o 105 P-1

                        SUPPLEMENT DATED JANUARY 1, 2000
                              TO THE PROSPECTUS OF

                         FRANKLIN'S AGE HIGH INCOME FUND
                              DATED OCTOBER 1, 1999

The prospectus is amended as follows:

I. The section "Sales charge waivers" on page 20 is replaced with the following:

  SALES CHARGE WAIVERS Class A shares may be purchased  without an initial sales
  charge or CDSC by various individuals, institutions and retirement plans or by
  investors who reinvest  certain  distributions  and proceeds  within 365 days.
  Certain investors also may buy Class C shares without an initial sales charge.
  The  CDSC  for  each  class  may  be  waived  for  certain   redemptions   and
  distributions.  If you would like  information  about  available  sales charge
  waivers,  call your investment  representative or call Shareholder Services at
  1-800/632-2301.   For  information   about  retirement  plans,  you  may  call
  Retirement Plan Services at  1-800/527-2020.  A list of available sales charge
  waivers also may be found in the Statement of Additional Information (SAI).

II. The section "Dealer compensation" on page 30 is replaced with the following:

  DEALER COMPENSATION  Qualifying dealers who sell fund shares may receive sales
  commissions  and  other  payments.   These  are  paid  by  Franklin  Templeton
  Distributors, Inc. (Distributors) from sales charges, distribution and service
  (12b-1) fees and its other resources.

                                            Class A        Class B     Class C
- --------------------------------------------------------------------------------

  Commission (%)                                 -           3.00        2.00

  Investment under $100,000                   4.00              -           -

  $100,000 but under $250,000                 3.25              -           -

  $250,000 but under $500,000                 2.25              -           -

  $500,000 but under $1 million               1.85              -           -

  $1 million or more                    up to 0.75 1            -           -

  12b-1 fee to dealer                         0.15           0.15 2      0.65 3

  A  dealer  commission  of up to 1% may be paid on  Class  A NAV  purchases  by
  certain retirement plans1 and on Class C NAV purchases. A dealer commission of
  up to 0.25% may be paid on Class A NAV  purchases by certain  trust  companies
  and  bank  trust   departments,   eligible   governmental   authorities,   and
  broker-dealers  or others on behalf of clients  participating in comprehensive
  fee programs.

  1.  During the first year  after  purchase,  dealers  may not be  eligible  to
  receive the 12b-1 fee.
  2.  Dealers may be eligible to receive up to 0.15% from
  the date of purchase.  After 8 years, Class B shares convert to Class A shares
  and dealers may then receive the 12b-1 fee  applicable  to Class A.
  3.  Dealers may be  eligible to receive up to 0.15%  during the first year
  after purchase  and may be eligible to receive the full 12b-1 fee starting in
  the 13th month.

III.  The section  "Statements  and  reports"  on page 28 is  replaced  with the
      following:

  STATEMENTS AND REPORTS You will receive quarterly account statements that show
  all your  account  transactions  during  the  quarter.  You also will  receive
  written notification after each transaction affecting your account (except for
  distributions and transactions made through automatic investment or withdrawal
  programs,  which will be reported on your quarterly statement).  You also will
  receive  the  fund's  financial  reports  every six  months.  To  reduce  fund
  expenses, we try to identify related shareholders in a household and send only
  one copy of the financial reports. If you need additional copies,  please call
  1-800/DIAL BEN.

  If there is a dealer  or other  investment  representative  of  record on your
  account,  he or  she  also  will  receive  copies  of  all  notifications  and
  statements and other information about your account directly from the fund.

              Please keep this supplement for future reference.







FRANKLIN'S
AGE HIGH
INCOME FUND

FRANKLIN HIGH INCOME TRUST
CLASS A, B & C

STATEMENT OF ADDITIONAL INFORMATION

OCTOBER 1, 1999, AS AMENDED JANUARY 1, 2000

[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
- --------------------------------------------------------------------------------

This Statement of Additional Information (SAI) is not a prospectus.  It contains
information in addition to the information in the fund's prospectus.  The fund's
prospectus,  dated  October  1,  1999,  which we may  amend  from  time to time,
contains the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectus.

The audited  financial  statements  and  auditor's  report in the fund's  Annual
Report to Shareholders, for the fiscal year ended May 31, 1999, are incorporated
by reference (are legally a part of this SAI).

For a free  copy of the  current  prospectus  or  annual  report,  contact  your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).

CONTENTS

Goals and Strategies                                 2
Risks                                                7
Officers and Trustees                               10
Management and Other Services                       12
Portfolio Transactions                              13
Distributions and Taxes                             14
Organization, Voting Rights
 and Principal Holders                              16
Buying and Selling Shares                           16
Pricing Shares                                      23
The Underwriter                                     23
Performance                                         25
Miscellaneous Information                           28
Description of Ratings                              28

- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:

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

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

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

105 SAI 01/00

GOALS AND STRATEGIES
- -------------------------------------------------------------------------------

The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is to seek capital appreciation to the extent it
is possible and consistent with the fund's principal goal. These goals are
fundamental, which means they may not be changed without shareholder approval.

DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.

The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.

The fund may buy certain bonds issued at a discount which defer payment of
interest or pay no interest until maturity, known as zero-coupon bonds, or
which pay the interest through the issuance of additional bonds, known as
pay-in-kind bonds. For federal tax purposes, holders of these bonds, such as
the fund, are deemed to receive interest over the life of the bonds and are
taxed as if interest were paid on a current basis although the holder does
not receive cash interest payments until the bonds mature.

The fund may invest in debt securities on which the issuer is not currently
making interest payments (defaulted debt securities). The fund may buy
defaulted debt securities if, in the opinion of the manager, it appears
likely that the issuer may resume interest payments or other advantageous
developments appear likely in the near future. These securities may be
illiquid. The fund will not invest more than 10% of its total assets, at the
time of purchase, in defaulted debt securities, although this is not a
fundamental policy and may be changed by the fund's board of trustees without
shareholder approval.

RATINGS. The fund may buy both rated and unrated debt securities. Independent
rating organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk. The fund may buy debt securities regardless of their rating and up to
100% of the portfolio may be invested in non-investment grade securities
(rated lower than BBB by S&P or Baa by Moody's). Please see "Description of
Ratings" for details.

Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis
at the time of the rating. Credit quality in the high yield debt market,
however, can change suddenly and unexpectedly, and credit ratings may not
reflect the issuer's current financial condition. For these reasons, the
manager does not rely principally on the ratings assigned by rating agencies,
but performs its own independent investment analysis of securities being
considered for the fund's portfolio. In its analysis, the manager considers a
variety of factors, including:

o    the experience and managerial strength of the issuer;

o    responsiveness to changes in interest rates and business conditions;

o    debt maturity schedules and borrowing requirements;

o    the issuer's  changing  financial  condition and market  recognition of the
     change; and

o    relative values based on such factors as anticipated cash flow, interest or
     dividend coverage, asset coverage, and earnings prospects.

The fund may purchase certain high yield, fixed-income securities at a
discount to par value. These securities, when held to maturity or retired,
may include an element of capital gain. The fund does not generally intend to
hold securities solely for the purpose of achieving capital gain, but will
generally hold them as long as expected returns on the securities remain
attractive. The fund may realize a capital loss when a security is purchased
at a premium (that is, in excess of its stated or par value) and is held to
maturity, or is called or redeemed at a price lower than its purchase price.
The fund may also realize a capital gain or loss upon the sale of securities,
whether purchased at par, a discount, or a premium.

EQUITY SECURITIES The fund may invest in dividend-paying equity securities.
Equity securities generally entitle the holder to participate in a company's
general operating results. These include common stock, preferred stock,
warrants and rights. The fund's equity investments generally will be limited
to dividend-paying common or preferred stocks. As of May 31, 1999, the
percentage of the fund's assets invested in equity securities was 3.758%.

The purchaser of an equity security typically receives an ownership interest
in the company as well as certain voting rights. The owner of an equity
security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also
participate in a company's success or lack of success through increases or
decreases in the value of the company's shares as traded in the public
trading market for such shares. Equity securities generally take the form of
common stock or preferred stock. Preferred stockholders typically receive
greater dividends but may receive less appreciation than common stockholders
and may have greater voting rights as well. Equity securities may also
include warrants or rights. Warrants or rights give the holder the right to
purchase a common stock at a given time for a specified price.

TRADE CLAIMS The fund may invest a portion of its assets in trade claims
purchased from creditors of companies in financial difficulty. For purchasers
such as the fund, trade claims offer the potential for profits since they are
often purchased at a significantly discounted value and, consequently, may
generate capital appreciation in the event that the value of the claim
increases as the debtor's financial position improves. If the debtor is able
to pay the full obligation on the face of the claim as a result of a
restructuring or an improvement in the debtor's financial condition, trade
claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price.

An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the U.S. Securities and Exchange Commission. Currently,
trade claims are regulated primarily by bankruptcy laws. Because trade claims
are unsecured, holders of trade claims may have a lower priority in terms of
payment than most other creditors in a bankruptcy proceeding. Because of the
nature and risk of trade claims, the fund will limit its investment in these
instruments to 5% of its net assets at the time of purchase.

LOAN PARTICIPATIONS The fund may acquire loan participations and other
related direct or indirect bank debt obligations (Loan Participations), in
which the fund will buy from a lender a portion of a larger loan that the
lender has made to a borrower. Generally, Loan Participations are sold
without guarantee or recourse to the lending institution and are subject to
the credit risks of both the borrower and the lending institution. Loan
Participations, however, may enable the fund to acquire an interest in a loan
from a financially strong borrower which it could not do directly. While Loan
Participations generally trade at par value, the fund will be permitted to
buy Loan Participations that sell at a discount because of the borrower's
credit problems. To the extent the borrower's credit problems are resolved,
Loan Participations may appreciate in value.

The fund's investment in Loan Participations,  all of which may have speculative
characteristics  and  some of  which  may be in  default,  and  other  defaulted
securities  may  not  exceed  15% of the  fund's  net  assets  at  the  time  of
investment.

RESTRICTED SECURITIES A restricted security is one that has been purchased
through a private offering and cannot be sold without prior registration
under the Securities Act of 1933, as amended (the 1933 Act), unless the sale
is pursuant to an exemption under the 1933 Act. In recent years, the fund's
portfolio has included several issues of restricted securities.

Notwithstanding the restriction on the sale of restricted securities, a
secondary market exists for many of these securities. As with other
securities in the fund's portfolio, if there are readily available market
quotations for a restricted security, it will be valued, for purposes of
determining the fund's net asset value per share, within the range of the bid
and ask prices. If no quotations are available, the security will be valued
at fair value in accordance with procedures adopted by the Board. The fund
may receive commitment fees when it buys restricted securities. For example,
the transaction may involve an individually negotiated purchase of short-term
increasing rate notes. Maturities for this type of security typically range
from one to five years. These notes are usually issued as temporary or
"bridge" financing to be replaced ultimately with permanent financing for the
project or transaction which the issuer seeks to finance. Typically, at the
time of commitment, the fund receives the security and sometimes a cash
commitment fee. Because the transaction could possibly involve a delay
between the time the fund commits to buy the security and the fund's payment
for and receipt of that security, the fund will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities
with an aggregate value equal to the amount of its commitments until payment
is made. The fund will not buy restricted securities to generate commitment
fees, although the receipt of fees will help the fund achieve its principal
objective of earning a high level of current income.

The fund may receive consent fees in a variety of situations. For example,
the fund may receive consent fees if an issuer seeks to "call" a bond it has
issued which does not contain a provision permitting the issuer to call the
bond, or if the fund's consent is required to facilitate a merger or other
business combination transaction. Consent fees are received only
occasionally, are privately negotiated, and may be in any amount. As is the
case with commitment fees, the fund will not buy securities with a view to
generating consent fees, although the receipt of such fees is consistent with
the fund's principal investment objective.

ILLIQUID SECURITIES It is the policy of the fund that illiquid securities
(including illiquid equity securities, securities with legal or contractual
restrictions on resale, repurchase agreements of more than seven days
duration, and other securities that are not readily marketable) may not
constitute more than 10% of the value of the 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 fund's board
of trustees has authorized the fund to invest in restricted securities to the
extent consistent with the fund's investment objectives and has authorized
the fund to treat restricted securities as liquid if the manager determines
on a daily basis that there is a liquid institutional or other market for the
securities. For example, the fund may treat as liquid restricted securities
that may be freely transferred among qualified institutional buyers pursuant
to Rule 144A under the 1933 Act and for which a liquid institutional market
has developed. The board will review on an on-going basis any determination
by the manager to treat a restricted security as liquid, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the board will take
into account the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers willing to buy or sell the
security and the number of other potential buyers; (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 the fund invests in restricted securities that are deemed liquid,
the general level of illiquidity may be increased if qualified institutional
buyers become uninterested in buying these securities or the market for these
securities contracts.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The fund may buy debt
securities on a "when-issued" or "delayed delivery" basis. These transactions
are arrangements under which the fund buys securities with payment and
delivery scheduled for a future time. Purchases of debt securities on a
when-issued or delayed delivery basis are subject to market fluctuation and
to the risk that the value or yields at delivery may be more or less than the
purchase price or the yields available when the transaction was entered into.
Although the fund will generally buy debt securities on a when-issued basis
with the intention of acquiring such securities, it may sell them before the
settlement date if it deems the sale to be advisable. The fund will not enter
into these transactions for investment leverage. When the fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of its purchase commitments until payment is made.

In when-issued and delayed delivery transactions, the fund relies on the
seller to complete the transaction. The other party's failure may cause the
fund to miss a price or yield considered advantageous. Securities purchased
on a when-issued or delayed delivery basis do not generally earn interest
until their scheduled delivery date. The fund is not subject to any
percentage limit on the amount of its assets which may be invested in
when-issued debt securities.

OPTIONS ON SECURITIES Although it does not currently anticipate that it will
do so, the fund may write covered call options that are listed for trading on
a national securities exchange. This means that the fund will only write
options on securities that the fund actually owns. A call option gives the
buyer the right to buy the security on which the option is written for a
specified period of time at a price agreed to at the time the option is sold,
even though that price may be less than the value of the security at the time
the option is exercised. When the fund sells covered call options, the fund
receives a cash premium which can be used in whatever way the fund deems to
be most beneficial. In writing covered call options, the fund is subject to
the risk that in the event of a price increase on the underlying security
which would likely trigger the exercise of the call option, the fund will not
participate in the increase in price beyond the exercise price. If the fund
determines that it does not wish to deliver the underlying securities from
its portfolio, it may have to enter into a "closing purchase transaction" and
pay a premium which may be higher or lower than the premium it received for
writing the option. There is no assurance that a closing purchase transaction
will be available in every instance.

OPTIONS ON FOREIGN CURRENCIES The fund may buy and write put and call options
on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities or other assets to be acquired. As
with other kinds of options, however, the writing of an option on foreign
currency will be only a partial hedge, up to the amount of the premium
received, and the fund could be required to buy or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may be an effective hedge against fluctuations
in exchange rates although, in the event of rate movements adverse to the
fund's position, the fund may forfeit the entire amount of the premium plus
related transaction costs.

FORWARD CURRENCY EXCHANGE CONTRACTS The fund may enter into forward currency
exchange contracts (forward contracts) to attempt to minimize the risk to the
fund from adverse changes in the relationship between currencies or to
enhance income. A forward contract is an obligation to buy or sell a specific
currency for an agreed price at a future date which is individually
negotiated and is privately traded by currency traders and their customers.
The fund will either cover its position in such a transaction or maintain, in
a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of any such
commitment until payment is made.

INTEREST RATE SWAPS The fund may participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest
rate obligations. One obligation has an interest rate fixed to maturity while
the other has an interest rate that changes with changes in a designated
benchmark, such as the London Interbank Offered Rate (LIBOR), prime,
commercial paper, or other benchmarks. The obligations to make repayment of
principal on the underlying securities are not transferred. These
transactions generally require the participation of an intermediary,
frequently a bank. The entity holding the fixed rate obligation will transfer
the obligation to the intermediary, and the entity will then be obligated to
pay to the intermediary a floating rate of interest, generally including a
fractional percentage as a commission for the intermediary. The intermediary
also makes arrangements with a second entity that has a floating-rate
obligation that substantially mirrors the obligation desired by the first
entity. In return for assuming a fixed obligation, the second entity will pay
the intermediary all sums that the intermediary pays on behalf of the first
entity, plus an arrangement fee and other agreed upon fees.

The fund intends to participate in interest rate swaps with regard to
obligations held in the fund's portfolio. To the extent, however, the fund
does not own the underlying obligation, the fund will maintain, in a
segregated account with its custodian bank, cash or liquid debt securities
with an aggregate value equal to the amount of the fund's outstanding swap
obligation.

Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the obligation at a lower rate than is directly
available in the credit market, while permitting the party desiring a fixed
rate obligation the opportunity to acquire a fixed rate obligation, also
frequently at a price lower than is available in the capital markets. The
success of the transaction depends in large part on the availability of fixed
rate obligations at a low enough coupon rate to cover the cost involved.

FOREIGN SECURITIES The fund may invest in securities of issuers in any
foreign country, developed or developing, and may buy foreign securities that
are traded in the U.S. or securities of U.S. issuers that are denominated in
a foreign currency. The fund presently has no intention of investing more
than 10% of its net assets in foreign securities not publicly traded in the
U.S. The fund will not invest in any equity securities issued without stock
certificates or debt securities that are not issues and transferable in fully
registered form. The fund does not consider securities it acquires outside
the U.S. that are publicly traded in the U.S., on a foreign securities
exchange, or in a foreign securities market to be illiquid so long as the
fund acquires and holds the security with the intention of reselling the
security in the foreign trading market, the fund reasonably believes it can
readily dispose of the security for cash in the U.S. or foreign market, and
current market quotations are readily available.

DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and
Global Depositary Receipts (GDRs) (collectively Depositary Receipts). ADRs
evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. Foreign banks or trust companies typically issue EDRs and
GDRs, although U.S. banks or trust companies also may issue them. EDRs and
GDRs evidence ownership of underlying securities issued by either a foreign
or a U.S. corporation. Generally, Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in
bearer form are designed for use in securities markets outside the U.S.

Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.

Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts. The fund will only buy Depositary Receipts that are
issued under sponsored programs.

UNSEASONED ISSUERS It is the present policy of the fund (which may be changed
without shareholder approval) not to invest more than 5% of its total assets
in companies that have a record of less than three years continuous
operation, including predecessors.

REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as
to payment of principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the securities back
to the bank or broker-dealer after a short period of time (generally, less
than seven days) at a higher price. The bank or broker-dealer must transfer
to the fund's custodian securities with an initial market value of at least
102% of the dollar amount invested by the fund in each repurchase agreement.
The manager will monitor the value of such securities daily to determine that
the value equals or exceeds the repurchase price. Repurchase agreements may
involve risks in the event of default or insolvency of the bank or
broker-dealer, including possible delays or restrictions upon the fund's
ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined
present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction.

LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. These loans may not exceed 10% of the value of the fund's
total assets, measured at the time of the most recent loan. For each loan,
the borrower must maintain with the fund's custodian collateral (consisting
of any combination of cash, securities issued by the U.S. government and its
agencies and instrumentalities, or irrevocable letters of credit) with a
value at least equal to 100% of the current market value of the loaned
securities. The fund retains all or a portion of the interest received on
investment of the cash collateral or receives a fee from the borrower. The
fund may terminate the loan at any time and obtain the return of the
securities loaned within the normal settlement period for the security
involved. The fund will continue to receive any interest or dividends paid on
the loaned securities and to have voting rights with respect to the
securities. As with other extensions of credit, however, there are risks of
delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. The fund will loan its securities only
to parties who meet creditworthiness standards approved by the fund's board
of trustees, i.e., banks or broker-dealers that the manager has determined
present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the loan.

TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents. The fund may invest cash being
held for liquidity purposes in shares of one or more money market funds
managed by the manager or its affiliates.

TIMING OF THE FUND'S TRANSACTIONS Normally, the fund will buy securities with
the intention of holding them for the long term. It may on occasion, however,
buy securities with the expectation of selling them within a short period of
time. The fund may make changes in particular portfolio holdings whenever it
determines that a security is no longer suitable for the fund's portfolio or
that another security appears to offer a relatively greater opportunity, and
will make such changes without regard to the length of time a security has
been held.

INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.

The fund may not:

1. Invest more than 25% of the value of the fund's total assets in one
particular industry.

2. Purchase securities, if the purchase would cause the fund at that time to
have more than 5% of the value of its total assets invested in the securities
of any one company or to own more than 10% of the voting securities of any
one company (except obligations issued or guaranteed by the U.S. government).

3. Underwrite or engage in the agency distributions of securities of other
issuers, except insofar as the fund may be technically deemed an underwriter
in connection with the disposition of securities in its portfolio.

4. Make loans to other persons except on a temporary basis in connection with
the delivery or receipt of portfolio securities which have been bought or
sold, or by the purchase of bonds, debentures or similar obligations which
have been publicly distributed or of a character usually acquired by
institutional investors or through loans of the fund's portfolio securities,
or to the extent the entry into a repurchase agreement may be deemed a loan.

5. Borrow money in excess of 5% of the value of the fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes.

6. Sell securities short or buy on margin nor pledge or hypothecate any of
the fund's assets.

7. Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts.

8. Invest in the securities of another investment company, except securities
acquired in connection with a merger, consolidation or reorganization; except
to the extent the fund invests its uninvested daily cash balances in shares
of the Franklin Money Fund and other money market funds in the Franklin
Templeton Group of Funds provided (i) its purchases and redemptions of such
money market fund shares may not be subject to any purchase or redemption
fees, (ii) its investments may not be subject to duplication of management
fees, nor to any charge related to the expense of distributing the fund's
shares (as determined under Rule 12b-1, as amended under the federal
securities laws), and (iii) aggregate investments by the fund in any such
money market fund do not exceed (a) the greater of (i) 5% of the fund's total
net assets or (ii) $2.5 million, or (b) more than 3% of the outstanding
shares of any such money market fund.

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

10. Purchase the securities of any company in which any officer, trustee, or
director of the fund or its investment manager owns more than 1/2 of 1% of
the outstanding securities and in which all of the officers, trustees, and
directors of the fund and its investment manager as a group, own more than 5%
of such securities.

If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.

Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation is met at the time of investment, a
later increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities will not be considered a violation of the
restriction or limitation.

RISKS
- -------------------------------------------------------------------------------

HIGH YIELD SECURITIES Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which the fund invests. Accordingly, an investment in the fund should not be
considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.

The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.

Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.

The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value per share. Defaulted
securities tend to lose much of their value before they default. Thus, the
fund's net asset value per share may be adversely affected before an issuer
defaults. In addition, the fund may incur additional expenses if it must try
to recover principal or interest payments on a defaulted security.

High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the fund. The premature disposition of a
high yield security due to a call or buy-back feature, the deterioration of
an issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income.

Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.

The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.

The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.

The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993, depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's net asset value per share.

The fund relies on the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.

The credit risk factors above also apply to lower-quality zero-coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, the fund will not receive any cash until
the cash payment date. If the issuer defaults, the fund may not obtain any
return on its investment.

Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the cash payment date), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.

The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.

Pay-in-kind securities pay interest by issuing more bonds. The fund is deemed
to receive interest over the life of these bonds and is treated as if the
interest were paid on a current basis for federal income tax purposes,
although the fund does not receive any cash interest payments until maturity
or the cash payment date. Accordingly, during times when the fund does not
receive any cash interest payments on its zero-coupon, deferred interest or
pay-in-kind securities, it may have to sell portfolio securities to meet
distribution requirements and these sales may be subject to the risk factors
discussed above. The fund is not limited in the amount of its assets that may
be invested in these types of securities.

CALL There is a risk that a security will be prepaid (called) before its
stated maturity date. An issuer is more likely to call its securities when
interest rates are falling because the issuer can issue new securities with
lower interest payments. Issuers of high yield securities often have the
right to call their securities prior to maturity. If a security is called,
the fund may have to replace it with a lower yielding security.

DERIVATIVE SECURITIES Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions, futures contracts and swap agreements are
considered derivative investments. To the extent the fund enters into these
transactions, their success will depend upon the manager's ability to predict
pertinent market movements.

FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments. The fund may invest in
securities of issuers in any foreign country, developed or developing, and
may buy foreign securities that are traded in the U.S. or securities of U.S.
issuers that are denominated in a foreign currency. The fund presently has no
intention of investing more than 10% of its net assets in foreign securities
not publicly traded in the U.S.

There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value. Foreign markets
have substantially less volume than the New York Stock Exchange, and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign
countries, which are generally fixed rather than subject to negotiation as in
the U.S., are likely to be higher. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S.

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

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

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

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

The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.

Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.

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

EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.

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

The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors the fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.

The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.

Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE

President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food
processing) (until 1996).

*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE

Executive  Vice  President  and Director,  Franklin  Resources,  Inc.,  Franklin
Templeton  Distributors,  Inc. and Franklin Templeton Services,  Inc.; Executive
Vice President,  Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services,  Inc. and  Franklin/Templeton  Investor  Services,  Inc.;  and officer
and/or  director  or  trustee,  as the  case  may  be,  of  most  of  the  other
subsidiaries of Franklin Resources,  Inc. and of 52 of the investment  companies
in the Franklin Templeton Group of Funds.

Robert F. Carlson (71)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE

Member and past President, Board of Administration,  California Public Employees
Retirement Systems (CALPERS);  director or trustee,  as the case may be, of nine
of the  investment  companies  in the  Franklin  Templeton  Group of Funds;  and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals,  member,
Corporate  Board,  Blue  Shield of  California,  and Chief  Counsel,  California
Department of Transportation.

S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE

Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment  companies in the Franklin Templeton
Group of Funds.

*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE

Executive Vice  President and Director,  Franklin  Resources,  Inc. and Franklin
Templeton  Distributors,  Inc.; President and Director,  Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; Director,  Franklin/Templeton  Investor Services,  Inc.;
and officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources,  Inc. and of 52 of the investment  companies
in the Franklin Templeton Group of Funds.

Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102
Cupertino, CA 95014
TRUSTEE

General  Partner,  Miller & LaHaye,  which is the General  Partner of  Peregrine
Ventures II (venture capital firm);  director or trustee, as the case may be, of
27 of the investment  companies in the Franklin  Templeton  Group of Funds;  and
FORMERLY,  Director,  Fischer Imaging  Corporation  (medical  imaging  systems),
Digital  Transmission  Systems,  Inc. (wireless  communications) and Quarterdeck
Corporation (software firm), and General Partner,  Peregrine  Associates,  which
was the General Partner of Peregrine Ventures (venture capital firm).

*R. Martin Wiskemann (72)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE

Senior Vice President,  Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President,  Franklin Management,  Inc.; Vice President and Director,
ILA Financial  Services,  Inc.; and officer and/or  director or trustee,  as the
case may be, of 15 of the investment  companies in the Franklin  Templeton Group
of Funds.

Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Senior Vice President and Chief Financial  Officer,  Franklin  Resources,  Inc.,
Franklin/Templeton  Investor Services,  Inc. and Franklin Mutual Advisers,  LLC;
Executive  Vice  President,  Chief  Financial  Officer and  Director,  Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer,  Franklin Advisers,  Inc.; Chief Financial  Officer,  Franklin Advisory
Services,  LLC and Franklin  Investment Advisory Services,  Inc.;  President and
Director,  Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources,  Inc.; and officer and/or director
or  trustee,  as the  case  may be,  of 52 of the  investment  companies  in the
Franklin Templeton Group of Funds.

Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY

Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President,   Franklin   Templeton   Services,   Inc.  and   Franklin   Templeton
Distributors,  Inc.;  Executive Vice President,  Franklin  Advisers,  Inc.; Vice
President,  Franklin Advisory Services,  LLC and Franklin Mutual Advisers,  LLC;
Vice  President,  Chief Legal  Officer  and Chief  Operating  Officer,  Franklin
Investment  Advisory  Services,  Inc.;  and  officer  of  53 of  the  investment
companies in the Franklin Templeton Group of Funds.

Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER

Senior Vice President,  Franklin Templeton Services,  Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.

Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Senior  Vice   President  and  National  Sales   Manager,   Franklin   Templeton
Distributors,  Inc.;  and  officer  of 28 of  the  investment  companies  in the
Franklin Templeton Group of Funds.

*This board member is considered an "interested person" under federal securities
laws.

The trust pays noninterested  board members $850 per month plus $810 per meeting
attended.  Board members who serve on the audit committee of the trust and other
funds in the Franklin  Templeton Group of Funds receive a flat fee of $2,000 per
committee  meeting  attended,  a portion  of which is  allocated  to the  trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting.  Noninterested board members also may serve as directors
or  trustees  of other funds in the  Franklin  Templeton  Group of Funds and may
receive  fees  from  these  funds  for  their  services.  The  fees  payable  to
noninterested  board  members by the trust are subject to  reductions  resulting
from fee caps  limiting the amount of fees payable to board members who serve on
other boards within the Franklin  Templeton Group of Funds.  The following table
provides the total fees paid to noninterested  board members by the trust and by
the Franklin Templeton Group of Funds.

                                                                 NUMBER OF
                                                                 BOARDS IN
                                                TOTAL FEES     THE FRANKLIN
                                               RECEIVED FROM    TEMPLETON
                               TOTAL FEES      THE FRANKLIN       GROUP
                                RECEIVED         TEMPLETON       OF FUNDS
                                  FROM            GROUP          ON WHICH
NAME                         THE TRUST 1 ($)  OF FUNDS 2 ($)   EACH SERVES 3
- -------------------------------------------------------------------------------

Frank H. Abbott, III            13,681           166,614            27
Robert F. Carlson               19,790            78,052             9
S. Joseph Fortunato             14,158           367,835            50
Frank W.T. LaHaye               14,621           171,536            27

1. For the fiscal year ended May 31, 1999.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds  within  each  investment  company for which the board
members  are  responsible.  The  Franklin  Templeton  Group of  Funds  currently
includes 54 registered investment  companies,  with approximately 161 U.S. based
funds or series.

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

Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.

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

MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.

The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.

The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.

Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.

MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:

o    5/96 of 1% of the value of net assets up to and including $100 million;

o    1/24 of 1% of the value of net assets  over $100  million and not over $250
     million; and

o    9/240 of 1% of the value of net assets in excess of $250 million.

The fee is computed at the close of  business on the last  business  day of each
month  according  to the terms of the  management  agreement.  Each class of the
fund's shares pays its proportionate share of the fee.

For the last  three  fiscal  years  ended May 31,  the fund  paid the  following
management fees:

                                               MANAGEMENT
                                              FEES PAID ($)
- -----------------------------------------------------------
1999                                          16,672,024
1998                                          15,055,199
1997                                          11,610,513

ADMINISTRATOR  AND  SERVICES  PROVIDED  Franklin  Templeton  Services,  Inc. (FT
Services) has an agreement  with the manager to provide  certain  administrative
services and  facilities  for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.

The   administrative   services  FT  Services  provides  include  preparing  and
maintaining  books,  records,  and tax and  financial  reports,  and  monitoring
compliance with regulatory requirements.

ADMINISTRATION  FEES The  manager  pays FT  Services  a monthly  fee equal to an
annual rate of:

o    0.15% of the fund's average daily net assets up to $200 million;

o    0.135% of average daily net assets over $200 million up to $700 million;

o    0.10% of average daily net assets over $700 million up to $1.2 billion; and

o    0.075% of average daily net assets over $1.2 billion.

During the last three  fiscal  years ended May 31, the manager  paid FT Services
the following administration fees:

                                             ADMINISTRATION
                                              FEES PAID ($)
- -------------------------------------------------------------
1999                                          3,304,935
1998                                          3,236,064
19971                                         1,679,927

1. For the period October 1, 1996 through May 31, 1997.

SHAREHOLDER SERVICING AND TRANSFER AGENT  Franklin/Templeton  Investor Services,
Inc. (Investor  Services) is the fund's shareholder  servicing agent and acts as
the fund's  transfer  agent and  dividend-paying  agent.  Investor  Services  is
located at 777  Mariners  Island  Blvd.,  San Mateo,  CA 94404.  Please send all
correspondence  to  Investor  Services  to  P.O.  Box  997151,   Sacramento,  CA
95899-9983.

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

CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.

AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).

PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------

The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.

When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.

The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.

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

Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.

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

During the last three  fiscal  years  ended May 31, the fund paid the  following
brokerage commissions:

                                               BROKERAGE
                                             COMMISSIONS ($)
- ------------------------------------------------------------
1999                                             7,524
1998                                                 0
1997                                            18,993

For the fiscal year ended May 31, 1999,  the fund paid no brokerage  commissions
to brokers who provided research services.

As  of  May  31,  1999,   the  fund  did  not  own  securities  of  its  regular
broker-dealers.

DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------

The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. The fund does
not pay "interest" or guarantee any fixed rate of return on an investment in
its shares.

DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.

DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.

EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.

INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions
at the time they are paid, and will advise you of their tax status for
federal income tax purposes shortly after the close of each calendar year. If
you have not held fund shares for a full year, the fund may designate and
distribute to you, as ordinary income or capital gain, a percentage of income
that is not equal to the actual amount of such income earned during the
period of your investment in the fund.

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.

EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.

REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss and will be
long-term or short-term, generally depending on how long you hold your
shares. Any loss incurred on the redemption or exchange of shares held for
six months or less will be treated as a long-term capital loss to the extent
of any long-term capital gains distributed to you by the fund on those shares.

All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.

DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis in
the shares sold will be added to the tax basis of the shares you acquire from
your reinvestment.

U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 1.95% of the dividends paid by the fund for
the most recent fiscal year qualified for the dividends-received deduction.
In some circumstances, you will be allowed to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to
pay on these dividends. The dividends-received deduction will be available
only with respect to dividends designated by the fund as eligible for such
treatment. All dividends (including the deducted portion) must be included in
your alternative minimum taxable income calculation.

INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses, and,
in limited cases, subject the fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by the fund.

ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------

The fund is a diversified series of Franklin High Income Trust, an open-end
management investment company, commonly called a mutual fund. It was
incorporated in Colorado in January 1968 under the sponsorship of the
Assembly of Governmental Employees, reorganized as a Delaware business trust
in its present form on October 1, 1996, and is registered with the SEC.

The fund currently offers four classes of shares, Class A, Class B, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:

o     AGE High Income Fund - Class A
o     AGE High Income Fund - Class B
o     AGE High Income Fund - Class C
o     AGE High Income Fund - Advisor Class

Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law.

The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.

The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a board member. A special meeting also may be called by the board in its
discretion.

As of July 6, 1999,  the principal  shareholders  of the fund,  beneficial or of
record, were:

NAME AND ADDRESS                    SHARE CLASS         PERCENTAGE (%)
- -------------------------------------------------------------------------------

Richard C. Stoker Trustee
Richard C. Stoker Living Trust
10205 Collins Ave., Apt. 109
Bal Harbour, FL 33154-1426          Advisor Class            6.49

NAME AND ADDRESS                    SHARE CLASS         PERCENTAGE (%)
- -------------------------------------------------------------------------------

Andrew R. Johnson
P.O. Box 370100
Las Vegas, NV 89137-0100            Advisor Class           10.46

Franklin Templeton Trust Company
Trustee for ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438       Advisor Class            5.94

Franklin Templeton Fund Allocator
 Conservative Target Fund
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470            Advisor Class           10.81

Franklin Templeton Fund Allocator
 Moderate Target Fund
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470            Advisor Class           22.48

Franklin Templeton Fund Allocator
 Growth Target Fund
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470            Advisor Class           10.25

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

As of July 6, 1999, the officers and board members,  as a group, owned of record
and  beneficially  1.72% of the fund's  Advisor Class shares and less than 1% of
the  outstanding  shares of the fund's other classes.  The board members may own
shares in other funds in the Franklin Templeton Group of Funds.

BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------

The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.

For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.

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

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

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

INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A
and 1% for Class C. There is no initial sales charge for Class B.

The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.

CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.

LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:

o    You authorize Distributors to reserve 5% of your total intended purchase in
     Class A shares  registered  in your name until you fulfill  your LOI.  Your
     periodic  statements  will include the reserved  shares in the total shares
     you  own,   and  we  will  pay  or  reinvest   dividend  and  capital  gain
     distributions on the reserved shares  according to the distribution  option
     you have chosen.

o    You give  Distributors  a  security  interest  in the  reserved  shares and
     appoint Distributors as attorney-in-fact.

o    Distributors  may  sell any or all of the  reserved  shares  to  cover  any
     additional sales charge if you do not fulfill the terms of the LOI.

o    Although you may exchange  your shares,  you may not sell  reserved  shares
     until you complete the LOI or pay the higher sales charge.

After you file  your LOI with the fund,  you may buy Class A shares at the sales
charge  applicable to the amount specified in your LOI. Sales charge  reductions
based on purchases in more than one  Franklin  Templeton  Fund will be effective
only after  notification  to  Distributors  that the investment  qualifies for a
discount.  Any Class A  purchases  you made within 90 days before you filed your
LOI also may qualify for a  retroactive  reduction in the sales  charge.  If you
file your LOI with the fund before a change in the fund's sales charge,  you may
complete  the LOI at the  lower of the new sales  charge or the sales  charge in
effect when the LOI was filed.

Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period, except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.

If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.

If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.

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

GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current
purchase.

A qualified group is one that:

o    Was formed at least six months ago,

o    Has a purpose other than buying fund shares at a discount,

o    Has more than 10 members,

o    Can arrange for meetings between our representatives and group members,

o    Agrees to include  Franklin  Templeton  Fund sales and other  materials  in
     publications  and  mailings  to  its  members  at  reduced  or no  cost  to
     Distributors,

o    Agrees to arrange  for  payroll  deduction  or other bulk  transmission  of
     investments to the fund, and

o    Meets  other  uniform  criteria  that allow  Distributors  to achieve  cost
     savings in distributing shares.

A  qualified  group  generally  does not  include a 403(b) plan that only allows
salary deferral contributions,  although any such plan that purchased the fund's
Class A shares at a reduced  sales  charge  under the group  purchase  privilege
before February 1, 1998, may continue to do so.

WAIVERS FOR INVESTMENTS from certain payments. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:

o    Dividend and capital gain  distributions  from any Franklin Templeton Fund.
     The  distributions  generally  must be  reinvested in the same share class.
     Certain  exceptions  apply,  however,  to Class C shareholders who chose to
     reinvest their  distributions in Class A shares of the fund before November
     17,  1997,  and to  Advisor  Class or Class Z  shareholders  of a  Franklin
     Templeton Fund who may reinvest their  distributions  in the fund's Class A
     shares. This waiver category also applies to Class B and C shares.

o    Dividend or capital gain  distributions from a real estate investment trust
     (REIT) sponsored or advised by Franklin Properties, Inc.

o    Annuity  payments  received  under  either an annuity  option or from death
     benefit  proceeds,  if the annuity contract offers as an investment  option
     the Franklin  Templeton  Variable Insurance Products Trust or the Templeton
     Variable  Products  Series  Fund.  You should  contact your tax advisor for
     information on any tax consequences that may apply.

o    Redemption  proceeds from a repurchase of shares of Franklin  Floating Rate
     Trust, if the shares were continuously held for at least 12 months.

     If you immediately placed your redemption proceeds in a Franklin Bank CD or
     a Franklin  Templeton money fund, you may reinvest them as described above.
     The  proceeds  must be  reinvested  within  365  days  from the date the CD
     matures,  including  any  rollover,  or the date you redeem your money fund
     shares.

o    Redemption proceeds from the sale of Class A shares of any of the Templeton
     Global Strategy Funds if you are a qualified investor.

     If you paid a CDSC when you  redeemed  your Class A shares from a Templeton
     Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
     and the CDSC holding period will begin again. We will, however, credit your
     fund account with  additional  shares based on the CDSC you previously paid
     and the amount of the redemption proceeds that you reinvest.

     If you immediately placed your redemption  proceeds in a Franklin Templeton
     money fund, you may reinvest them as described  above. The proceeds must be
     reinvested  within 365 days from the date they are redeemed  from the money
     fund.

o    Distributions  from an existing  retirement  plan  invested in the Franklin
     Templeton Funds

WAIVERS FOR CERTAIN  INVESTORS.  Class A shares also may be purchased without an
initial  sales charge or CDSC by various  individuals  and  institutions  due to
anticipated economies in sales efforts and expenses, including:

o    Trust companies and bank trust  departments  agreeing to invest in Franklin
     Templeton  Funds over a 13 month  period at least $1 million of assets held
     in a fiduciary,  agency,  advisory,  custodial or similar capacity and over
     which  the  trust  companies  and bank  trust  departments  or  other  plan
     fiduciaries or participants,  in the case of certain retirement plans, have
     full or shared  investment  discretion.  We will  accept  orders  for these
     accounts 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 the order.

o    Any state or local government or any instrumentality, department, authority
     or agency  thereof that has  determined  the fund is a legally  permissible
     investment  and that can only buy fund shares without paying sales charges.
     Please  consult  your legal and  investment  advisors  to  determine  if an
     investment in the fund is permissible  and suitable for you and the effect,
     if any, of payments by the fund on arbitrage rebate calculations.

o    Broker-dealers,  registered  investment  advisors  or  certified  financial
     planners who have entered into an agreement with  Distributors  for clients
     participating in comprehensive fee programs

o    Qualified registered investment advisors who buy through a broker-dealer or
     service agent who has entered into an agreement with Distributors

o    Registered  securities  dealers and their affiliates,  for their investment
     accounts only

o    Current  employees of  securities  dealers and their  affiliates  and their
     family members, as allowed by the internal policies of their employer

o    Officers,  trustees,  directors  and  full-time  employees  of the Franklin
     Templeton Funds or the Franklin  Templeton Group, and their family members,
     consistent with our then-current policies

o    Any  investor  who is currently a Class Z  shareholder  of Franklin  Mutual
     Series Fund Inc. (Mutual Series),  or who is a former Mutual Series Class Z
     shareholder  who had an account in any Mutual  Series  fund on October  31,
     1996,  or who sold his or her  shares of Mutual  Series  Class Z within the
     past 365 days

o    Investment  companies  exchanging  shares or selling  assets  pursuant to a
     merger, acquisition or exchange offer

o    Accounts managed by the Franklin Templeton Group

o    Certain unit investment trusts and their holders reinvesting  distributions
     from the trusts

o    Group annuity separate accounts offered to retirement plans

o    Chilean  retirement  plans  that  meet  the  requirements  described  under
     "Retirement plans" below

o    Members of the Assembly of Governmental Employees (AGE)

In addition,  Class C shares may be purchased without an initial sales charge by
any  investor  who buys Class C shares  through an omnibus  account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply,  however,  if the shares are
sold within 18 months of purchase.

RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
fund, to add together certain small qualified retirement plan accounts for
the purpose of meeting these requirements.

For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.

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

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

SIZE OF PURCHASE - U.S. DOLLARS             SALES CHARGE (%)
- ------------------------------------------------------------

Under $30,000                                      3.0
$30,000 but less than $100,000                     2.0
$100,000 but less than $400,000                    1.0
$400,000 or more                                     0

DEALER  COMPENSATION  Securities  dealers may at times  receive the entire sales
charge. A securities  dealer who receives 90% or more of the sales charge may be
deemed an underwriter  under the  Securities Act of 1933, as amended.  Financial
institutions or their affiliated  brokers may receive an agency  transaction fee
in the  percentages  indicated  in the dealer  compensation  table in the fund's
prospectus.

Distributors  may pay the following  commissions,  out of its own resources,  to
securities  dealers who initiate and are  responsible  for  purchases of Class A
shares of $1 million or more:  0.75% on sales of $1 million to $2 million,  plus
0.60% on sales  over $2  million  to $3  million,  plus  0.50% on sales  over $3
million to $50  million,  plus 0.25% on sales over $50 million to $100  million,
plus 0.15% on sales over $100 million.

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

Distributors  or  one of  its  affiliates  may  pay  up to  1%,  out of its  own
resources,  to securities dealers who initiate and are responsible for purchases
of Class A shares by certain  retirement  plans without an initial sales charge.
These payments may be made in the form of contingent advance payments, which may
be recovered from the securities dealer or set off against other payments due to
the  dealer  if shares  are sold  within  12  months  of the  calendar  month of
purchase. Other conditions may apply. All terms and conditions may be imposed by
an agreement between Distributors,  or one of its affiliates, and the securities
dealer.

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

Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.

CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.

Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial
purchase in the Franklin Templeton Funds.

For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.

IF YOU SELL YOUR CLASS B SHARES WITHIN         THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM              YOUR PROCEEDS AS A CDSC
- ---------------------------------------------------------------------------
1 Year                                                 4
2 Years                                                4
3 Years                                                3
4 Years                                                3
5 Years                                                2
6 Years                                                1
7 Years                                                0

CDSC WAIVERS. The CDSC for any share class generally will be waived for:

o    Account fees

o    Sales of Class A shares  purchased  without  an  initial  sales  charge  by
     certain  retirement  plan accounts if (i) the account was opened before May
     1, 1997, or (ii) the  securities  dealer of record  received a payment from
     Distributors  of  0.25% or less,  or  (iii)  Distributors  did not make any
     payment in connection with the purchase,  or (iv) the securities  dealer of
     record has entered into a supplemental agreement with Distributors

o    Redemptions of Class A shares by investors who purchased $1 million or more
     without an initial sales charge if the  securities  dealer of record waived
     its commission in connection with the purchase

o    Redemptions  by the fund when an account  falls below the minimum  required
     account size

o    Redemptions following the death of the shareholder or beneficial owner

o    Redemptions through a systematic  withdrawal plan set up before February 1,
     1995

o    Redemptions  through  a  systematic  withdrawal  plan  set  up on or  after
     February 1, 1995, up to 1% monthly,  3% quarterly,  6%  semiannually or 12%
     annually of your  account's  net asset value  depending on the frequency of
     your plan

o    Redemptions by Franklin  Templeton Trust Company  employee benefit plans or
     employee benefit plans serviced by  ValuSelect(R)  (not applicable to Class
     B)

o    Distributions  from individual  retirement  accounts (IRAs) due to death or
     disability or upon periodic  distributions  based on life  expectancy  (for
     Class B, this applies to all retirement plan accounts, not only IRAs)

o    Returns  of  excess  contributions  (and  earnings,   if  applicable)  from
     retirement plan accounts

o    Participant   initiated   distributions  from  employee  benefit  plans  or
     participant  initiated  exchanges  among  investment  choices  in  employee
     benefit plans (not applicable to Class B)

EXCHANGE  PRIVILEGE  If you  request  the  exchange  of the total  value of your
account,  declared but unpaid income  dividends  and capital gain  distributions
will be  reinvested  in the fund and  exchanged  into the new fund at net  asset
value when paid. Backup withholding and information reporting may apply.

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

The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.

SYSTEMATIC  WITHDRAWAL  PLAN Our systematic  withdrawal  plan allows you to sell
your  shares  and  receive  regular  payments  from your  account  on a monthly,
quarterly,  semiannual  or annual  basis.  The value of your  account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory  distribution  requirements,  the
$50 minimum will not apply.  There are no service  charges for  establishing  or
maintaining a systematic withdrawal plan.

Payments under the plan will be made from the redemption of an equivalent amount
of shares  in your  account,  generally  on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the  redemption  on the next  business  day.  When you sell your shares  under a
systematic withdrawal plan, it is a taxable transaction.

To avoid  paying  sales  charges  on money you plan to  withdraw  within a short
period of time, you may not want to set up a systematic  withdrawal  plan if you
plan to buy shares on a regular  basis.  Shares  sold under the plan also may be
subject to a CDSC.

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

You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.

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

SHARE  CERTIFICATES  We will credit your shares to your fund account.  We do not
issue share certificates  unless you specifically  request them. This eliminates
the costly problem of replacing  lost,  stolen or destroyed  certificates.  If a
certificate  is lost,  stolen  or  destroyed,  you may have to pay an  insurance
premium of up to 2% of the value of the certificate to replace it.

Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.

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

Distribution or redemption  checks sent to you do not earn interest or any other
income  during the time the checks  remain  uncashed.  Neither  the fund nor its
affiliates  will be  liable  for any loss  caused by your  failure  to cash such
checks. The fund is not responsible for tracking down uncashed checks,  unless a
check is returned as undeliverable.

In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.

Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.

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

If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.

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

For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.

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

PRICING SHARES
- -------------------------------------------------------------------------------

When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.

The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.

The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.

When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.

The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.

The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by
the board.

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

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

THE UNDERWRITER
- -------------------------------------------------------------------------------

Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.

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

The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
May 31:

                                                                 AMOUNT
                                                              RECEIVED IN
                                                               CONNECTION
                                                                 WITH
                                 TOTAL          AMOUNT        REDEMPTIONS
                              COMMISSIONS     RETAINED BY         AND
                                RECEIVED     DISTRIBUTORS     REPURCHASES
                                   ($)           ($)              ($)
- --------------------------------------------------------------------------------
1999                          14,965,326        918,814         409,040
1998                          19,440,869        974,528          62,723
1997                          12,822,146        786,932          14,004

Distributors  may be entitled to  reimbursement  under the Rule 12b-1 plans,  as
discussed below.  Except as noted,  Distributors  received no other compensation
from the fund for acting as underwriter.

DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate  distribution or
"Rule  12b-1"  plan.  Under  each  plan,  the fund  shall  pay or may  reimburse
Distributors  or  others  for the  expenses  of  activities  that are  primarily
intended to sell shares of the class. These expenses may include,  among others,
distribution  or  service  fees paid to  securities  dealers  or others who have
executed a servicing agreement with the fund, Distributors or its affiliates;  a
prorated  portion  of  Distributors'  overhead  expenses;  and the  expenses  of
printing  prospectuses  and reports used for sales  purposes,  and preparing and
distributing sales literature and advertisements.

The  distribution  and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.

THE CLASS A PLAN.  Payments  by the fund  under the Class A plan may not  exceed
0.15% per year of Class A's average  daily net assets,  payable  quarterly.  All
distribution  expenses over this amount will be borne by those who have incurred
them.

In implementing  the Class A plan, the board has determined that the annual fees
payable  under the plan will be equal to the sum of: (i) the amount  obtained by
multiplying  0.15% by the  average  daily net assets  represented  by the fund's
Class A shares that were  acquired  by  investors  on or after May 1, 1994,  the
effective  date of the  plan  (new  assets),  and (ii) the  amount  obtained  by
multiplying  0.05% by the  average  daily net assets  represented  by the fund's
Class A shares that were acquired  before May 1, 1994 (old  assets).  These fees
will be paid to the  current  securities  dealer of record  on the  account.  In
addition, until such time as the maximum payment of 0.15% is reached on a yearly
basis, up to an additional  0.02% will be paid to  Distributors  under the plan.
The payments made to  Distributors  will be used by Distributors to defray other
marketing  expenses that have been incurred in accordance with the plan, such as
advertising.

The fee is a  Class  A  expense.  This  means  that  all  Class A  shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.07% (0.05% plus 0.02%) of the
average  daily net assets of Class A and, as Class A shares are sold on or after
May 1, 1994, will increase over time.  Thus, as the proportion of Class A shares
purchased on or after May 1, 1994,  increases in relation to outstanding Class A
shares, the expenses  attributable to payments under the plan also will increase
(but will not  exceed  0.15% of  average  daily net  assets).  While this is the
currently  anticipated  calculation for fees payable under the Class A plan, the
plan  permits  the board to allow the fund to pay a full  0.15% on all assets at
any time. The approval of the board would be required to change the  calculation
of the payments to be made under the Class A plan.

The Class A plan does not permit unreimbursed  expenses incurred in a particular
year to be carried over to or reimbursed in later years.

THE  CLASS  B AND C  PLANS.  Under  the  Class  B and C  plans,  the  fund  pays
Distributors up to 0.50% per year of the class's average daily net assets to pay
Distributors  or others for  providing  distribution  and related  services  and
bearing certain  expenses.  All  distribution  expenses over this amount will be
borne by those  who have  incurred  them.  Under  the  Class B plan,  the fee is
payable monthly. Under the Class C plan, the fee is payable quarterly.  The fund
also may pay a  servicing  fee of up to 0.15%  per year of the  class's  average
daily net assets. Under the Class B plan, the fee is payable monthly.  Under the
Class  C  plan,  the  fee is  payable  quarterly.  This  fee  may be used to pay
securities  dealers or others for, among other things,  helping to establish and
maintain  customer  accounts and records,  helping with requests to buy and sell
shares,  receiving and answering  correspondence,  monitoring  dividend payments
from  the fund on  behalf  of  customers,  and  similar  servicing  and  account
maintenance activities.

The  expenses  relating  to each of the Class B and C plans also are used to pay
Distributors  for advancing  the  commission  costs to  securities  dealers with
respect  to the  initial  sale of Class B and C shares.  Further,  the  expenses
relating  to the Class B plan may be used by  Distributors  to pay  third  party
financing  entities that have provided  financing to  Distributors in connection
with advancing commission costs to securities dealers.

THE CLASS A, B AND C PLANS.  In addition to the payments  that  Distributors  or
others are  entitled  to under each plan,  each plan also  provides  that to the
extent the fund, the manager or  Distributors  or other parties on behalf of the
fund,  the manager or  Distributors  make payments that are deemed to be for the
financing  of any  activity  primarily  intended  to  result in the sale of fund
shares  within the  context of Rule 12b-1  under the  Investment  Company Act of
1940, as amended,  then such payments shall be deemed to have been made pursuant
to the plan. The terms and provisions of each plan relating to required reports,
term, and approval are consistent with Rule 12b-1.

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

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

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

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

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

For the fiscal year ended May 31, 1999,  Distributors' eligible expenditures for
advertising,  printing,  payments to underwriters and  broker-dealers  and other
expenses pursuant to the plans and the amounts the fund paid Distributors  under
the plans were:

                                   DISTRIBUTORS'     AMOUNT
                                    ELIGIBLE       PAID BY THE
                                   EXPENSES ($)     FUND ($)
- -----------------------------------------------------------------
Class A                            5,003,203       4,125,576
Class B                              527,122          19,465
Class C                            4,307,356       2,875,661

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

Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. Performance figures reflect Rule 12b-1 fees from the date of the
plan's implementation. An explanation of these and other methods used by the
fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.

AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.

When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge
reflected in each quotation is a one time fee charged on all direct
purchases, which will have its greatest impact during the early stages of
your investment. This charge will affect actual performance less the longer
you retain your investment in the fund. The average annual total returns for
the indicated periods ended May 31, 1999, were:

                               1 YEAR (%)   5 YEARS (%)   10 YEARS (%)
- -------------------------------------------------------------------------------
Class A                          -4.89        8.86           9.29

                                             SINCE INCEPTION
                                              (1/1/99) (%)
- -------------------------------------------------------------------------------
Class B                                          -2.61

                                                  SINCE INCEPTION
                                     1 YEAR (%)     (5/16/95) (%)
- -------------------------------------------------------------------------------
Class C                               -2.82             8.13

The following SEC formula was used to calculate these figures:

                          n
                    P(1+T)  = ERV

where:

P =    a hypothetical initial payment of $1,000
T =    average annual total return
n =    number of years
ERV =  ending redeemable value of a hypothetical $1,000 payment made at the
       beginning of each period at the end of each period

CUMULATIVE  TOTAL RETURN Like  average  annual total  return,  cumulative  total
return  assumes the maximum  initial  sales charge is deducted  from the initial
$1,000 purchase,  income dividends and capital gain distributions are reinvested
at net asset  value,  the  account  was  completely  redeemed at the end of each
period and the deduction of all applicable  charges and fees.  Cumulative  total
return,  however,  is based on the actual  return for a specified  period rather
than on the average  return over the periods  indicated  above.  The  cumulative
total returns for the indicated periods ended May 31, 1999, were:

                               1 YEAR (%)   5 YEARS (%)    10 YEARS (%)
- -------------------------------------------------------------------------------
Class A                          -4.89        52.87          143.01

                                             SINCE INCEPTION
                                              (1/1/99) (%)
- -------------------------------------------------------------------------------
Class B                                          -2.61

                                                  SINCE INCEPTION
                                     1 YEAR (%)    (5/16/95) (%)
- -------------------------------------------------------------------------------
Class C                                 -2.82          37.13

CURRENT YIELD Current yield shows the income per share earned by the fund. It is
calculated  by dividing  the net  investment  income per share  earned  during a
30-day base period by the  applicable  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 of the class during the base
period. The yields for the 30-day period ended May 31, 1999, were:

      CLASS A (%)              CLASS B (%)               CLASS C (%)
- -------------------------------------------------------------------------------
        9.51                      9.38                       9.29

The following SEC formula was used to calculate these figures:

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

where:

a =    dividends and interest earned during the period
b =    expenses accrued for the period (net of reimbursements)
c =    the average daily number of shares outstanding during the period that
       were entitled to receive dividends
d =    the maximum offering price per share on the last day of the period

CURRENT  DISTRIBUTION  RATE Current  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 shareholders.  Amounts paid to shareholders are reflected in the
quoted  current  distribution  rate.  The current  distribution  rate is usually
computed by annualizing the dividends paid per share by a class during a certain
period and  dividing  that amount by the current  maximum  offering  price.  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.  The  current
distribution rates for the 30-day period ended May 31, 1999, were:

      CLASS A (%)              CLASS B (%)               CLASS C (%)
- -------------------------------------------------------------------------------
        9.40                      9.37                      9.10

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

OTHER PERFORMANCE QUOTATIONS The fund also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.

Sales literature referring to the use of the fund as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.

The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.

COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:

o    Dow   Jones(R)   Composite   Average  and  its   component   averages  -  a
     price-weighted  average  of 65  stocks  that  trade on the New  York  Stock
     Exchange.  The average is a combination of the Dow Jones Industrial Average
     (30 blue-chip stocks that are generally leaders in their industry), the Dow
     Jones Transportation Average (20 transportation  stocks), and the Dow Jones
     Utilities  Average  (15  utility  stocks  involved  in  the  production  of
     electrical energy).

o    Standard  &  Poor's(R)  500  Stock  Index  or  its  component  indices  - a
     capitalization-weighted  index designed to measure performance of the broad
     domestic  economy  through  changes in the  aggregate  market  value of 500
     stocks representing all major industries.

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

o    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.

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

o    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.

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

o    Financial  publications:  The  WALL  STREET  JOURNAL,  and  BUSINESS  WEEK,
     CHANGING TIMES,  FINANCIAL WORLD,  FORBES,  FORTUNE,  and MONEY magazines -
     provide performance statistics over specified time periods.

o    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.

o    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.

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

o    Historical  data  supplied by the research  departments  of CS First Boston
     Corporation,  the J. P. Morgan companies,  Salomon Brothers, Merrill Lynch,
     Lehman Brothers and Bloomberg L.P.

o    Morningstar  -  information  published  by  Morningstar,   Inc.,  including
     Morningstar   proprietary   mutual  fund  ratings.   The  ratings   reflect
     Morningstar's assessment of the historical  risk-adjusted  performance of a
     fund over  specified  time  periods  relative  to other  funds  within  its
     category.

o    Salomon Brothers Combined  Corporate Index - an unmanaged  composite of the
     Salomon High Yield Market Index and the corporate  component of the Salomon
     Broad Investment Grade Index. The index includes corporate issues rated AAA
     to CCC. Comparisons of performance assume reinvestment of dividends.

o    CS First Boston High Yield Index - an unmanaged index constructed to mirror
     the public  high yield debt  market.  The index  represents  a total of 250
     sectors and contains issues rated BBB and below. Comparisons of performance
     assume reinvestment of dividends.

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

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

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

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

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

The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 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, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $225 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 110 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.

Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.

The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.

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

CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICE, INC. (MOODY'S)

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

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

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

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

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

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

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

Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.

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

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

STANDARD & POOR'S CORPORATION (S&P)

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

AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in 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 these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.

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

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

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

SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS

MOODY'S

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
their promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations for both short-term
debt and commercial paper, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:

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

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

S&P

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

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

A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.

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