 Fund's Manager or Sub-adviser, as the 
case may be, 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 (the "1933 Act"), and for which a liquid     
institutional market has developed. The Board of Trustees reviews any           
determination by the Funds' Advisers to treat a restricted security as liquid on
a monthly basis, including the Funds' Advisers' 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     
Funds' Advisers and the Board of Trustees will take into account the following  
factors: (i) the frequency of trades and quotes for the security; (ii) the      
number of dealers willing to purchase or sell the security and the number of    
other potential purchasers; (iii) dealer undertakings to make a market in the   
security; and (iv) the nature of the security and the nature of the marketplace 
trades (e.g., the time needed to dispose of the security, the method of         
soliciting offers and the mechanics of transfer). To the extent a Fund invests  
in restricted securities that are deemed liquid, the general level of           
illiquidity in the applicable Fund may be increased if qualified institutional  
buyers become uninterested in purchasing these securities or the market for     
these securities contracts.                                                     

WHEN WILL EACH FUND ENGAGE IN SECURITIES TRANSACTIONS?                          

Normally, each Fund purchases securities for investment with a view to long-term
appreciation. Each Fund may, however, on occasion purchase securities with the  
expectation of realizing gains over the short term. Changes in particular       
portfolio holdings may be made whenever it is considered that a security no     
longer has the optimum growth potential or has reached its anticipated level of 
performance, or that another security appears to have a relatively greater      
opportunity for capital appreciation, and will be made without regard to the    
length of time a security has been held. The differences between the tax        
treatment of long-term gains and short-term gains may, however, be considered in
determining the timing of sales of portfolio securities.                        

INVESTMENT RESTRICTIONS                                                         

Each Fund has adopted the following restrictions as fundamental policies, which 
means that they may not be changed without the approval of a majority of such   
Fund's shareholders. In order to change any of these restrictions, the lesser of
(i) 67% or more of the voting securities of such Fund 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 such Fund must vote to make the change.                    

Each Fund will not:                                                             

1. Purchase the securities of any one issuer (other than cash, cash items and 
obligations of the U.S. government) if immediately thereafter and as a result of
the purchase, with respect to 75% of its total assets, the Fund would (a) have  
invested more than 5% of the value of its total assets in the securities of the 
issuer, or (b) hold more than 10% of any or all classes of the outstanding      
voting securities of any one issuer;                                            

2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usu-       

9 

497
109th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 109th
ally acquired by institutional investors or through loans of either Fund's      
portfolio securities, or to the extent the entry into a repurchase agreement may
be deemed a loan;                                                               

3. Borrow money, except for temporary or emergency (but not investment)       
purposes from banks and only in an amount up to 10% of the value of the assets. 
While borrowings exceed 5% of a Fund's total assets, it will not make any       
additional investments;                                                         

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

5. Underwrite securities of other issuers, except insofar as a Fund may be    
technically deemed an underwriter under the federal securities laws in          
connection with the disposition of portfolio securities;                        

6. Purchase illiquid securities, including illiquid securities which, at the  
time of acquisition, could be disposed of publicly by each Fund only after      
registration under the 1933 Act, if as a result more than 10% of their net      
assets would be invested in such illiquid securities;                           

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

8. Maintain a margin account with a securities dealer, except that either Fund
may obtain such short-term credits as may be necessary for the clearance of     
purchases and sales of securities, nor invest in commodities or commodities     
contracts or interests (other than publicly-traded equity securities) or leases 
with respect to any oil, gas or other mineral exploration or development        
programs, except that either Fund may enter into contracts for hedging purposes 
and make margin deposits in connection therewith;                               

9. Effect short sales, unless at the time the Fund owns securities equivalent 
in kind and amount to those sold;                                               

10. Invest more than 5% of total assets in companies which have a record of less
than three years continuous operation, including the operations of any          
predecessor companies;                                                          

11. Invest directly in real estate or real estate limited partnerships (although
either Fund may invest in real estate investment trusts) or in the securities of
other investment companies, except to the extent permitted under the 1940 Act or
pursuant to any exemptions therefrom, including any exemption permitting either 
Fund to invest in shares of one or more money market funds managed by Advisers  
or its affiliates, or except that securities of another investment company may  
be acquired pursuant to a plan of reorganization, merger, consolidation or      
acquisition; or                                                                 

12. Purchase or retain in either Fund's portfolio any security if any officer,  
trustee or security holder of the issuer is at the same time an officer, trustee
or employee of the Trust or of its investment adviser and such person owns      
beneficially more than 1/2 of 1% of the securities, and if all such persons     
owning more than 1/2 of 1% own more than 5% of the outstanding securities of the
issuer.                                                                         

In addition to these fundamental policies, it is the present policy of the Trust
(which may be changed without the approval of either Fund's shareholders) not to
pledge, mortgage or hypothecate either Fund's assets as security for loans nor  
to engage in joint or joint and several trading accounts in securities, except  
that an order to purchase or sell may be combined with orders from other persons
to obtain lower brokerage commissions. In addition, neither Fund will purchase  
puts, calls, straddles, spreads or any combination thereof if by reason thereof 
the value of its aggregate investment in such securities will exceed 5% of its  
total assets.                                                                   

Pursuant to an undertaking given to the Texas State Securities Board, neither   
the International Fund nor the Pacific Fund will invest in real estate limited  
partnerships or in interests (other than publicly traded equity securities) in  
oil, gas, or other mineral leases, exploration or development.                  

If a percentage restriction contained herein is adhered to at the time of       
investment, a later increase or decrease in the percentage resulting from a     
change in the value of portfolio securities or the amount of net assets will not
be considered a violation of any of the foregoing restrictions.                 

For the fiscal years ended October 31, 1992 and October 31, 1993, the rates of  
portfolio turnover equaled 48.78% and 52.99%, respectively, for the             
International Fund and 62.96% and 47.52%, respectively, for the Pacific Fund.   

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

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

10  

497
110th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 110th
                                                        [Enlarge/Download Table]


                                 Positions and Offices                                                   
  Name and Address               with the Fund           Principal Occupations During Past Five Years    
---------------------------------------------------------------------------------------------------------
                                                                                                         
  Frank H. Abbott, III           Trustee                 President and Director, Abbott Corporation      
  1045 Sansome St.                                       (an investment company); Director, Vacu-Dry     
  San Francisco, CA 94111                                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(R).                                       

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

  Harris J. Ashton               Trustee                 President, Chief Executive Officer and          
  General Host Corporation                               Chairman of the Board, General Host             
  Metro Center, 1 Station Place                          Corporation (nursery and craft centers);        
  Stamford, CT 06904-2045                                Director, RBC Holdings, Inc. (a bank            
                                                         holding company) and Bar-S Foods; 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.       

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

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

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

  David W. Garbellano            Trustee                 Private Investor; Assistant                     
  111 New Montgomery St., #402                           Secretary/Treasurer and Director, Berkeley      
  San Francisco, CA 94105                                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.                        

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

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

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

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

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

11

497
111th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 111th
                                                        [Enlarge/Download Table]

                                 Positions and Offices                                                   
  Name and Address               with the Fund               Principal Occupations During Past Five Years
---------------------------------------------------------------------------------------------------------
                                                                                                         
  Frank W. T. LaHaye             Trustee                     General Partner, Peregrine Associates and   
  20833 Stevens Creek Blvd.                                  Miller & LaHaye, which are General Partners 
  Suite 102                                                  of Peregrine Ventures and Peregrine         
  Cupertino, CA 95014                                        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                                     (financial services); Director,             
  Bethesda, MD 20817                                         Fundamerican Enterprises Holdings, Inc.,    
                                                             Martin Marietta Corporation, and MCI        
                                                             Communications Corporation; director of     
                                                             certain of the investment companies in the  
                                                             Templeton Group of Funds; and director,     
                                                             trustee or managing general partner, as the 
                                                             case may be, of most of the investment      
                                                             companies in the Franklin Group of Funds;   
                                                             formerly, Chairman, Hambrecht and Quist     
                                                             Group; Director, H & Q Healthcare           
                                                             Investors; and President, National          
                                                             Association of Securities Dealers, Inc.     

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

  Harmon E. Burns                Vice President              Executive Vice President, Secretary and     
  777 Mariners Island Blvd.                                  Director, Franklin Resources, Inc.;         
  San Mateo, CA 94404                                        Executive Vice President and Director,      
                                                             Franklin/Templeton Distributors, Inc.;      
                                                             Executive Vice President, Franklin          
                                                             Advisers, Inc.; Director,                   
                                                             Franklin/Templeton Investor Services, Inc.; 
                                                             director of certain of the investment       
                                                             companies in the Templeton Group of Funds;  
                                                             officer and/or director, as the case may    
                                                             be, of other subsidiaries of Franklin       
                                                             Resources, Inc.; and officer and/or         
                                                             director or trustee of all the investment   
                                                             companies in the Franklin Group of Funds.   

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

  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 or director, as the case may  
                                                             be, of other subsidiaries of Franklin       
                                                             Resources, Inc.; and officer and/or         
                                                             managing general partner, as the case may   
                                                             be, of all the investment companies in the  
                                                             Franklin Group of Funds.                    

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

  Deborah R. Gatzek              Vice President              Senior Vice President - Legal, Franklin     
  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.                             

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

  Charles E. Johnson             Vice President              Senior Vice President, Franklin Resources,  
  777 Mariners Island Blvd.                                  Inc. and Franklin/Templeton Distributors,   
  San Mateo CA 94404                                         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.                                   

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

12  

497
112th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 112th
                                                        [Enlarge/Download Table]


                                 Positions and Offices                                                   
  Name and Address               with the Fund               Principal Occupations During Past Five Years
---------------------------------------------------------------------------------------------------------
                                                                                                         
  Edward V. McVey                Vice President              Senior Vice President/National Sales        
  777 Mariners Island Blvd.                                  Manager, Franklin/Templeton Distributors,   
  San Mateo, CA 94404                                        Inc.; and officer of many of the investment 
                                                             companies in the Franklin Group of Funds.   

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

  R. Martin Wiskemann            Vice President              Senior Vice President, Portfolio Manager    
  777 Mariners Island Blvd.                                  and Director , Franklin Advisers, Inc.;     
  San Mateo, CA 94404                                        Senior Vice President, Franklin Management, 
                                                             Inc.; Vice President, Treasurer and         
                                                             Director, ILA Financial Services, Inc. and  
                                                             Arizona Life Insurance Company of America;  
                                                             and officer and/or director, as the case    
                                                             may be, of many of the investment companies 
                                                             in the Franklin Group of Funds.             

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


As indicated above, certain of the trustees and officers hold positions with    
other companies in the Franklin 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 B. Johnson and Rupert H. Johnson, Jr. are brothers, and   
father and uncle, respectively, of Charles E. Johnson.                          

As of December 7, 1993, the officers and trustees, as a group, owned less than  
1% of the total outstanding shares of the Pacific Fund's 1,979,795.810          
outstanding shares and less than 1% of the International Fund's 1,787,038.062   
outstanding shares.                                                             

INVESTMENT ADVISORY AND OTHER SERVICES                                          
--------------------------------------------------------------------------------

The investment manager of each Fund is Franklin Advisers, Inc. The Manager is a 
wholly owned subsidiary of Franklin Resources, Inc. ("Resources"), a publicly   
owned holding company with shares listed on the New York Stock Exchange (the    
"Exchange"). Resources owns several other subsidiaries which are involved in    
investment management and shareholder services. The Manager and other subsidiary
companies of Resources currently manage over $113 billion in assets for over 3.3
million shareholders. Prior to January 1, 1993, sub-advisory services were      
provided to each Fund by Barclays de Zoete Wedd Investment Management           
Incorporated, a subsidiary of Barclays de Zoete Wedd U.S. Holdings Inc., which  
is an indirect wholly owned subsidiary of Barclays Bank PLC. On that date,      
pursuant to a contract, Templeton Investment Counsel, Inc. became each Fund's   
Sub-adviser. The Sub-adviser is an indirect wholly owned subsidiary of          
Resources. Please refer to the table above which indicates officers and trustees
who are affiliated persons of the Trust and who are also affiliated persons of  
Franklin/Templeton Distributors, Inc. ("Distributors"), each Fund's principal   
underwriter, and the Manager.                                                   

Pursuant to the management agreement between the Funds and Advisers and pursuant
to the sub-advisory agreement between Advisers and TICI (together the           
"Agreements"), the Manager supervises and implements each Fund's investment     
objective and provides certain administrative services and facilities which are 
necessary to conduct each Fund's business. The Sub-adviser, subject to the      
overall review by the Manager and the Board of Trustees, is responsible for     
recommending an optimal geographic equity allocation and for providing advice   
with respect to each Fund's investments. Investments may be shifted among       
capital markets and different types of securities in accordance with ongoing    
analysis of trends and developments affecting such markets and securities as    
directed by the Manager or Sub-adviser. Under the management agreement, Advisers
receives a monthly fee equal to an annual rate of 1.0% of the value of each     
Fund's average daily net assets up through $100,000,000; 0.90% of the value of  
each Fund's average daily net assets over $100,000,000 up through $250,000,000; 
0.80% of the value of each Fund's average daily net assets over $250,000,000 up 
through $500,000,000; and 0.75% of the value of each Fund's average daily net   
assets over $500,000,000. Under the sub-advisory agreement, TICI receives from  
the Manager a fee equal to an annual rate of 0.50% of the value of each Fund's  
average daily net assets up through $100,000,000; 0.40% of the value of each    
Fund's average daily net assets over $100,000,000 up through $250,000,000; 0.30%
of the value of each Fund's average daily net assets over $250,000,000 up       
through $500,000,000; and 0.25% of the value of each Fund's average daily net   
assets over $500,000,000. The Manager, at its own expense,                      

13  

497
113th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 113th
furnishes the Fund with office space and office furnishings, facilities and     
equipment required for managing the business affairs of the Fund; maintains all 
internal bookkeeping, clerical, secretarial and administrative personnel and    
services; and provides certain telephone and other mechanical services. The     
Manager is covered by fidelity insurance on its officers, directors and         
employees for the protection of the Trust.                                      

Each Fund bears all of its expenses not assumed by the Manager. Each Fund is    
responsible for its pro-rata portion of the Trust's operating expenses,         
including, but not limited to, the Manager's fee; any 12b-1 distribution and    
services expenses; 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; 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. TICI pays all expenses incurred by it in      
connection with its activities under the sub-advisory agreement with Advisers,  
other than the cost of securities purchased for each Fund and brokerage         
commissions in connection with such purchases. (See the Statement of Operations 
in the financial statements at the end of this Statement of Additional          
Information for additional details of these expenses.)                          

The Manager has voluntarily agreed to waive its management fees and assume      
responsibility for making payments, if necessary, to offset certain operating   
expenses otherwise payable by each Fund. This action may be terminated by the   
Manager at any time. For the fiscal years ended October 31, 1992 and October 31,
1993, management fees that the Pacific Fund was contractually obligated to pay  
the Manager were $33,936 and $93,882, respectively, although after fee waivers, 
no management fees were actually paid by the Fund. For the same periods,        
management fees that the International Fund was contractually obligated to pay  
the Manager were $42,990 and $108,434, respectively, although after fee waivers,
no management fees were actually paid by the Fund.                              

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 a 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 each Fund (excluding interest, taxes, brokerage commissions and     
extraordinary expenses such as litigation costs) would otherwise exceed in any  
fiscal year 21/2% of the first $30 million of average net assets of each Fund,  
2% of the next $70 million of net assets of each Fund, and 11/2% of average     
annual net assets of each Fund in excess of $100 million.                       

The Agreements are in effect until April 30, 1993. Thereafter, they may continue
in effect for successive annual periods providing such continuance is           
specifically approved at least annually by a vote of the Board of Trustees or by
a vote of the holders of a majority of each Fund's outstanding voting           
securities, and in either event by a majority vote of the trustees who are not  
parties to the Agreements 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
Agreements may be terminated without penalty at any time by each Fund or by the 
Funds' Advisers on 60-days' written notice and automatically terminate in the   
event of 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 Funds and acts as the Funds' transfer agent and         
dividend-paying agent. Investor Services is compensated on the basis of a fixed 
fee per account. For the fiscal year ended October 31, 1993, costs under the    
shareholder services agreement with Investor Services aggregated $16,296 of     
which $16,028 was paid to Investor Services.                                    

Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,       
California 94104, acts as custodian of each Funds' securities and other assets  
of the Funds. 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  
Funds' independent auditors. During the fiscal year ended October 31, 1993,     
their auditing services consisted of rendering an opinion on the financial      
statements of the Trust included in the Trust's Annual Report and this Statement
of Additional Information.                                                      

THE FUNDS' POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS            
--------------------------------------------------------------------------------

Under the management agreements with Advisers, the selection of brokers and     
dealers to execute transactions in each Fund's portfolio is made by Advisers or 
the Sub-adviser, as the case may be,                                            

14  

497
114th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 114th
in accordance with the Agreements and any directions which the Board of Trustees
may give.                                                                       

When placing a portfolio transaction, the Funds' Advisers attempt to obtain the 
best net price and execution of the transaction. On portfolio transactions which
are done on a securities exchange, the amount of commission paid by each Fund is
negotiated between Advisers or the Sub-adviser and the broker executing the     
transaction. Advisers or the Sub-adviser 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.     
Advisers or the Sub-adviser ordinarily places 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 Funds' Advisers, a better  
price and execution can otherwise be obtained. Purchases of portfolio securities
from underwriters include a commission or concession paid by the issuer to the  
underwriter, and purchases from dealers include a spread between the bid and ask
prices. Each Fund seeks to obtain prompt execution of orders at the most        
favorable net price.                                                            

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

When it is felt that several brokers are equally able to provide the best net   
price and execution, Advisers or the Sub-adviser may decide to execute          
transactions through brokers who provide quotations and other services to each  
Fund, specifically including the quotations necessary to determine the value of 
each 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 each Fund and the Funds' Advisers in such amount  
of total brokerage as may reasonably be required.                               

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

Because Distributors is a member of the National Association of Securities      
Dealers, it is sometimes entitled to obtain certain fees when either Fund       
tenders portfolio securities pursuant to a tender-offer solicitation. As a means
of recapturing brokerage for the benefit of each Fund, any portfolio securities 
tendered by a 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 is 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 either Fund and one or more other        
investment companies or clients supervised by Advisers or advised by the        
Sub-adviser are considered at or about the same time, transactions in such      
securities are allocated among the several investment companies and clients in a
manner deemed equitable to all by Advisers or the Sub-adviser, taking into      
account the respective sizes of the funds and/or clients 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 either Fund is concerned. In other cases,                    

15  

497
115th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 115th
it is possible that the ability to participate in volume transactions and to    
negotiate lower brokerage commissions would be beneficial to each Fund.         

For the fiscal period from September 20, 1991 (the effective date of the Funds' 
registration statement) to October 31, 1991, neither Fund paid brokerage        
commissions. During the fiscal years ended October 31, 1992 and October 31,     
1993, the Pacific Fund paid total brokerage commissions of $45,362 and $102,203,
respectively, and the International Fund paid total brokerage commissions of    
$18,523 and $57,590, respectively. As of October 31, 1993, the International    
Fund and the Pacific Fund held a total of $1,655,000 and $3,805,000,            
respectively, in debt securities of Daiwa Securities of America, Inc. Under the 
1940 Act, Daiwa Securities of America, Inc. may be deemed to be one of the      
Trust's regular broker dealers.                                                 

ADDITIONAL INFORMATION REGARDING FUND SHARES                                    
--------------------------------------------------------------------------------

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

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

Each 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, each 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 each Fund may also 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 each Fund will 
be offered with the following schedule of sales charges:                        

                                                                [Download Table]


                                                 SALES 
SIZE OF PURCHASE                                 CHARGE
----------------------------------------------   ------
                                                       
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%  

PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS                            
--------------------------------------------------------------------------------

Orders for the purchase of shares of each 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 are 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 are effected at the Fund's  
public offering price on the day it is next calculated. The use of the term     
"securities dealer" hereinafter includes other financial institutions which     
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 dealer.                                            

PURCHASES AT NET ASSET VALUE                                                    

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

16  

497
116th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 116th
REDEMPTIONS IN KIND                                                             

Each Fund has committed itself to pay in cash (by check) all requests for       
redemption by any shareholder of record, limited in amount, however, during any 
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net    
assets at the beginning of such period. Such commitment is irrevocable without  
the prior approval of the SEC. In the case of requests for redemption in excess 
of such amounts, the trustees reserve the right to make payments in whole or in 
part in securities or other assets of the Fund from which the shareholder is    
redeeming, in case of an emergency or if the payment of such a redemption in    
cash would be detrimental to the existing shareholders of each Fund. In such    
circumstances, the securities distributed would be valued at the price used to  
compute each Fund's net assets. Should either Fund do so, a shareholder might   
incur brokerage fees in converting the securities to cash. Neither Fund intends 
to redeem illiquid securities in kind; however, should it happen, shareholders  
might not be able to timely recover their investment and might also incur       
brokerage costs in selling such securities.                                     

REDEMPTIONS BY EACH FUND                                                        

Due to the relatively high cost of handling small investments, each 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 each Fund not to      
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before a Fund redeems such shares and sends the      
proceeds to the shareholder, it would 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 would   
increase the value of the account to at least $100.                             

CALCULATION OF NET ASSET VALUE                                                  

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

Each Fund's portfolio securities are valued as stated in its 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 a Fund's shares are determined as of such times.             
Occasionally, events affecting the values of such securities and such exchange  
rates may occur between the times at which they are determined and 1:00 p.m.    
Pacific time which will not be reflected in the computation of a 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 the additional shares are   
purchased for the investor who has elected to have dividends reinvested. This   
date may vary from month to month, based on operational considerations, and is  
not necessarily the same date as the record date or payable date for cash       
dividends.                                                                      

SPECIAL SERVICES                                                                

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

Investor Services may pay certain financial institutions and record keepers     
which maintain omnibus accounts with each 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, each Fund may         
reimburse Investor Services an amount not to exceed the per account fee which   
each 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 each Fund's Prospectus, each Fund has elected to be treated as a   
regulated investment company under Subchapter M of the Internal Revenue Code of 
1986, as amended (the "Code"). The trustees reserve the right not to maintain   
the qualification of either 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                    

17  

497
117th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 117th
corporate taxes on its taxable income and gains, and distributions to           
shareholders will be ordinary dividend income to the extent of the Fund's       
available earnings and profits.                                                 

Subject to the limitations discussed below, all or a portion of the income      
distributions paid by a Fund may be treated by corporate shareholders as        
qualifying dividends for purposes of the dividends-received deduction under     
federal income tax law. If the aggregate qualifying dividends (generally,       
dividends from U.S. domestic corporations the stock in which is not             
debt-financed by the Fund and is held for at least a minimum holding period)    
received by a Fund are less than 100% of its distributable income, then the     
amount of each Fund's dividends paid to corporate shareholders which may be     
designated as eligible for such deduction will not exceed the aggregate         
qualifying dividends received by the Fund for the taxable year. The amount or   
percentage of income qualifying for the corporate dividends-received deduction  
will be declared by each Fund annually in a notice to shareholders mailed       
shortly after the end of the Fund's fiscal year.                                

Corporate shareholders should note that dividends paid by a Fund from sources   
other than the qualifying dividends it receives will not qualify for the        
dividends-received deduction. For example, any interest income and short-term   
capital gain (in excess of any net long-term capital loss or capital loss       
carryover) included in investment company taxable income and distributed by a   
Fund as a dividend will not qualify for the dividends-received deduction.       

Corporate shareholders should also note that availability of the corporate      
dividends-received deduction is subject to certain restrictions. For example,   
the deduction is eliminated unless the Fund's shares have been held (or deemed  
held) for at least 46 days in a substantially unhedged manner. The              
dividends-received deduction may also be reduced to the extent interest paid or 
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a   
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in   
its Fund's shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in a Fund is "debt 
financed" for these tax purposes should consult with their tax advisors         
concerning the availability of the dividends-received deduction.                

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

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

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

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

Each Fund's investment in options, futures contracts and forward contracts,     
options on futures contracts and stock indices and certain other securities,    
including transactions involving actual or deemed short sales or foreign        
exchange gains or losses, are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,        
including options on stock and on narrow-based stock indices, 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, each Fund's    
treatment of certain other options, fu-                                         

18  

497
118th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 118th
tures 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 indices, options
on securities indices, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.                     

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

When either Fund holds an option or contract which substantially diminishes its 
risk of loss with respect to other positions (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 securities owned by either Fund 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, each Fund is also subject to the requirement 
that less than 30% of their 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 either Fund's ability to engage in options, spreads, 
straddles, hedging transactions, forward or futures contracts or options on any 
of these positions because these transactions are often consummated in less than
three months, may require the sale of portfolio securities held less than three 
months and may, as in the case of short sales of portfolio securities, reduce   
the holding periods of certain securities within either Fund, resulting in      
additional short-short income for either Fund.                                  

Each 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.                                         

Foreign exchange gains and losses realized by the Funds in connection with      
certain transactions involving foreign currencies, foreign currency payables or 
receivables, foreign currency-denominated debt securities, foreign currency     
forward contracts, and options or futures contracts on foreign currencies are   
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may      
affect the amount and timing of the Funds' income or loss from such transactions
and in turn its distributions to shareholders.                                  

In order for each Fund to qualify as a regulated investment company, at least   
90% of the Fund's annual gross income must consist of dividends, interest and   
certain other types of qualifying income and no more than 30% of its annual     
gross income may be derived from the sale or other disposition of securities or 
certain other instruments held for less than three months. Foreign exchange     
gains derived by a Fund with respect to the Fund's business of investing in     
stock or securities, or options or futures with respect to such stock or        
securities is qualifying income for purposes of this 90% limitation.            

Currency speculation or the use of currency forward contracts or other currency 
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect to each Fund's business of investing in stock or securities and    
related options or futures. Under current law, non-directly-related gains       
arising from foreign currency positions or instruments held for less than three 
months are treated as derived from the disposition of securities held less than 
three months in determining each Fund's compliance with the 30% limitation. Each
Fund will limit its activities involving foreign exchange gains to the extent   
necessary to comply with these requirements.                                    

The federal income tax treatment of interest rate and currency swaps is unclear 
in certain respects and may in some circumstances result in the real-           

19  

497
119th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 119th
ization of income not qualifying under the 90% test described above or be deemed
to be derived from the disposition of securities held less than three months in 
determining each Fund's compliance with the 30% limitation. Each Fund will limit
its interest rate and currency swaps to the extent necessary to comply with     
these requirements.                                                             

If a Fund owns shares in a foreign corporation that constitutes a "passive      
foreign investment company" (a "PFIC") for federal income tax purposes and the  
Fund does not elect to treat the foreign corporation as a "qualified electing   
fund" within the meaning of the Code, the Fund may be subject to United States  
federal income taxation on a portion of any "excess distribution" it receives   
from the PFIC or any gain it derives from the disposition of such shares, even  
if such income is distributed as a taxable dividend by the Fund to its United   
States shareholders. A Fund may be also subject to additional interest charges  
in respect of deferred taxes arising from such distributions or gains. Any tax  
paid by a Fund as a result of its ownership of shares in a PFIC will not give   
rise to a deduction or credit to the Fund or to any shareholder. A PFIC means   
any foreign corporation if, for the taxable year involved, either (i) it derives
at least 75 percent of its gross income from "passive income" (including, but   
not limited to, interest, dividends, royalties, rents and annuities), or (ii) on
average, at least 50 percent of the value (or adjusted basis, if elected) of the
assets held by the corporation produce "passive income."                        

Legislation introduced in the U.S. House of Representatives would unify, and, in
some cases, modify the anti-deferral rules contained in various provisions of   
the Code, including the provisions dealing with PFICs, related to the taxation  
of U.S. shareholders of foreign corporations. In the case of passive foreign    
company, as defined in the proposed legislation ("PFC"), having "marketable     
stock," the proposed legislation would require U.S. shareholders, such as the   
Funds, owning less than 25% of a PFC that is not U.S.-controlled to             
mark-to-market PFC stock annually, unless the shareholders elected to include in
income currently their proportionate shares of the PFC's income and gain.       
Otherwise, U.S. shareholders would be treated substantially the same as under   
current law. Special rules applicable to mutual funds would classify as         
"marketable stock" all stock in PFCs held by a Fund; however, a Fund would not  
be liable for tax on income from PFCs that is distributed to its shareholders.  
It is unclear if or when the proposed legislation will become law and if enacted
what form it will take. On April 1, 1992, the U.S. Internal Revenue Service     
released proposed regulations regarding a mark-to-market election for regulated 
investment companies that would have effects similar to the proposed            
legislation. These regulations would be effective for taxable years ending after
promulgation of the regulations as final regulations. The IRS subsequently      
issued a notice indicating that final regulations will provide that regulated   
investment companies may elect the mark-to-market election for tax years ending 
after March 31, 1992 and before April 1, 1993. Whether and to what extent the   
notice will apply to taxable years of a Fund is unclear.                        

The Funds may be subject to foreign withholding taxes on income from certain of 
its foreign securities. If more than 50% of the total assets of the Fund at the 
end of its fiscal year are invested in securities of foreign corporations, the  
Fund may elect to pass-through to its shareholders the pro rata share of foreign
taxes paid by the Fund. If this election is made, shareholders will be (i)      
required to include in their gross income their pro rata share of foreign source
income (without deduction of foreign taxes paid by the Fund) and (ii) entitled  
to either deduct their share of such foreign taxes in computing their taxable   
income or to claim a credit for such taxes against their U.S. income tax,       
subject to certain limitations under the Code. Shareholders will be informed by 
the Funds at the end of each calendar year regarding the availability of any    
credits and the amount of foreign source income (including any foreign taxes    
paid by the Funds) to be included on their income tax returns.                  

THE FUNDS' UNDERWRITER                                                          
--------------------------------------------------------------------------------

Pursuant to an underwriting agreement in effect until September 18, 1994,       
Distributors acts as principal underwriter in a continuous public offering for  
shares of the Funds.                                                            

Distributors pays the expenses of distributing each Fund's shares, including    
advertising expenses and the costs of printing sales material and prospectuses  
used to offer shares to the public. Each Fund pays the expenses of preparing and
printing amendments to the registration statement and prospectuses (other than  
those necessitated by the activities of Distributors) and of sending            
prospectuses to existing shareholders.                                          

The underwriting agreement continues in effect for successive annual periods    
provided that its continuance is specifically approved at least annually by a   
vote of the Board of Trustees or by a vote of the holders of a majority of each 
Fund's outstanding voting securities, and in either event by a majority of the  
trustees who are not parties to the underwriting agreement or interested persons
of any such party (other than as trustees of the Trust), cast in person at      

20  

497
120th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 120th
a meeting called for that purpose. The underwriting agreement terminates        
automatically in the event of its assignment and may be terminated by either    
party on 90-days' written notice.                                               

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

In connection with the offering of the Pacific Fund's shares, aggregate         
underwriting commissions for the fiscal period ended October 31, 1991 and the   
fiscal years ended October 31, 1992 and 1993 were $3231, $58,483 and $214,144,  
respectively. After allowances to dealers, Distributors retained $0, $2437 and  
$27,047, respectively. For the International Fund's shares, aggregate           
underwriting commissions for the same fiscal periods were $6549, $147,885 and   
$170,962, respectively. After allowances to dealers, Distributors retained $0,  
$5245 and $25,157, respectively. Distributors received no other compensation    
from the Fund for acting as underwriter.                                        

DISTRIBUTION PLAN                                                               

Each Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 
Act (collectively, "the Plans"), whereby each Fund may pay up to a maximum of   
0.25% per annum (1/4 of 1%) of its average daily net assets for expenses        
incurred in the distribution of its shares.                                     

Pursuant to the Plans, Distributors is entitled to be reimbursed each month (up 
to the maximum of 0.25% per annum of average net assets) for its actual expenses
incurred in the distribution and promotion of each Fund's shares, including but 
not limited to the printing of prospectuses and reports used for sales purposes,
advertisements, expenses of preparation and printing of sales literature and    
other such distribution-related expenses, including any distribution or service 
fees paid to securities dealers or other firms who have executed a distribution 
or service agreement with Distributors. As stated in the Funds' Prospectuses,   
the Plans covers not only payments to Distributors for expenses incurred in the 
promotion and distribution of the Funds' shares but also payments to or by      
Distributors, the Manager, TICI, or their affiliates and any other payments made
by each Fund in the ordinary course of its business to the extent such payments,
although primarily intended to cover operational and not distribution-related   
activities, may be deemed (for example, by a court of law) to be payments for   
the financing of an activity primarily intended to result in the sale of either 
Fund's shares within the context of Rule 12b-1 under the 1940 Act. The Plans do 
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 are not     
currently entitled to participate in the Plans as a result of applicable federal
law prohibiting certain banks from engaging in the distribution of mutual fund  
shares. However, such banking institutions are permitted to receive fees from   
Distributors under the Plans 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 each
Fund and alternate means for continuing the servicing of such shareholders would
be sought. In such an event, changes in the services provided might occur and   
such shareholders might no longer be able to avail themselves of any automatic  
investment or other services then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these changes. Securities laws of states in which either 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 either 
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, believed that it would benefit each Fund to have monies    
available for the direct distribution activities of Distributors 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 Plans will benefit each Fund and its shareholders.                          

The Plans have been approved by Resources, each Fund's initial shareholder, and 
by the trustees, including those trustees who are not interested persons, as    
defined in the 1940 Act. The Plans are effective through April 30, 1994, and    
renewable annually by the Trust's Board of Trustees, including a majority vote  
of the trustees who are non-interested persons of each Fund and who have no     
direct or indirect financial interest in the operation of the Plans, 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 Plans and any distribution or service agreement may be terminated 
at any time, without                                                            

21  

497
121st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 121st
any penalty, by such trustees on 60-days' written notice, by Distributors, by   
any act that terminates the underwriting agreement with Distributors, or by vote
of a majority of the each 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 Plans and any distribution or service agreements may not be amended to      
increase materially the amount spent for distribution expenses or in any other  
material way without approval by a majority vote of each Fund's outstanding     
shares, and all such material amendments to the Plans or any distribution or    
service agreements also shall be approved by 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 Plans and any
distribution or service agreements, as well as to furnish the Board 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 Plans should be       
continued.                                                                      

During the fiscal year ended October 31, 1993, fees incurred under the Plans for
the Pacific Fund and International Fund aggregated $23,351 (.248% of average net
assets) and $26,475 (.244% of average net assets), respectively.                

GENERAL INFORMATION                                                             
--------------------------------------------------------------------------------

PERFORMANCE                                                                     

As noted in the Prospectuses, each Fund may from time to time quote various     
performance figures to illustrate the Fund's past performance. They may         
occasionally cite statistics to reflect their volatility or risk.               

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

TOTAL RETURN                                                                    

The average annual total return is determined by finding the average annual     
compounded rates of return over one-, five- and ten-year periods, or fractional 
portion thereof, that would equate an initial hypothetical $1,000 investment to 
its ending redeemable value. The calculation assumes the maximum sales charge is
deducted from the initial $1,000 purchase order, and that income dividends and  
capital gains are reinvested at net asset value on the reinvestment dates during
the period. The quotation assumes that the account was completely redeemed at   
the end of each one-, five- and ten-year period and that all applicable charges 
and fees were deducted.                                                         

In considering the quotations set forth below, investors should remember that   
the 4.5% maximum sales charge reflected in each quotation is the maximum one    
time fee (charged on all direct purchases) which has its greatest impact during 
the early stages of an investor's investment in either Fund. The actual         
performance of an investment is affected less by this charge the longer an      
investor retains the investment in such Fund.                                   

The average annual compounded rates of return for each Fund for the indicated   
periods ended on the date of the financial statements included herein was as    
follows:                                                                        

                                                        [Enlarge/Download Table]


                                                            AVERAGE ANNUAL TOTAL RETURNS    
                                                       -------------------------------------
                                                         ONE-YEAR     PERIOD SINCE INCEPTION
FUND NAME                                              PERIOD ENDING   (9/20/91 TO 10/31/93)
-----------------------------------------------------  -------------  ----------------------
                                                                                            
PUBLIC OFFERING PRICE                                                                       
Pacific Fund.........................................     32.27%              19.58%        
International Fund...................................     21.69%              10.78%        
NET ASSET VALUE                                                                             
Pacific Fund.........................................     38.46%              22.20%        
International Fund...................................     27.40%              13.20%        


The above figures were calculated according to the following SEC formula:       

P(1 + T)n = ERV                 

where:                                                                          

P  =  a hypothetical initial payment of $1,000                                  

T  =  average annual total return                                               

22  

497
122nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 122nd
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 or at the end of the
one-, five-, or ten-year periods (or fractional portion thereof)    

As discussed in each Prospectus, a 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 average annual compounded rate, except that such quotations  
are based on actual return for a specified period instead of the average return 
over one-, five- or ten-year periods, or fractional portion thereof. The rates  
of total return from commencement of operations of each Fund to October 31, 1993
were as follows:                                                                

                                                        [Enlarge/Download Table]


                                                               AGGREGATE TOTAL RETURNS       
                                                        -------------------------------------
                                                          ONE-YEAR     PERIOD SINCE INCEPTION
FUND NAME                                               PERIOD ENDING   (9/20/91 TO 10/31/93)
------------------------------------------------------  -------------  ----------------------
                                                                                             
PUBLIC OFFERING PRICE                                                                        
Pacific Fund.........................................      32.27%              46.04%        
International Fund...................................      21.69%              24.20%        
NET ASSET VALUE                                                                              
Pacific Fund.........................................      38.46%              52.90%        
International Fund...................................      27.40%              30.03%        


YIELD                                                                           

Current yield reflects the income per share earned by each 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 Funds for the 30-day period ended on the date of the financial
statements included herein was as follows:                                      

                                                                [Download Table]


FUND NAME                                30-DAY YIELDS*
---------------------------------------  --------------
                                                       
Pacific Fund...........................      1.89%     
International Fund.....................      1.90%     


* Figures are net of fee waivers and expense reimbursements.                    

The above figures were obtained using the following SEC formula:                

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

where                                                                           

a  =  income distributions 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 income distributions                            

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 each 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 each Fund during the past 12 months 
by a current maximum offering price. Under certain circumstances, such as when  
there has been a change in the amount of dividend payout, or a fundamental      
change in investment policies, it might be appropriate to annualize the         
dividends paid over the period such policies were in effect, rather than using  
the dividends during the past 12 months. The current distribution rate differs  
from the current yield computation because it may include distributions to      
shareholders from sources other than dividends and interest, such as premium    
income from option writing and short-term capital gains, and is calculated over 
a different period of time.                                                     

                                                                [Download Table]


                          FISCAL YEAR-END DISTRIBUTION RATES*
                          -----------------------------------
                                 PUBLIC       NET ASSET      
FUND NAME                    OFFERING PRICE     VALUE        
-----------------------      --------------   ---------      
                                                             
Pacific Fund...........           1.28%         1.34%        
International Fund.....           3.21%         3.36%        


*Figures are net of fee waivers and expense reimbursements.                     

VOLATILITY                                                                      

Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or     
performance relative to a market index. One measure of volatility is beta. Beta 
is the volatility of a fund relative to the total market as represented by the  
S&P 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                                        

23  

497
123rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 123rd
of net asset value or total return around an average over a specified period of 
time. The premise is that greater volatility connotes greater risk undertaken in
achieving performance.                                                          

OTHER PERFORMANCE QUOTATIONS                                                    

With respect to those categories of investors who are permitted to purchase     
shares of each Fund at net asset value, sales literature pertaining to each Fund
may quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described above 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 each Fund as a potential investment for
Individual Retirement Accounts (or 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.                                                 

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

COMPARISONS                                                                     

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

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

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

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

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

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

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

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

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

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

j) Salomon Brothers Broad Bond Index or its component indices - The Broad Index 
measures yield, price, and total return for Treasury, Agency, Corporate, and    
Mortgage bonds.                                                                 

k) Salomon Brothers World Government Bond Index - measures capitalization and   
performance return of foreign bond markets.                                     

l) Lehman Brothers Aggregate Bond Index or its component indices - the Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,         
Corporate, Mortgage, and Yankee bonds.                                          

m) Historical data supplied by the research departments of First Boston         
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,       
Pierce, Fenner & Smith, Data Stream International, Frank Russell, Goldman Sachs,
Morgan Stanley Capital International, Lehman Brothers and Bloomberg L.P.        

n) Yields and total return of other taxable investments including certificates  
of deposit (CDs), money market deposit accounts (MMDAs), checking accounts,     
savings accounts, money market mutual funds, and repurchase agreements.         

24  

497
124th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 124th
o) Yields of other countries' government and corporate bonds as compared        
to U.S. government and corporate bonds to illustrate the potentially higher     
returns available outside the U.S.                                              

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

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) Financial Times Actuaries Indices, including the FTA - World Index (and      
components thereof), which is based on stocks in the major world equity markets.

s) Morgan Stanley Capital International Indices, including the EAFE Index (and  
components thereof), which are based on stocks in major equity markets in       
Europe, Australia, and the Far East.                                            

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 each 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 each Fund to calculate its 
figures. In addition there can be no assurance that either Fund will continue   
its performance as compared to such other averages.                             

OTHER FEATURES AND BENEFITS                                                     

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

The Funds of the Trust are members of the Franklin/Templeton Group, one of the  
largest mutual fund organizations in the United States, and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the  
oldest mutual fund organizations, has managed mutual funds for over 45 years and
now services more than 2.4 million shareholder accounts. In 1992, Franklin, a   
leader in managing fixed-income mutual funds and an innovator in creating       
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer  
in international investing. Together, the Franklin/Templeton Group has over $113
billion in assets under management for more than 3.3 million shareholder        
accounts and offers 97 U.S.-based mutual funds. A Fund may identify itself by   
its Quotron or CUSIP number.                                                    

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

SHAREHOLDERS OF 5% OR MORE                                                      

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.          

With respect to the Pacific Fund, as of December 7, 1993, the officers and      
trustees, as a group, owned less than 1% of the total outstanding shares of the 
Fund's 1,979,795.810 outstanding shares. With respect to the International Fund,
as of December 7, 1993, the officers and trustees owned less than 1% of the     
Fund's 1,787,038.062 outstanding shares.                                        

OWNERSHIP AND AUTHORITY DISPUTES                                                

In the event of disputes involving multiple claims of ownership or authority to 
control a shareholder's account, each Fund has the right (but has no obligation)
to (a) freeze the account and require the written agreement of all persons      
deemed by either 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.                                                   

25  

497
125th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 125th
APPENDIX                                                                        
--------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

DESCRIPTION OF STANDARD & POOR'S CORPORATION 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 a 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.                                     

26  

FRANKLIN INTERNATIONAL TRUST                                                    
REPORT OF INDEPENDENT ACCOUNTANTS                                               

To the Shareholders and Board of Trustees                                       
of Franklin International Trust:                                                

We have audited the accompanying statements of assets and liabilities of the    
funds comprising Franklin International Trust, including each Fund's statement  
of investments in securities and net assets, as of October 31, 1993, and the    
related statements of operations for the year then ended, the stat ements of    
changes in net assets for each of the two years in the period then ended, and   
the financial highlights included under the caption "Financial Highlights" for  
the periods indicated thereon. 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 audits.                                                            

We conducted our audits in accordance with generally accepted auditing          
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements and financial       
highlights are free of material misstatement. An audit includes examining, on a 
test basis, evidence supporting the amounts and disclosures in the financial    
statements. Our procedures included confirmation of investments and cash held by
the custodian as of October 31, 1993, and confirmation by correspondence with   
brokers as to securities purchased but not received at the date, or other       
auditing procedures where confirmations from brokers were not received. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement       
presentation. We believe that our audits provide a reasonable basis for our     
opinion.                                                                        

In our opinion, the financial statements and financial highlights referred to   
above present fairly, in all material respects, the financial position of the   
funds comprising Franklin International Trust as of October 31, 1993, the       
results of their operations for the year then ended, the changes in their net   
assets for each of the two years in the period then ended, and the financial    
highlights for the periods indicated thereon in conformity with generally       
accepted accounting principles.                                                 

                         COOPERS & LYBRAND
San Francisco, California                                                       
November 30, 1993                                                               

27

497
126th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 126th
FRANKLIN INTERNATIONAL TRUST                                                    

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993         

                                                        [Enlarge/Download Table]


                  SHARES/                                                                    VALUE    
COUNTRY*         WARRANTS       FRANKLIN PACIFIC GROWTH FUND                               (NOTE 1)   
------------------------------------------------------------------------------------------------------
                                                                                                      
                                COMMON STOCKS & WARRANTS 79.2%                                        
                                AUSTRALIA 14.6%                                                       
   AUS            97,400        Australian Gas and Light Co. ...........................   $  289,292 
   AUS           126,000        Australia & New Zealand Banking Group, Ltd. ............      364,169 
   AUS            28,000        Brambles Industries, Ltd. ..............................      241,661 
   AUS           101,600        Comalco, Ltd. ..........................................      250,345 
   AUS           146,300        Gio Australia Holdings, Ltd. ...........................      311,772 
   AUS           125,500        Leighton Holdings, Ltd. ................................      192,227 
   AUS            21,600        National Australia Bank, Ltd. ..........................      182,109 
   AUS           257,000        National Foods, Ltd. ...................................      316,627 
   AUS           102,540        Pacific Dunlop, Ltd. ...................................      357,822 
   AUS           245,600        Pioneer International, Ltd. ............................      426,068 
   AUS           126,400        Westpac Banking Corp. ..................................      381,318 
                                                                                           ---------- 
                                                                                            3,313,410 
                                                                                           ---------- 
                                HONG KONG 27.5%                                                       
   HK            296,000        CNT Group, Ltd .........................................       42,899 
   HK            241,000        Cathay Pacific Airways, Ltd ............................      392,935 
   HK             94,000        Cheung Kong Holdings, Ltd. .............................      443,970 
   HK            193,000        Dairy Farm International Holdings ......................      373,363 
   HK            821,000        Fountain Set Holdings ..................................      137,046 
   HK            479,000        Gold Peak Industries (Holding) Develops, Ltd. ..........      227,785 
   HK            496,000        Grand Hotel Holdings, Ltd ..............................      206,988 
   HK          1,190,000        Great Wall Electronics International, Ltd ..............      220,199 
   HK             34,600     (a)Great Wall Electronics International, Ltd, warrants ....        1,231 
   HK             33,273        HSBC Holdings Corp .....................................      385,343 
   HK            208,000        Hang Lung Development Co., Ltd. ........................      401,035 
   HK            783,200        Hon Kwok Land Investment Co., Ltd ......................      321,773 
   HK             84,000        Hong Kong & China Gas Co., Ltd. ........................      204,348 
   HK             71,500        Hong Kong Electric Holdings, Ltd. ......................      231,302 
   HK             86,000        Hutchinson Whampoa, Ltd. ...............................      323,835 
   HK             41,600        Jardine Matheson Holdings, Ltd. ........................      398,344 
   HK            101,000        Jardine Strategic Holdings, Ltd. .......................      418,219 
   HK            596,000        Lai Sun Development Co., Ltd. ..........................      127,252 
   HK            632,000     (a)Maanshan Iron and Steel Co., Ltd. ......................      185,642 
   HK            122,000        New World Development Co., Ltd. ........................      423,085 
   HK            180,000        Shun Tak Holdings, Ltd. ................................      214,286 
   HK            344,000        South China Morning Post, Ltd. .........................      206,987 
   HK            197,000        Winsor Industrial Corp., Ltd. ..........................      321,195 
                                                                                           ---------- 
                                                                                            6,209,062 
                                                                                           ---------- 
                                INDONESIA 7.2%                                                        
   IND            91,000        Panin Bank .............................................      108,253 
   IND            84,000        P.T. Bali Bank .........................................      287,788 
   IND            20,000     (a)P.T. Barito Pacific Timber .............................      109,443 
   IND           124,000        P.T. Evershine Textile .................................      300,921 
   IND            14,000        P.T. Hadtex Indosyntex .................................       16,155 
   IND            38,000     (a)P.T. Indah Kiat Pulp & Paper ...........................       35,712 
   IND            12,000        P.T. Indorama Synthetics ...............................       38,257 
   IND            74,000     (a)P.T. Inti Indorayon Utama ..............................      164,617 
   IND            98,000        P.T. Japfa Comfeed Indonesia ...........................      144,560 
   IND            93,000        P.T. Pabrik Kertas Tjiwi Kim ...........................      159,311 
   IND            99,000        P.T. Panin Bank ........................................      155,457 
   IND            70,000        Toko Gunung Agung ......................................      100,758 
                                                                                           ---------- 
                                                                                            1,621,232 
                                                                                           ---------- 

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

28

497
127th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 127th
FRANKLIN INTERNATIONAL TRUST                                                    

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.) 

                                                        [Enlarge/Download Table]


                SHARES/                                                                                              VALUE   
COUNTRY*       WARRANTS      FRANKLIN PACIFIC GROWTH FUND                                                          (NOTE 1)  
-----------------------  ----------------------------------------------------------------------------------------------------
                                                                                                                             
                             COMMON STOCKS & WARRANTS (CONT.)                                                                
                             JAPAN 6.2%                                                                                      
 JPN           53,000        Hitachi, Ltd. ....................................................................  $   421,260 
 JPN           36,000        Matsushita Electric Industrial Co. ...............................................      488,530 
 JPN           11,000        Sony Corp ........................................................................      499,608 
                                                                                                                 ----------- 
                                                                                                                   1,409,398 
                                                                                                                 ----------- 
                             MALAYSIA 5.0%                                                                                   
 MLN           50,000        Commerce Asset Holdings ..........................................................      155,486 
 MLN           47,000        Malaysian International ..........................................................      136,965 
 MLN           79,000        Oriental Holdings BHD ............................................................      305,926 
 MLN          120,000        Public Finance ...................................................................      181,185 
 MLN          160,000        Sime Darby BHD ...................................................................      353,608 
                                                                                                                 ----------- 
                                                                                                                   1,133,170 
                                                                                                                 ----------- 
                             PHILIPPINES 5.1%                                                                                
 PLP            8,800        Philippine Long Distance Telephone Co. ...........................................      559,309 
 US             2,080        Philippine Long Distance Telephone, Co., ADR .....................................      132,340 
 PLP           35,230        Philippine National Bank .........................................................      471,559 
                                                                                                                 ----------- 
                                                                                                                   1,163,208 
                                                                                                                 ----------- 
                             SINGAPORE 8.3%                                                                                  
 SNG           85,000        City Developments, Ltd. ..........................................................      375,158 
 SNG            6,000     (a)City Developments, Ltd., warrants ................................................       15,284 
 US            10,000        GP Batteries International Co., ADR ..............................................       65,000 
 SNG           87,250        Overseas Union Bank, Ltd. ........................................................      440,101 
 SNG          244,000        Parkway Holdings, Ltd ............................................................      413,846 
 SNG           35,500        Singapore Airlines, Ltd ..........................................................      277,554 
 SNG           34,700        Singapore Bus Service ............................................................      284,425 
                                                                                                                 ----------- 
                                                                                                                   1,871,368 
                                                                                                                 ----------- 
                             THAILAND 4.7%                                                                                   
 TLD            4,000        Ayudhya Insurance ................................................................       41,989 
 TLD           70,500        Charoen Pokphand Feedmill ........................................................      467,403 
 TLD           43,000        MDX Public Co., Ltd. .............................................................      305,446 
 TLD           22,700        Oriental Hotel Public Co., Ltd. ..................................................      103,019 
 TLD           37,140        Thai Farmers Bank Public Co., Ltd. ...............................................      146,567 
                                                                                                                 ----------- 
                                                                                                                   1,064,424 
                                                                                                                 ----------- 
                             UNITED STATES .6%                                                                               
 US             6,000     (a)Hansol Paper Co., Ltd. ...........................................................      129,000 
                                                                                                                 ----------- 
                                  TOTAL COMMON STOCKS AND WARRANTS (Cost $14,023,243) .........................   17,914,272 
                                                                                                                 ----------- 
               FACE                                                                                                          
              AMOUNT                                                                                                         
              ------                                                                                                         
                             BONDS .7%                                                                                       
 US             6,000        Dairy Farm International Holdings, cvt. pfd., 6.50%, 09/09/49                             8,460 
 US            13,000        Jardine Strategic Holdings, Ltd., cvt. pfd., 7.50%, 09/09/49 .....................       18,436 
 SWT          150,000        P.T. Indorama Synthetics, cvt., 4.50%, 12/31/97 ..................................      117,425 
                                                                                                                 ----------- 
                                  TOTAL BONDS (Cost $147,200) .................................................      144,321 
                                                                                                                 ----------- 
                                  TOTAL INVESTMENTS BEFORE REPURHASE AGREEMENTS (COST $14,170,443) ............   18,058,593 
                                                                                                                 ----------- 
                             RECEIVABLES FROM REPURCHASE AGREEMENTS 16.8%                                                    
            3,875,000(b)     Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $3,805,935)                  
                              Collateral: U.S. Treasury Notes, 5.00%, 06/30/92 (Cost $3,805,000) ..............    3,805,000 
                                                                                                                 ----------- 
                                   TOTAL INVESTMENTS (COST $17,975,443) 96.7% .................................   21,863,593 
                                   OTHER ASSETS AND LIABILITIES, NET 3.3% .....................................      755,412 
                                                                                                                 ----------- 
                                   NET ASSETS 100.0% ..........................................................  $22,619,005 
                                                                                                                 =========== 

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

29

497
128th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 128th
FRANKLIN INTERNATIONAL TRUST                                                    

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.) 

                                                        [Enlarge/Download Table]


                                                                                                                  VALUE   
FRANKLIN PACIFIC GROWTH FUND                                                                                    (NOTE 1)  
--------------------------------------------------------------------------------------------------------------------------
                                                                                                                          
                    At October 31, 1993, the net unrealized appreciation based on the cost of                             
                     investments for income tax purposes of $17,979,467 was as follows:                                   
                      Aggregate gross unrealized appreciation for all investments in which there was                      
                       an excess of value over tax cost ....................................................   $3,959,901 
                      Aggregate gross unrealized depreciation for all investments in which there was                      
                       an excess of tax cost over value ....................................................      (75,775)
                                                                                                               ---------- 
                      Net unrealized appreciation ..........................................................   $3,884,126 
                                                                                                               ========== 

CURRENCY LEGEND:                                                                
AUS - Australia                                                                 
HK  - Hong Kong                                                                 
IND - Indonesia                                                                 
JPN - Japan                                                                     
MLN - Malaysia                                                                  
PLP - Philippines                                                               
SNG - Singapore                                                                 
SWT - Switzerland                                                               
TLD - Thailand                                                                  
US  - United States                                                             

*  Securities traded in currency of country indicated.                        
(a) Non-income producing.                                                       
(b) Face amount for repurchase agreements is for the underlying collateral.     

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

30

497
129th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 129th
FRANKLIN INTERNATIONAL TRUST                                                    

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993         

                                                        [Enlarge/Download Table]


                  SHARES/                                                           VALUE  
COUNTRY*         WARRANTS    FRANKLIN PACIFIC GROWTH FUND                         (NOTE 1) 
-------------------------------------------------------------------------------------------
                                                                                           
                             COMMON STOCKS & WARRANTS 87.6%                                
                             AUSTRALIA 8.3%                                                
 AUS           64,400        Australia & New Zealand Banking Group, Ltd. .....  $  186,131 
 AUS            8,000        Brambles Industries, Ltd. .......................      69,046 
 AUS           83,000        Comalco, Ltd. ...................................     204,514 
 AUS           77,000        Gio Australia Holdings, Ltd. ....................     164,091 
 AUS           65,600        Leighton Holdings, Ltd. .........................     100,479 
 AUS          146,000        National Foods, Ltd. ............................     179,874 
 AUS           48,950        Pacific Dunlop, Ltd. ............................     170,815 
 AUS          160,300        Pioneer International, Ltd. .....................     278,089 
 AUS           79,500        Westpac Banking Corp. ...........................     239,833 
                                                                                ---------- 
                                                                                 1,592,872 
                                                                                ---------- 
                             AUSTRIA .8%                                                   
 AST            1,300        EVN-Energie Versorgung, Ag ......................     142,981 
                                                                                ---------- 
                             BELGIUM 1.0%                                                  
 BEL              700        Arbed, SA .......................................      73,915 
 BEL              340        Solvay, SA ......................................     127,152 
                                                                                ---------- 
                                                                                   201,067 
                                                                                ---------- 
                             CANADA 4.6%                                                   
 CAN            7,600        Bank of Montreal ................................     154,553 
 CAN           10,000        Canadian Imperial Bank of Commerce ..............     239,302 
 CAN            9,100        London Insurance Group, Inc. ....................     177,311 
 CAN            9,300        National Bank of Canada .........................      74,770 
 CAN           15,300        Toronto-Dominion Bank ...........................     243,124 
                                                                                ---------- 
                                                                                   889,060 
                                                                                ---------- 
                             FRANCE 4.9%                                                   
 US               500        Banque Nationale de Paris, ADR ..................      24,630 
 FR             1,805        Compagnie de Saint Gobain .......................     172,783 
 FR             1,800     (a)ECCO, SA ........................................     165,560 
 FR               830     (a)Labinal, SA .....................................      97,547 
 FR             1,100        Societe Generale de Paris .......................     130,590 
 FR             2,370     (a)Societe Nationale Elf Aquitaine .................     185,450 
 FR             2,800        Total, SA .......................................     156,764 
                                                                                ---------- 
                                                                                   933,324 
                                                                                ---------- 
                             GERMANY 3.0%                                                  
 GER              500        BASF, Ag ........................................      82,165 
 GER              900        Bayer, Ag .......................................     171,357 
 GER              236        Bayerische Motoren Werke, Ag ....................      88,544 
 GER              310        Bayerische Vereinsbank, Ag ......................      97,447 
 GER              265        Deutsche Bank, Ag ...............................     133,757 
                                                                                ---------- 
                                                                                   573,270 
                                                                                ---------- 
                             HONG KONG 11.8%                                               
 HK           300,000        CNT Group, Ltd. .................................      43,478 
 HK            93,000        Cathay Pacific Airways, Ltd. ....................     151,630 
 HK            42,000        Cheung Kong Holdings, Ltd. ......................     198,370 
 HK            88,000        Hang Lung Development Co., Ltd. .................     169,669 
 HK            40,000        Henderson Land Development ......................     164,337 
 HK            54,000        Hong Kong & China Gas Co., Ltd. .................     131,366 
 HK            50,000        Hong Kong Land Holdings, Ltd. ...................     133,929 
 HK           110,000        Hong Kong Telecommunications, Ltd. ..............     237,707 
 HK            45,000        Hutchison Whampoa, Ltd. .........................     169,449 
 HK            19,200        Jardine Matheson Holdings, Ltd. .................     183,851 

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

31

497
130th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 130th
FRANKLIN INTERNATIONAL TRUST                                                    

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.) 

                                                        [Enlarge/Download Table]

             SHARES/                                                                                VALUE    
 COUNTRY*    WARRANTS     FRANKLIN INTERNATIONAL EQUITY FUND                                       (NOTE 1)  
-------------------------------------------------------------------------------------------------------------
                                                                                                             
                          COMMON STOCKS & WARRANTS (CONT.)                                                   
                          HONG KONG (CONT.)                                                                  
  HK         45,000       Jardine Strategic Holdings, Ltd.......................................  $  186,335 
  HK         61,000       New World Development Co., Ltd........................................     211,541 
  HK         20,000       Sun Hung Kai Properties, Ltd..........................................     137,164 
  HK        128,000       Sun Tak Holdings, Ltd.................................................     152,381 
                                                                                                  ---------- 
                                                                                                   2,271,207 
                                                                                                  ---------- 

                          ITALY 4.0%                                                                         
  ITY        71,100       Autostrade-Concessioni e Construzioni.................................      73,195 
  ITY        35,000       Banca Commerciale Italiana............................................      84,460 
  ITY        23,300       Banco di Sardegna S.p.A...............................................     171,925 
  ITY        19,140    (a)Cartiere Burgo S.p.A..................................................     107,508 
  ITY        39,000       Danieli & C. Officine Meccaniche S.p.A................................     133,591 
  ITY        44,600       Sasib S.p.A...........................................................     142,370 
  ITY        20,000       Unicem S.p.A..........................................................      56,231 
                                                                                                  ---------- 
                                                                                                     769,280 
                                                                                                  ---------- 

                          JAPAN 3.4%                                                                         
  JPN        29,000       Hitachi, Ltd..........................................................     230,501 
  JPN        15,000       Matsushita Electric Industrial Co.....................................     203,554 
  JPN         5,000       Sony Corp.............................................................     227,094 
                                                                                                  ---------- 
                                                                                                     661,149 
                                                                                                  ---------- 

                          MALAYSIA .7%                                                                       
  MLN        15,000       Telekom, Malaysia.....................................................     126,736 
                                                                                                  ---------- 

                          MEXICO 5.3%                                                                        
  MEX       110,000    (a)Aerovias de Mexico....................................................      59,821 
  MEX        14,100    (a)Desc Sociedad de Fomento Industrial...................................      67,433 
  MEX        14,600       Grupo Embotelladoras de Mexico........................................     210,173 
  MEX        10,000       Grupo Financiero Banamex..............................................      60,301 
  MEX        90,000       Grupo Industrial Maseca, SA...........................................      95,010 
  MEX         4,000       Grupo Televisa SA de C.V..............................................     108,125 
  MEX         6,700       Kimberly-Clark de Mexico, SA..........................................     102,879 
  US          3,900       Telefonos de Mexico, ADR..............................................     213,525 
  MEX        18,000       Vitro, SA.............................................................     104,223 
                                                                                                  ---------- 
                                                                                                   1,021,490 
                                                                                                  ---------- 

                          NETHERLANDS 8.0%                                                                   
  NTH         4,400       ABN Amro Holdings, NV.................................................     167,846 
  NTH         1,280       Akzo, NV..............................................................     121,934 
  NTH         3,000    (a)DSM, NV...............................................................     162,735 
  NTH         6,300       Internationale Nederlanden Groep, NV..................................     275,135 
  NTH         2,800       Koninklijke Bijenkorf Beheer..........................................     144,448 
  NTH         9,380       Koninklijke KNP, NV...................................................     200,338 
  NTH         4,800       Koninklijke Pakhoed, NV...............................................     118,075 
  NTH         6,300       Oce-Van Der Grinten, NV...............................................     190,787 
  NTH         6,900    (a)Philips Electronics, NV...............................................     143,338 
                                                                                                  ---------- 
                                                                                                   1,524,636 
                                                                                                  ---------- 

                          NEW ZEALAND .6%                                                                    
  NWZ        50,000       New Zealand Telecommunications........................................     123,343 
                                                                                                  ---------- 

                          PHILIPPINES 1.2%                                                                   
  PLP         2,800       Philippine Long Distance Telephone Co.................................     177,962 
  PLP         3,190       Philippine National Bank..............................................      42,699 
                                                                                                  ---------- 
                                                                                                     220,661 
                                                                                                  ---------- 

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

32

497
131st Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 131st
FRANKLIN INTERNATIONAL TRUST                                                    

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.) 

                                                        [Enlarge/Download Table]

             SHARES/                                                                                VALUE    
 COUNTRY*    WARRANTS     FRANKLIN INTERNATIONAL EQUITY FUND                                       (NOTE 1)  
-------------------------------------------------------------------------------------------------------------
                                                                                                             
                          COMMON STOCKS & WARRANTS (CONT.)                                                   
                          SINGAPORE 2.4%                                                                     
  SNG        54,000       City Developments, Ltd................................................  $  238,335 
  SNG         5,400    (a)City Developments, Ltd., warrants.....................................      13,755 
  SNG        25,000       Overseas Union Bank, Ltd..............................................     126,103 
  SNG        36,000       Sime Darby Berhad.....................................................      80,353 
                                                                                                  ---------- 
                                                                                                     458,546 
                                                                                                  ---------- 

                          SPAIN 7.5%                                                                         
  SP          6,350       Banco Bilbao Vizcaya, SA..............................................     163,360 
  SP          1,100       Banco de Andalucia....................................................     135,964 
  SP          2,430       Banco Intercontinental Espana.........................................     213,145 
  SP          1,450       Banco Popular Espanol.................................................     188,511 
  SP         36,600       Compania Sevillana de Electricidad....................................     160,517 
  SP          2,800    (a)Cristaleria Espanol, SA...............................................      99,553 
  SP         47,300       Iberdrola, SA.........................................................     313,102 
  SP          3,000       Repsol................................................................      90,134 
  SP          4,000       Unipapel, SA..........................................................      84,736 
                                                                                                  ---------- 
                                                                                                   1,449,022 
                                                                                                  ---------- 

                          SWEDEN 5.2%                                                                        
  SWD        10,150       Astra AB, Class A.....................................................     223,288 
  SWD        13,100       Esselte AB............................................................     158,582 
  SWD        12,100       Marieberg Tidnings AB.................................................     194,806 
  SWD         8,400    (a)SKF AB................................................................     130,076 
  SWD         3,300       Stora Kopparbergs.....................................................   1,148,842 
  SWD        10,950    (a)Svenska Handelsbanke, Inc., Class A...................................     150,723 
                                                                                                  ---------- 
                                                                                                   1,006,317 
                                                                                                  ---------- 

                          SWITZERLAND 4.2%                                                                   
  SWT           320       BBC Brown Boveri, Ag..................................................     216,385 
  SWT            68       CS Holdings...........................................................     155,797 
  SWT            50       Nestle, Ag............................................................      40,053 
  SWT           507    (a)Schweiz Rueckversicherungs............................................     255,245 
  SWT           120       Societe Generale de Surveillance Holdings, SA.........................     145,769 
                                                                                                  ---------- 
                                                                                                     813,249 
                                                                                                  ---------- 
                          UNITED KINGDOM 10.3%                                                               
  UK        109,000       Albert Fisher Group, Plc..............................................     121,574 
  UK         20,000       BICC, Ag, Plc.........................................................     121,648 
  UK         35,000       British Airways, Plc..................................................     196,749 
  UK         15,800       Cable & Wireless......................................................     117,602 
  UK          8,000       Glaxo Holdings, Plc...................................................      81,139 
  UK         33,300       Govett & Co., Plc.....................................................     168,374 
  UK         42,000       Hillsdown Holdings, Plc...............................................     103,059 
  UK         13,988       Hong Kong Shanghai Bank...............................................     158,929 
  UK         17,100       Kwik Save Group, Plc..................................................     163,262 
  UK         60,000       Medeva, Plc...........................................................     102,613 
  UK         18,400       National Westminster Bank, Plc........................................     151,867 
  UK         79,000    (a)Queens Moat Houses, Plc...............................................      28,196 
  UK         18,000       Scottish Power, Plc., 50P.............................................     111,357 
  UK          8,400       Standard Chartered, Plc...............................................     132,041 
  UK         49,000       Taylor Woodrow, Plc...................................................      89,630 
  UK         17,300       Thames Water, Plc.....................................................     138,929 
                                                                                                  ---------- 
                                                                                                   1,986,969 
                                                                                                  ---------- 

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

33

497
132nd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 132nd
FRANKLIN INTERNATIONAL TRUST                                                    

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.) 

                                                        [Enlarge/Download Table]


           SHARES/                                                                                                    VALUE    
COUNTRY*   WARRANTS       FRANKLIN INTERNATIONAL EQUITY FUND                                                         (NOTE 1)  
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                                               
                          COMMON STOCKS & WARRANTS (CONT.)                                                                     
                          UNITED STATES .4%                                                                                    
 US            2,000      ACE, Ltd............................................................................          65,000 
                                                                                                                   ----------- 
                             TOTAL COMMON STOCKS & WARRANTS (COST $14,198,656)................................      16,830,179 
                                                                                                                   ----------- 
                          PREFERRED STOCK                                                                                      
                          NETHERLANDS                                                                                          
 NTH             216      ABN Amro Holding, NV (Cost $7,457)..................................................           8,240 
                                                                                                                   ----------- 
             FACE                                                                                                              
            AMOUNT                                                                                                             
          ----------                                                                                                           
                          CONVERTIBLE BOND .1%                                                                                 
 US       $   10,000      Jardine Strategic, cvt., 7.50%, 09/09/49 (Cost $10,200).............................          14,181 
                                                                                                                   ----------- 
                             TOTAL COMMON STOCKS & WARRANTS, PREFERRED STOCKS & CONVERTIBLE BONDS                              
                              (COST $14,216,313)..............................................................      16,852,600 
                                                                                                                   ----------- 
                          RECEIVABLES FROM REPURCHASE AGREEMENTS 8.6%                                                          
 US        1,650,000(b)   Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $1,655,407)                       
                           Collateral: U.S. Treasury Notes, 5.00%, 06/30/94 (Cost $1,655,000).................       1,655,000 
                                                                                                                   ----------- 
                             TOTAL INVESTMENTS (COST $15,871,313) 96.3%.......................................      18,507,600 
                             OTHER ASSETS AND LIABILITIES, NET 3.7%...........................................         709,479 
                                                                                                                   ----------- 
                             NET ASSETS 100.0%................................................................     $19,217,079 
                                                                                                                   =========== 
                          At October 31, 1993, the net unrealized appreciation based on the cost of                            
                           investments for income tax purposes of $15,871,313 was as follows:                                  
                            Aggregate gross unrealized appreciation for all investments in which there was an                  
                             excess of value over tax cost....................................................     $ 2,934,352 
                            Aggregate gross unrealized depreciation for all investments in which there was an                  
                             excess of tax cost over value....................................................        (298,065)
                                                                                                                   ----------- 
                            Net unrealized appreciation.......................................................     $ 2,636,287 
                                                                                                                   =========== 

COUNTRY LEGEND:                                                                 

AUS - Australia                                                                 
AST - Austria                                                                   
BEL - Belgium                                                                   
CAN - Canada                                                                    
FRN - France                                                                    
GER - Germany                                                                   
HK  - Hong Kong                                                                 
ITY - Italy                                                                     
JPN - Japan                                                                     
MEX - Mexico                                                                    
MLN - Malaysia                                                                  
NTH - Netherlands                                                               
NWZ - New Zealand                                                               
PLP - Philippines                                                               
SNG - Singapore                                                                 
SP  - Spain                                                                     
SWD - Sweden                                                                    
SWT - Switzerland                                                               
UK  - United Kingdom                                                            
US  - United States                                                             

*  Securities traded in currency of country indicated.                        
(a) Non-income producing.                                                       
(b) Face amount for repurchase agreements is for the underlying collateral.     

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

34  

497
133rd Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 133rd
FRANKLIN INTERNATIONAL TRUST                                                    
FINANCIAL STATEMENTS                                                            

STATEMENTS OF ASSETS AND LIABILITIES                                            
OCTOBER 31, 1993                                                                

                                                        [Enlarge/Download Table]


                                                                                                  Franklin       Franklin   
                                                                                                  Pacific      International
                                                                                                 Growth Fund    Equity Fund 
                                                                                                 -----------   -------------
                                                                                                                            
Assets:                                                                                                                     
 Investments:                                                                                                               
  At identified cost............................................................................ $14,170,443    $14,216,313 
                                                                                                 ===========    =========== 
  At value......................................................................................  18,058,593     16,852,600 
 Receivables from repurchase agreements at value and cost.......................................   3,805,000      1,655,000 
 Cash...........................................................................................     159,766         52,785 
 Foreign currencies (Cost $580,141 and $747,748, respectively)..................................     578,813        743,156 
 Receivables:                                                                                                               
  Dividends and interest........................................................................      51,560         46,323 
  Capital shares sold...........................................................................     151,982         38,850 
  From affiliates...............................................................................      29,953         32,172 
 Unamortized organization costs (Note 4)........................................................      18,757         18,757 
                                                                                                 -----------    ----------- 
     Total assets...............................................................................  22,854,424     19,439,643 
Liabilities:                                                                                     -----------    ----------- 
 Payables:                                                                                                                  
  Investment securities purchased...............................................................     186,607        161,935 
  Capital shares repurchased....................................................................           -          3,375 
  Shareholder servicing costs...................................................................       1,100          1,240 
 Accrued expenses and other liabilities.........................................................      47,712         56,014 
                                                                                                 -----------    ----------- 
     Total liabilities..........................................................................     235,419        222,564 
                                                                                                 -----------    ----------- 
Net assets, at value............................................................................ $22,619,005    $19,217,079 
                                                                                                 ===========    =========== 
Net assets consist of:                                                                                                      
 Undistributed net investment income............................................................    $ 81,099       $ 80,945 
 Net unrealized appreciation on investments.....................................................   3,888,150      2,636,287 
 Net unrealized depreciation on translation of assets and liabilities in foreign currencies.....        (944)          (960)
 Accumulated net realized gain (loss)...........................................................     122,709       (203,390)
 Capital shares.................................................................................      15,665         15,654 
 Additional paid-in capital.....................................................................  18,512,326     16,688,543 
                                                                                                 -----------    ----------- 
Net assets, at value............................................................................ $22,619,005    $19,217,079 
                                                                                                 ===========    =========== 
Shares outstanding..............................................................................   1,566,521      1,565,424 
                                                                                                 ===========    =========== 
Net asset value per share.......................................................................      $14.44         $12.28 
                                                                                                 ===========    =========== 
Representative computation of Franklin Pacific Growth Fund                                                                  
 net asset value and offering price per share:                                                                              
  Net asset value and redemption price per share                                                                            
   ($22,619,005 divided by 1,566,521)..........................................................      $14.44                 
                                                                                                 ===========                
  Maximum offering price (100/95.5 of $14.44)*..................................................      $15.12                
                                                                                                 ===========                

*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.  

35  

497
134th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 134th
FRANKLIN INTERNATIONAL TRUST                                                    
FINANCIAL STATEMENTS (CONT.)                                                    

STATEMENTS OF OPERATIONS                                                        
FOR THE YEAR ENDED OCTOBER 31, 1993                                             

                                                        [Enlarge/Download Table]

                                                                                  FRANKLIN      FRANKLIN   
                                                                                   PACIFIC    INTERNATIONAL
                                                                                 GROWTH FUND   EQUITY FUND 
                                                                                 -----------  -------------
                                                                                                           
Investment income:                                                                                         
 Interest (Note 1) ............................................................. $   39,387     $   77,733 
 Dividends, net of foreign taxes withheld of $13,794 and $44,945, respectively..    212,242        243,365 
 Realized foreign currency gain (loss), net (Note 1) ...........................    (14,322)       191,058 
                                                                                 ----------     ---------- 
   Total income ................................................................    237,307        512,156 
                                                                                 ----------     ---------- 
Expenses:                                                                                                  
 Shareholder servicing costs (Note 8) ..........................................      6,241         10,055 
 Distribution fees (Note 8) ....................................................     23,351         26,475 
 Reports to shareholders .......................................................     11,194         14,810 
 Custodian fees ................................................................     20,147         20,462 
 Professional fees .............................................................     16,599         19,438 
 Registration & filing fees ....................................................     38,804         33,929 
 Amortization of organization cost (Note 4) ....................................      6,489          6,489 
 Other .........................................................................        295          6,699 
 Payments from Manager (Note 8) ................................................    (76,497)       (84,376)
                                                                                 ----------     ---------- 
   Total expenses ..............................................................     46,623         53,981 
                                                                                 ----------     ---------- 
    Net investment income ......................................................    190,684        458,175 
                                                                                 ----------     ---------- 
Realized and unrealized gain (loss) on investments:                                                        
 Net realized gain (loss) ......................................................    122,709       (139,848)
 Net unrealized appreciation (depreciation) on:                                                            
  Investments ..................................................................  3,811,661      2,933,934 
  Translation of assets and liabilities in foreign currencies ..................       (465)      (155,373)
                                                                                 ----------     ---------- 
Net realized and unrealized gain on investments ................................  3,933,905      2,638,713 
                                                                                 ----------     ---------- 
Net increase in net assets resulting from operations ........................... $4,124,589     $3,096,888 
                                                                                 ==========     ========== 

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

36

497
135th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 135th
FRANKLIN INTERNATIONAL TRUST                                                    
FINANCIAL STATEMENTS (CONT.)                                                    

STATEMENTS OF CHANGES IN NET ASSETS                                             
FOR THE YEARS ENDED OCTOBER 31, 1993 AND 1992                                   

                                                        [Enlarge/Download Table]

                                                                         FRANKLIN PACIFIC          FRANKLIN INTERNATIONAL   
                                                                           GROWTH FUND                   EQUITY FUND        
                                                                    --------------------------   -------------------------- 
                                                                        1993           1992          1993            1992   
                                                                    -----------    -----------   -----------    ----------- 
                                                                                                                            
Increase (decrease) in net assets:                                                                                          
 Operations:                                                                                                                
  Net investment income ........................................... $   190,684    $    62,551   $   458,175    $   100,077 
  Net realized gain (loss) on investments .........................     122,709        151,395      (139,848)       (63,542)
  Net unrealized appreciation (depreciation) on investments .......   3,811,661         76,489     2,933,934       (297,647)
  Net unrealized appreciation (depreciation) on translation of                                                              
   assets and liabilities denominated in foreign currencies .......        (465)          (479)     (155,373)       154,413 
                                                                    -----------    -----------   -----------    ----------- 
  Net increase (decrease) in net assets                                                                                     
  resulting from operations .......................................   4,124,589        289,956     3,096,888       (106,699)
 Distributions to shareholders:                                                                                             
  From undistributed net investment income ........................    (139,768)       (39,625)     (407,731)       (77,064)
  From net realized capital gains .................................    (151,395)            --            --             -- 
 Increase in net assets from capital                                                                                        
  share transactions (Note 5) .....................................  13,061,561      4,308,762     9,583,991      5,842,135 
                                                                    -----------    -----------   -----------    ----------- 
      Net increase in net assets ..................................  16,894,987      4,559,093    12,273,148      5,658,372 
Net assets:                                                                                                                 
 Beginning of year ................................................   5,724,018      1,164,925     6,943,931      1,285,559 
                                                                    -----------    -----------   -----------    ----------- 
 End of year ...................................................... $22,619,005    $ 5,724,018   $19,217,079    $ 6,943,931 
                                                                    ===========    ===========   ===========    =========== 
Undistributed net investment income included in net assets:                                                                 
 Beginning of year ................................................ $    30,183    $     7,257   $    30,501    $     7,488 
                                                                    ===========    ===========   ===========    =========== 
 End of year ...................................................... $    81,099    $    30,183   $    80,945    $    30,501 
                                                                    ===========    ===========   ===========    =========== 

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

37

497
136th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 136th
FRANKLIN INTERNATIONAL TRUST                                                    
NOTES TO FINANCIAL STATEMENTS                                                   

1. SIGNIFICANT ACCOUNTING POLICIES                                              

Franklin International Trust (the Trust) is an open-end management investment   
company (mutual fund) registered under the Investment Company Act of 1940, as   
amended. The Trust currently has two separate diversified Funds (the Funds) in  
operation, consisting of the Franklin Pacific Growth Fund (the Pacific Fund)    
and the Franklin International Equity Fund (the International Fund). Each of the
Funds issues a separate series of the Trust's shares and maintains a totally    
separate investment portfolio.                                                  

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

A. SECURITY VALUATIONS: Portfolio securities listed on a U.S. 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, at the mean between the most recent quoted bid  
and asked prices. Other securities for which market quotations are readily      
available are valued at current market values, obtained from a pricing service, 
which are based on a variety of factors, including recent trades, institutional 
size trading in similar types of securities (considering yield, risk and        
maturity) and/or developments related to specific securities. Portfolio         
securities which are traded both in the over-the-counter market and on a        
securities exchange are valued according to the broadest and most representative
market as determined by the Manager. Short-term securities and similar          
investments with remaining maturities of 60 days or less are valued at amortized
cost, which approximates value.                                                 

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

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

B. INCOME TAXES: It is the Trust's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to       
distribute all of its taxable income to its shareholders. Therefore, no income  
tax provision is required. Each Fund is treated as a separate entity in the     
determination of compliance with the Internal Revenue Code.                     

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

D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Dividend income and           
distributions to shareholders are recorded on the ex-dividend date. Interest    
income and estimated expenses are accrued daily. Bond discount and premium are  
amortized as required by the Internal Revenue Code.                             

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

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

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

2. FORWARD FOREIGN CURRENCY CONTRACTS:                                          

A forward currency contract which is individually negotiated and privately      
traded by currency traders and their customers is an obligation to purchase or  
sell a specific currency for an agreed-upon price at a future date.             

38

497
137th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 137th
FRANKLIN INTERNATIONAL TRUST                                                    
NOTES TO FINANCIAL STATEMENTS (CONT.)                                           

2. FORWARD FOREIGN CURRENCY CONTRACTS (CONT.)                                   

The Trust may enter into forward contracts with the goal of minimizing the risk 
to the Trust from adverse changes in the relationship between currencies or to  
enhance income. The Trust may also enter into a forward contract in relation to 
a security denominated in a foreign currency in order to "lock in" the U.S.     
dollar price of that security.                                                  

To limit potential risks in connection with forward contracts, the Funds will   
set aside or segregate in its custodian bank sufficient cash, cash equivalents  
or readily marketable debt securities equal to the amount of foreign currency   
purchased under forward contracts, or the Funds will cover any commitments to   
deliver currency under these contracts by acquiring a sufficient amount of the  
underlying currency. The segregated account is marked to market on a daily      
basis. The Funds could be exposed to risk if counterparties to the contracts are
unable to meet the terms of their contracts or if the value of the foreign      
currency changes unfavorably.                                                   

At October 31, 1993, the Trust had no outstanding foreign currency forward      
contracts.                                                                      

3. 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 Funds purchase 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 Funds 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 Funds, with the 
value of the underlying security marked to market daily to maintain coverage of 
at least 100%. The collateral is delivered to the Funds' custodian and held     
until resold to the dealer or bank. At October 31, 1993, all outstanding        
repurchase agreements held by the Funds had been entered into on October 29,    
1993.                                                                           

4. UNAMORTIZED ORGANIZATION COSTS                                               

The organization costs of each Fund are amortized on a straight-line basis over 
a period of five years from September 20, 1991 (the effective date of           
registration under the Securities Act of 1933). In the event Franklin Resources,
Inc. (which was the sole shareholder prior to September 20, 1991) redeems its   
shares within the five-year period, the pro rata share of the then-unamortized  
deferred organization costs will be deducted from the redemption price paid to  
Franklin Resources, Inc. New investors purchasing shares of the Funds subsequent
to that date bear such costs during the amortization period only as such        
charges are accrued daily against investment income. Organization costs for the 
Pacific Fund and the International Fund amounted to $32,447 each.               

5. TRUST SHARES                                                                 

At October 31, 1993, there were an unlimited number of shares of beneficial     
interest authorized with a par value of $0.01 per share. Transactions in each of
the Fund's shares for the years ended October 31, 1993 and 1992 were as follows:

                                                        [Enlarge/Download Table]


                                                                FRANKLIN PACIFIC           FRANKLIN INTERNATIONAL   
                                                                   GROWTH FUND                   EQUITY FUND        
                                                          ---------------------------   --------------------------- 
                                                           SHARES            AMOUNT      SHARES            AMOUNT   
                                                          ---------       -----------   ---------       ----------- 
                                                                                                                    
1993                                                                                                                
 Shares sold ............................................   492,991       $ 6,036,865     308,150       $ 3,352,168 
 Shares issued in reinvestment of distributions .........    25,762           277,029      34,587           363,060 
 Shares redeemed ........................................   (43,005)         (513,973)    (56,865)         (611,058)
 Changes from exercise of exchange privilege:                                                                       
  Shares sold ...........................................   845,277        10,586,263   1,086,855        12,018,568 
  Shares redeemed .......................................  (279,602)       (3,324,623)   (500,321)       (5,538,747)
                                                          ---------       -----------   ---------       ----------- 
 Net increase ........................................... 1,041,423       $13,061,561     872,406       $ 9,583,991 
                                                          =========       ===========   =========       =========== 

39

497
138th Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 138th
FRANKLIN INTERNATIONAL TRUST                                                    
NOTES TO FINANCIAL STATEMENTS (CONT.)                                           

5. TRUST SHARES (CONT.)                                                         

                                                        [Enlarge/Download Table]


                                                               FRANKLIN PACIFIC            FRANKLIN INTERNATIONAL   
                                                                  GROWTH FUND                   EQUITY FUND         
                                                          ---------------------------   --------------------------- 
                                                           SHARES           AMOUNT       SHARES            AMOUNT   
                                                          --------        -----------   --------        ----------- 
                                                                                                                    
1992                                                                                                                
 Shares sold ............................................  143,221        $ 1,494,386    314,165        $ 3,247,450 
 Shares issued in reinvestment of distributions .........    3,573             38,081      6,879             71,742 
 Shares redeemed ........................................  (31,830)          (338,279)   (21,385)          (221,822)
 Changes from exercise of exchange privilege:                                                                       
  Shares sold ...........................................  519,876          5,567,827    416,261          4,295,595 
  Shares redeemed ....................................... (225,428)        (2,453,253)  (150,570)        (1,550,830)
                                                          --------        -----------   --------        ----------- 
 Net increase ...........................................  409,412        $ 4,308,762    565,350        $ 5,842,135 
                                                          ========        ===========   ========        =========== 

6. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS                                    

At October 31, 1993, for tax purposes, the Funds had accumulated net realized   
gains or capital loss carryovers as follows:                                    

                                                                [Download Table]


                                        FRANKLIN PACIFIC   FRANKLIN INTERNATIONAL
                                           GROWTH FUND          EQUITY FUND      
                                        -----------------  ----------------------
                                                                                 
Accumulated net realized gains              $126,733             $    _          
                                            ========             ========        
Capital loss carryovers                                                          

Expiring in: 2000 .....................          _               $ 63,542        
             2001 .....................          _                139,848        
                                            --------             --------        
                                            $    _               $203,390        
                                            ========             ========        

For income tax purposes, the aggregate cost of securities is higher (and        
unrealized appreciation is lower) than for financial reporting purposes at      
October 31, 1993 by $4,024 in the Pacific Growth Fund.                          

7. PURCHASES AND SALES OF SECURITIES                                            

Aggregate purchases and sales of securities (excluding purchases and sales of   
short-term securities) for the year ended October 31, 1993, were as follows:    

                                                                [Download Table]


                              FRANKLIN PACIFIC          FRANKLIN INTERNATIONAL
                                GROWTH FUND                  EQUITY FUND      
                              ----------------          ----------------------
                                                                              
Purchases ..................    $12,827,865                  $12,800,296      
                                ===========                  ===========      
Sales ......................    $ 3,873,316                  $ 4,700,153      
                                ===========                  ===========      

8. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES                             

Franklin Advisers, Inc. ("Manager"), under the terms of a management agreement, 
provides investment advice, office space and facilities to each Fund and        
receives fees computed monthly on the average daily net assets of each Fund at  
an annualized rate of 1% of the first $100 million of net assets; 9/10 of 1% of 
net assets in excess of $100 million up to and including $250 million; 8/10 of  
1% of net assets in excess of $250 million up to and including $500 million; and
3/4 of 1% of net assets                                                         

40

497
Last Page of 139
TOC
1st
Previous
Next
↓Bottom
Just 139th
FRANKLIN INTERNATIONAL TRUST                                                    
NOTES TO FINANCIAL STATEMENTS (CONT.)                                           

8. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)                     

in excess of $500 million. Under a subadvisory agreement effective January 1,   
1993, Templeton Investment Counsel, Inc. ("TICI" or the "Subadviser"), an       
indirect subsidiary of Templeton Worldwide, Inc., which is a direct,            
wholly-owned subsidiary of Franklin Resources, Inc. ("Resources") receives      
from the Manager a fee equal to an annual rate of 1/2 of 1% of the value of     
each Fund's net assets up to and including $100 million; 2/5 of 1% of net       
assets in excess of $100 million up to and including $250 million; 3/10 of 1%   
of net assets in excess of $250 million up to and including $500 million; and   
1/4 of 1% of net assets in excess of $500 million. Prior to January 1, 1993,    
Barclays de Zoete Wedd Investment Management Inc., a subsidiary of Barclays de  
Zoete Wedd U.S. Holdings Inc., which itself is an indirect wholly owned         
subsidiary of Barclays Bank PLC, served as the subadviser under a contract      
with the Manager providing services to the shareholders with the same fee       
structure as Templeton Investment Counsel, Inc. Fees to which the manager is    
entitled by contract aggregated $93,882 and $108,434 for the Pacific Fund and   
the International Equity Fund, respectively, for the year ended October 31,     
1993. The terms of these agreements provide that aggregate annual expenses of   
the Funds 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 Funds' shares are registered. The Funds' expenses did not   
exceed these limitations; however, for the year ended October 31, 1993,         
Franklin Advisers, Inc. did not impose management fees for the Pacific Fund and 
the International Fund and bore other expenses as reflected in the Statements   
of Operations.                                                                  

In its capacity as underwriter for the shares of the Trust, Franklin/Templeton  
Distributors, Inc. receives commissions on sales of the Trust's shares.         
Commissions received by Franklin/Templeton Distributors, Inc. and the amounts   
which were subsequently paid to other dealers for the year ended October 31,    
1993 were as follows:                                                           

                                                        [Enlarge/Download Table]


                                               FRANKLIN PACIFIC  FRANKLIN INTERNATIONAL
                                                 GROWTH FUND         EQUITY FUND       
                                               ----------------  ----------------------
                                                                                       
Total commissions received ...................    $214,144             $170,962        
                                                  ========             ========        
Paid to other dealers ........................    $187,097             $145,805        
                                                  ========             ========        

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 Funds.                 

Under the terms of a Distribution Agreement pursuant to Rule 12b-1 of the       
Investment Company Act of 1940, the Funds will reimburse Franklin/Templeton     
Distributors, Inc., in an amount up to 0.25% per annum which covered costs      
incurred in the furnishing of promotion, offering and marketing of the Funds'   
shares. Fees incurred by the Pacific Fund and International Fund under the      
agreement aggregated $23,351 and $26,475, respectively, for the year ended      
October 31, 1993.                                                               

Pursuant to a shareholder service agreement with Franklin/Templeton Investor    
Services, Inc., the Funds pay costs on a per shareholder account basis. Costs   
incurred for the year ended October 31, 1993 aggregated $16,296, of which       
$16,028 was paid to Franklin/Templeton Investor Services, Inc.                  

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

9. FINANCIAL HIGHLIGHTS                                                         

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

41

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘497’ Filing		Date		First		Last			Other Filings
Filed on:		3/16/95							None on these Dates
		2/1/95		1		97
		11/4/94		49		53
		9/18/94		119
		9/1/94		39
		7/1/94		1		6
		4/30/94		120
		3/1/94		1		100
		12/7/93		112		124
		11/30/93		125
		10/31/93		8		139
		10/29/93		137
		4/30/93		113
		4/1/93		119
		1/1/93		56		139
		12/31/92		12		59
		10/31/92		9		137
		4/1/92		119
		3/31/92		119
									List all Filings