INVESTMENT STRATEGY GROWTH & INCOME

Please read this prospectus before investing, and keep it for future reference. It contains important information, including how each fund invests and the services available to shareholders.

To learn more about each fund and its policies, you may request a copy of the funds' Statement of Additional Information ("SAI"), dated December 1, 1998, which we may amend from time to time. We have filed the SAI with the SEC and have incorporated it by reference into this prospectus.

For a free copy of the SAI or a larger print version of this prospectus, contact your investment representative or call 1-800/DIAL BEN.

For a free copy of the SAI or a larger print version of this prospectus, contact your investment representative or call 1-800/DIAL BEN.

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

LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
December 1, 1998

When reading this prospectus, you will see certain terms beginning with capital letters. This means the term is explained in our glossary section.

TABLE OF CONTENTS

ABOUT THE FUNDS
Expense Summary.......................................... Financial Highlights..................................... How Do the Funds Invest Their Assets?.................... What Are the Risks of Investing in the Funds?............ What Are the Risks of Investing in the Underlying Franklin Templeton Funds?............................... How Do the Underlying Franklin Templeton Funds Invest Their Assets?.............................. Who Manages the Funds?................................... How Taxation Affects the Funds and Their Shareholders............................................. How Is the Trust Organized?..............................

ABOUT YOUR ACCOUNT
How Do I Buy Shares?..................................... May I Exchange Shares for Shares of Another Fund?........ How Do I Sell Shares?.................................... What Distributions Might I Receive From the Funds?....... Transaction Procedures and Special Requirements.......... Services to Help You Manage Your Account................. What If I Have Questions About My Account?...............

GLOSSARY
Useful Terms and Definitions.............................

APPENDICES
What Are Some of the Other Investment
Policies, Strategies and Risks of
the Underlying Franklin Templeton Funds?................ Description of Ratings...................................

777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777

1-800/DIAL BEN(R)

ABOUT THE FUNDS

EXPENSE SUMMARY

This table is designed to help you understand the costs of investing in a fund. It is based on the historical expenses of each fund for the fiscal year ended July 31, 1998. Each fund's actual expenses may vary.

Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price)++ .......... 5.75%       5.75%       5.75%
Paid at time of redemption++++ .................  None        None        None
Exchange Fee (per transaction)* ................  None        None        None

CLASS II

Maximum Sales Charges
(as a percentage of Offering Price) ............ 1.99%       1.99%       1.99%
Paid at time of purchase+++ .................... 1.00%       1.00%       1.00%
Paid at redemption++++ ......................... 0.99%       0.99%       0.99%
Exchange Fee (per transaction)* ................  None        None        None

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS) CLASS I

Asset Allocation Fees** ........................ 0.25%       0.25%       0.25%
Rule 12b-1 Fees*** ............................. 0.25%       0.25%       0.25%
Other Expenses** ............................... 0.56%       0.42%       0.48%
Management Fees of the Underlying Franklin
  Templeton Funds .............................. 0.54%       0.58%       0.61%
Other Expenses of the Underlying Franklin
  Templeton Funds .............................. 0.16%       0.20%       0.22%
                                                 -----------------------------
Total Fund Operating Expenses** ................ 1.76%       1.70%       1.81%
                                                 =============================

CLASS II

Asset Allocation Fees** ........................ 0.25%       0.25%       0.25%
Rule 12b-1 Fees*** ............................. 1.00%       1.00%       1.00%
Other Expenses** ............................... 0.56%       0.42%       0.48%
Management Fees of the Underlying Franklin
  Templeton Funds .............................. 0.54%       0.58%       0.61%
Other Expenses of the Underlying Franklin
  Templeton Funds .............................. 0.16%       0.20%       0.22%
                                                 -----------------------------
Total Fund Operating Expenses** ................ 2.51%       2.45%       2.56%
                                                 =============================

C. EXAMPLE

Assume the annual return for each class is 5%, operating expenses are as described above, and you sell your shares after the number of years shown. These are the projected expenses for each $1,000 that you invest in a fund.

Conservative Target Fund - Class I  $74****     $110        $147        $253
Conservative Fund - Class II        $45         $ 87        $142        $292
Moderate Target Fund - Class I      $74****     $108        $144        $247
Moderate Target Fund - Class II     $44         $ 86        $139        $286
Growth Target Fund - Class I        $75****     $111        $150        $258
Growth Target Fund - Class II       $45          $89        $145        $297

For the same Class II investment, you would pay projected expenses of $35 (Conservative Target Fund), $35 (Moderate Target Fund), and $36 (Growth Target Fund) if you did not sell your shares at the end of the first year. Your projected expenses for the remaining periods would be the same.

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. Each fund pays its operating expenses. The effects of these expenses are reflected in the Net Asset Value or dividends of each class and are not directly charged to your account.

+If your transaction is processed through your Securities Dealer, you may be charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule 12b-1 fees are higher. Over time you may pay more for Class II shares. Please see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you sell the shares within 18 months and to Class I purchases of $1 million or more if you sell the shares within one year. A Contingent Deferred Sales Charge may also apply to purchases by certain retirement plans that qualify to buy Class I shares without a front-end sales charge. The charge is 1% of the value of the shares sold or the Net Asset Value at the time of purchase, whichever is less. The number in the table shows the charge as a percentage of Offering Price. While the percentage is different depending on whether the charge is shown based on the Net Asset Value or the Offering Price, the dollar amount you would pay is the same. See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for details. *There is a $5.00 fee for exchanges by Market Timers. **For the period shown, the manager had agreed in advance to limit its asset allocation fees and to assume as its own expense certain expenses otherwise payable by each fund. With this reduction, asset allocation fees were 0.08% for the Moderate Target Fund and 0.02% for the Growth Target Fund. The Conservative Target Fund paid no asset allocation fees. Total direct operating expenses were .75% for Class I and 1.50% for Class II of each fund. The funds also indirectly bear their pro rata share of the expenses of the underlying Franklin Templeton funds. ***These fees may not exceed 0.25% for Class I and 1.00% for Class II. The combination of front-end sales charges and Rule 12b-1 fees could cause long-term shareholders to pay more than the economic equivalent of the maximum front-end sales charge permitted under the rules of the National Association of Securities Dealers, Inc. For the Conservative Target Fund - Class I and the Moderate Target Fund - Class I the total fund operating expenses are different than the ratio of expenses to average net assets shown under "Financial Highlights" due to a timing difference between the end of the 12b-1 plan year and the fund's fiscal year end. ****Assumes a Contingent Deferred Sales Charge will not apply.

WHAT ARE THE FUNDS' INVESTMENT STRATEGIES?

Each fund pursues its investment goal through active asset allocation by investing primarily in a combination of Franklin Templeton funds (underlying Franklin Templeton funds). These funds, in turn, invest in a variety of U.S. and foreign equity, fixed-income (investment grade or high yield), natural resources and money market securities. Each fund is designed to be a long-term investment and has a different level of risk and return. The following descriptions compare the three funds' levels of risk and return relative to one another and are not intended to imply any particular absolute level of risk or return for any fund.

CONSERVATIVE TARGET FUND is designed for investors seeking the highest level of long-term total return that is consistent with a lower level of risk. This fund may be most appropriate for investors with a shorter-term investment horizon.

MODERATE TARGET FUND is designed for investors seeking the highest level of long-term total return that is consistent with a moderate level of risk. This fund may be most appropriate for investors with an intermediate-term investment horizon.

GROWTH TARGET FUND is designed for investors seeking the highest level of long-term total return that is consistent with a higher level of risk. This fund may be most appropriate for investors with a longer-term investment horizon.

The funds offer investors the following potential benefits:

Convenient, efficient access to a broadly diversified portfolio of Franklin Templeton funds, in a single investment.

Disciplined asset allocation, implemented and reviewed by professional portfolio managers.

A choice of three funds offering a range of risk/return levels, enabling the investor to select the fund (or combination of funds) that most closely matches the investor's risk/return preferences.

WHAT KINDS OF SECURITIES DO THE FUNDS BUY?

Each fund invests in different combinations of underlying Franklin Templeton funds based on the fund's different risk/return level. The fund's investment manager determines the asset allocation for each fund and implements the allocation by investing in a combination of underlying Franklin Templeton funds. The manager evaluates the risk level of the underlying Franklin Templeton funds by looking at such factors as volatility (the variability of returns from one period to the next) and "downside" risk (the likelihood of the return in a particular period being below a specified level).

The underlying Franklin Templeton funds are listed below, grouped under broad asset classes. Please remember that the headings are provided for convenience only and that the investment policies of these funds may permit them to invest in securities other than those suggested by a particular heading. The list of funds may change from time to time upon the recommendation of the manager without shareholder approval. For more detailed information on the investment policies of each underlying Franklin Templeton fund, see "How Do the Underlying Franklin Templeton Funds Invest Their Assets?" in this prospectus.

U.S. EQUITY FUNDS
Franklin Equity Fund
Franklin Growth Fund
Franklin Real Estate Securities Fund Franklin Small Cap Growth Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Discovery Fund
Mutual Shares Fund

U.S. FIXED-INCOME FUNDS
Franklin Bond Fund
Franklin Investment Grade Income Fund Franklin's AGE High Income Fund
Franklin Short-Intermediate U.S. Government Securities Fund Franklin U.S. Government Securities Fund

INTERNATIONAL EQUITY FUNDS
Mutual European Fund
Templeton Developing Markets Trust Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund Templeton Global Smaller Companies Fund Templeton Greater European Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund

INTERNATIONAL FIXED-INCOME FUNDS

Franklin Global Government Income Fund

Franklin Templeton Hard Currency Fund Templeton Global Bond Fund

NATURAL RESOURCES FUNDS
Franklin Gold Fund
Franklin Natural Resources Fund

Generally, Growth Target Fund will hold a higher percentage of its assets in underlying Franklin Templeton funds investing primarily in U.S. and foreign equity securities and natural resources securities than will Moderate Target Fund, which in turn will hold a higher percentage of its assets in such funds than will Conservative Target Fund. Conservative Target Fund generally will hold a higher percentage of its assets in underlying Franklin Templeton funds investing primarily in fixed-income securities than will the Moderate Target Fund, which in turn will hold a higher percentage of its assets in such funds than will Growth Target Fund. The percentage ranges targeted for each fund by broad asset class are set forth below.

                           U.S. AND        (INCLUDING DIRECT
                         INTERNATIONAL     INVESTMENTS IN CASH        SECTOR
FUND                     EQUITY FUNDS     AND CASH EQUIVALENTS)    EQUITY FUNDS*
--------------------------------------------------------------------------------
Conservative Target.....  20% to 50%           30% to 80%            0% to 20%
Moderate Target.........  30% to 70%           20% to 70%            0% to 30%
Growth Target...........  40% to 90%           10% to 60%            0% to 40%

*Franklin Gold Fund, Franklin Natural Resources Fund and Franklin Real Estate Securities Fund.

The percentage ranges for each fund may be changed from time to time by the manager without the approval of shareholders. No more than 25% of each fund's assets may be invested in any one underlying Franklin Templeton fund, although each of the funds may invest up to 50% of its total assets in Franklin Short-Intermediate U.S. Government Securities Fund and Franklin U.S. Government Securities Fund.

DIRECT INVESTMENT IN SECURITIES AND OTHER INVESTMENT STRATEGIES. Each fund may invest up to 5% of its assets directly in the types of securities in which the underlying Franklin Templeton funds invest and may invest without limitation in repurchase agreements and securities issued or backed by the full faith and credit of the U.S. government. U.S. government securities include U.S. Treasury bills, notes, and bonds; securities backed by the full faith and credit of the U.S. government include those issued by the Government National Mortgage Association.

Each fund may also engage directly in the types of investment strategies employed by the underlying Franklin Templeton funds. Each fund may invest in futures and related options for the purpose of managing the desired effective asset allocation of the fund, but not for speculation. In addition, each fund may hedge its investments to protect the fund against a decline in market value. No fund intends to commit more than 5% of its assets to these investment strategies. Each fund may also invest up to 100% of its assets in the same types of securities that the underlying Franklin Templeton funds may invest in for temporary purposes.

PURCHASES OF SHARES OF THE UNDERLYING FRANKLIN TEMPLETON FUNDS. The funds invest only in Class Z shares of Mutual Discovery Fund, Mutual European Fund and Fund Mutual Shares Fund and Advisor Class shares of the other underlying Franklin Templeton funds. Accordingly, the funds will not pay any sales load or 12b-1 service or distribution fees in connection with their investments in shares of the underlying Franklin Templeton funds. The funds, however, will indirectly bear their pro rata share of the fees and expenses incurred by the underlying Franklin Templeton funds that are applicable to holders of Class Z and Advisor Class shares. The investment returns of each fund, therefore, will be net of the expenses of the underlying Franklin Templeton funds in which it invests.

WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?

DIVERSIFICATION. Diversification involves limiting the amount of money invested in any one issuer or, on a broader scale, in a particular industry or group of industries. Non-diversified funds may invest a greater portion of their assets in the securities of one issuer than diversified funds. Economic, business, political or other changes can affect all securities of a similar type. A non-diversified fund may be more sensitive to these changes.

Each of the funds is a non-diversified fund because it invests in a limited number of mutual funds. The underlying Franklin Templeton funds are diversified funds with the exception of Franklin Global Government Income Fund, Franklin Natural Resources Fund, Franklin Real Estate Securities Fund, Franklin Templeton Hard Currency Fund, Franklin Value Fund, and Templeton Global Bond Fund.

ILLIQUID INVESTMENTS. Each fund's policy is not to invest more than 15% of its net assets in illiquid securities. Illiquid securities are generally securities that cannot be sold within seven days in the normal course of business at approximately the amount at which the fund has valued them.

PORTFOLIO TURNOVER. The portfolio turnover rate for Conservative Target Fund was 141.96% for the fiscal year ended July 31, 1998, and 33.30% for the fiscal year ended July 31, 1997. The portfolio turnover rate for Growth Target Fund was 118.19% for the fiscal year ended July 31, 1998, and 65.52% for the fiscal year ended July 31, 1997. Although the funds generally anticipate that portfolio turnover will not exceed 100% per year, in any given year turnover may exceed that level for a variety of reasons. These include higher than anticipated market volatility, as well as changes in portfolio composition and relative performance of the underlying Franklin Templeton funds. High portfolio turnover may increase the fund's transaction costs.

OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional investment restrictions that govern its activities. Those that are identified as "fundamental" may only be changed with shareholder approval. The others may be changed by the Board alone. For a list of these restrictions and more information about the funds' investment policies, please see "How Do the Funds Invest Their Assets?" and "Investment Restrictions" in the SAI.

Generally, the policies and restrictions discussed in this prospectus and in the SAI apply when a 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 these guidelines.

For more information about the various types of investments and strategies of each fund and the underlying Franklin Templeton funds, see "What Are the Risks of Investing in the Funds?"; "What Are the Risks of Investing in the Underlying Franklin Templeton Funds?"; "How Do the Underlying Franklin Templeton Funds Invest Their Assets?"; "Other Investment Policies of the Underlying Franklin Templeton Funds"; and the Appendix and the SAI.

WHAT ARE SOME OF THE OTHER INVESTMENT POLICIES, STRATEGIES AND RISKS OF THE UNDERLYING FRANKLIN TEMPLETON FUNDS?

BORROWING. As a fundamental investment restriction, the underlying Franklin Templeton funds (except Value, Mutual Shares, Discovery, European, Developing Markets, Global Bond, Greater European and Latin America) may not borrow money except for temporary or emergency purposes, up to the following amounts: Equity, Growth, Utilities, Short-Intermediate, Government Securities, AGE, Gold - 5% of total assets; Smaller Companies and Templeton Foreign - 5% of total assets for purposes of redeeming their shares for cancellation; Small Cap, Real Estate, Pacific Growth, Foreign Smaller - 10% of total assets; Investment Grade - 15% of total assets; Global Government and Bond Fund - 30% of total assets; Natural Resources - 33% of total assets; and Hard Currency - 331/3% of total assets.

Value, Developing Markets, Greater European and Latin America may borrow money in an amount not exceeding 331/3% of their net assets; Global Bond may borrow money in an amount not exceeding 30% of its assets (however, the fund's Board of Trustees has adopted a policy of limiting the fund's borrowing to 5% of its net assets to increase holdings of portfolio securities); and Mutual Shares, Discovery and European may borrow up to 331/3% of their assets (plus 5% for emergency or short-term purposes).

BRADY BONDS. Brady Bonds involve various risk factors including residual risk and the history of defaults with respect to commercial bank loans by public and private entities of Brady Countries. There can be no assurance that Brady Bonds in which Greater European or Latin America may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the fund to suffer a loss of interest or principal on any of its holdings. In light of the residual risk of Brady Bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds, investments in Brady Bonds are generally considered speculative.

CONVERTIBLE SECURITIES, INCLUDING ENHANCED AND SYNTHETIC CONVERTIBLE SECURITIES. A convertible security is generally a preferred stock or debt security that may be converted within a specified period of time into a certain amount of common stock or other equity securities of the same or a different issuer. Convertible securities also include non-convertible debt securities with warrants or stock or stock index options attached ("synthetic convertible securities"). A convertible security entitles the holder to receive interest paid or accrued on debt securities or dividends paid or accrued on preferred stock until the security matures or is redeemed, converted or exchanged. If a convertible security is issued by an investment bank, the security is an obligation of and is convertible through the issuing investment bank. Convertible securities generally offer income yields that are higher than the dividend yield, if any, of the underlying common stock, but lower than the yield of similar non-convertible debt securities. While the underlying Franklin Templeton funds generally use the same criteria to rate a convertible debt security that they use to rate a more conventional debt security, a convertible preferred stock is treated like a preferred stock for financial reporting, credit rating, and investment limitation purposes.

A convertible security has risk characteristics of both equity and debt securities. Its value may rise and fall with the market value of the underlying stock or, like a debt security, vary with changes in interest rates and the credit quality of the issuer. A convertible security tends to perform more like a stock when the underlying stock price is high (because it is assumed it will be converted) and more like a debt security when the underlying stock price is low (because it is assumed it will not be converted). Because its value can be influenced by many different factors, a convertible security is not as sensitive to interest rate changes as a similar non-convertible debt security, and generally has less potential for gain or loss than the underlying stock.

ENHANCED CONVERTIBLE SECURITIES. Pacific Growth, Foreign Smaller, Gold, Equity, Growth, Small Cap, Utilities, Value and Real Estate may invest in convertible preferred stocks that offer enhanced yield features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which provide investors, with the opportunity to earn higher dividend income than is available on a company's common stock. PERCS are preferred stocks that generally feature a mandatory conversion date, as well as a capital appreciation limit which is usually expressed in terms of a stated price. Most PERCS expire three years from the date of issue, at which time they are convertible into common stock of the issuer. PERCS are generally not convertible into cash at maturity. Under a typical arrangement, after three years PERCS convert into one share of the issuer's common stock if the issuer's common stock is trading at a price below that set by the capital appreciation limit, and into less than one full share if the issuer's common stock is trading at a price above that set by the capital appreciation limit. The amount of that fractional share of common stock is determined by dividing the price set by the capital appreciation limit by the market price of the issuer's common stock. PERCS can be called at any time prior to maturity, and hence do not provide call protection. If called early, however, the issuer must pay a call premium over the market price to the investor. This call premium declines at a preset rate daily, up to the maturity date.

These funds may also invest in other classes of enhanced convertible securities. These include but are not limited to ACES (Automatically Convertible Equity Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative Securities) and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the following features: they are issued by the company, the common stock of which will be received in the event the convertible preferred stock is converted; unlike PERCS, they do not have a capital appreciation limit; they seek to provide the investor with high current income with some prospect of future capital appreciation; they are typically issued with three- or four-year maturities; they typically have some built-in call protection for the first two to three years; investors have the right to convert them into shares of common stock at a preset conversion ratio or hold them until maturity, and upon maturity they will necessarily convert into either cash or a specified number of shares of common stock.

Similarly, there may be enhanced convertible debt obligations issued by the operating company, whose common stock is to be acquired in the event the security is converted, or by a different issuer, such as an investment bank. These securities may be identified by names such as ELKS (Equity Linked Securities) or similar names. Typically they share most of the salient characteristics of an enhanced convertible preferred stock but will be ranked as senior or subordinated debt in the issuer's corporate structure according to the terms of the debt indenture. There may be additional types of convertible securities not specifically referred to herein which may be similar to those described in which these funds may invest, consistent with their objectives and policies.

An investment in an enhanced convertible security or any other security may involve additional risks to the underlying Franklin Templeton funds. A fund may have difficulty disposing of such securities because there may be a thin trading market for a particular security at any given time. Reduced liquidity may have an adverse impact on market price and the fund's ability to dispose of particular securities, when necessary, to meet its liquidity needs or in response to a specific economic event, such as the deterioration in the credit worthiness of an issuer. Reduced liquidity in the secondary market for certain securities may also make it more difficult for the underlying Franklin Templeton fund to obtain market quotations based on actual trades for purposes of valuing the fund's portfolio. The fund, however, intends to acquire liquid securities, though there can be no assurances that this will be achieved.

SYNTHETIC CONVERTIBLES. Value, Pacific Growth and Foreign Smaller may invest portions of their assets in "synthetic convertible" securities. A synthetic convertible is created by investing in nonconvertible fixed-income securities and in warrants or stock or stock index call options which grant the holder the right to purchase a specified quantity of securities within a specified period of time at a specified price or to receive cash in the case of stock index options. Synthetic convertible securities are generally not considered to be "equity securities" for the purposes of each fund's investment policy regarding those securities.

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

DEBT SECURITIES. Debt securities are securities issued by a company which represent a loan of money by the purchaser of the securities to the company. A debt security typically has a fixed payment schedule which obligates the company 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 dividends to holders of its equity securities. While debt securities are typically used as an investment to produce income to an investor as a result of the fixed payment schedule, debt securities may also increase or decrease in value depending upon factors such as interest rate movements and the success or lack of success of a company.

DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by 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. EDRs and GDRs are typically issued by foreign banks or trust companies, although they also may be issued by U.S. banks or trust companies, and 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, an underlying Franklin Templeton 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 such information and the market value of the Depositary Receipts.

Depositary Receipts reduce but do not eliminate all the risk inherent in investing in the securities of foreign issuers. To the extent that an underlying Franklin Templeton fund acquires Depositary Receipts through banks which do not have a contractual relationship with the foreign issuer of the security underlying the Depositary Receipt to issue and service such Depositary Receipts, there may be an increased possibility that the fund would not become aware of and be able to respond to corporate actions such as stock splits or rights offerings involving the foreign issuer in a timely manner.

DEVELOPING OR EMERGING MARKET COUNTRIES. Investments 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 results in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict a fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; (v) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property; (vi) the absence, until recently in certain Eastern European countries, of 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, some developing market countries 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.

To the extent of the Communist Party's influence, investments in such countries may involve risks of nationalization, expropriation and confiscatory taxation. The communist governments of a number of Eastern European countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there can be no assurance that such expropriation will not occur in the future. In the event of such expropriation, a fund could lose a substantial portion of any investments it has made in the affected countries. Further, no accounting standards exist in Eastern European countries. Finally, even though certain Eastern European currencies may be convertible into U.S. dollars, the conversion rates may be artificial to the actual market values and may be adverse to an underlying Franklin Templeton fund and its shareholders.

There are further risks specific to investments in Eastern Europe, including Russia, Hong Kong and/or Latin America. For a further discussion of these risks, please see the SAI.

EQUIPMENT RELATED INSTRUMENTS. Global Government may purchase equipment trust certificates, equipment lease certificates, and conditional sales contracts. Equipment related instruments are used to finance the acquisition of new equipment. The instrument gives the bondholder the first right to the equipment in the event that interest and principal are not paid when due. Title to the equipment is held in the name of the trustee, usually a bank, until the instrument is paid off. Equipment related instruments usually mature over a period of 10 to 15 years. In practical effect, equipment trust certificates, equipment lease certificates and conditional sales contracts are substantially identical; they differ mainly in legal structure. These fixed-income securities may involve equity features, such as conversion or exchange rights or warrants for the acquisition of stock of the same or a different issuer; participation based on revenues, sales or profits; or the purchase of common stock in a unit transaction (where an issuer's debt securities and common stock are offered as a unit).

EQUITY SECURITIES. Equity securities are securities which entitle the holder to participate in a company's general operating success or failure. 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. The public trading market for such shares is typically a stock exchange but can also be a market which arises between broker-dealers seeking buyers and sellers of a particular security. 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.

Euro. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a new single currency, the Euro, which will replace the national currency for participating member countries. If a fund holds investments in countries with currencies replaced by the Euro, the investment process, including trading, foreign exchange, payments, settlements, cash accounts, custody and accounting will be impacted.

Because this change to a single currency is new and untested, the establishment of the Euro may result in market volatility. For the same reason it is not possible to predict the impact of the Euro on the business or financial condition of European issuers or on a fund. To the extent a fund holds non-U.S. dollar (Euro or other) denominated securities, it will still be exposed to currency risk due to fluctuations in those currencies versus the U.S. dollar.

FOREIGN CURRENCY FLUCTUATIONS. Because certain of the underlying Franklin Templeton funds under normal circumstances will invest a substantial portion of their total assets in the securities of foreign issuers that are denominated in foreign currencies, the strength or weakness of the U.S. dollar against such foreign currencies will account for part of the fund's investment performance. A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of the fund's holdings of securities denominated in such currency and, therefore, will cause an overall decline in the fund's Net Asset Value and any net investment income and capital gains to be distributed by the fund in U.S. dollars.

The rate of exchange between the U.S. dollar and other currencies is determined by several factors, including the supply and demand for particular currencies, central bank efforts to support particular currencies, the movement of interest rates, the pace of business activity in certain other countries and the U.S., and other economic and financial conditions affecting the world economy.

Although the underlying Franklin Templeton funds value their assets daily in terms of U.S. dollars, the funds do not intend to convert their holdings of foreign currencies into U.S. dollars on a daily basis. Certain funds may do so from time to time. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the fund at one rate, while offering a lesser rate of exchange should the fund desire to sell that currency to the dealer.

FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS. Equity, Small Cap, Pacific
Growth, Foreign Smaller, Natural Resources, Mutual Shares, Discovery, European, Developing Markets, Greater European, Latin America, Global Bond, Bond Fund, Global Government and Hard Currency may enter into futures contracts on currencies. A futures contract on currency is an agreement to buy or sell currency at a specified price during a designated month.

These funds may also buy and sell put and call options on currency futures contracts. A put option purchased by the fund would give it the right to assume a position as the seller of a futures contract. A call option purchased by the fund would give it the right to assume a position as the buyer of a futures contract. The fund is required to pay a premium for a put or call option on a futures contract, but is not required to take any actions under the contract. If the option cannot be profitably exercised before it expires, the fund's loss will be limited to the amount of the premium and any transaction costs.

FOREIGN CURRENCY OPTIONS. AGE, Pacific Growth, Foreign Smaller, Natural Resources, Mutual Shares, Discovery, European, Greater European, Latin America, Developing Markets, Global Government and Global Bond may purchase and sell (write) put and call options on foreign currencies traded on U.S. and foreign exchanges, or OTC. The funds will engage in such option transactions for various hedging purposes such as 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 or to hedge the value of portfolio holdings denominated in particular currencies against fluctuations in relative value. Hard Currency may, for hedging purposes, buy put and call options on any currency in which the fund's investments are denominated.

FOREIGN CURRENCY SWAPS. Mutual Shares, Discovery and European may participate in currency swaps. A currency swap is an agreement to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them. The funds will usually enter into swaps on a net basis. The funds may participate in currency swaps with counterparties that have received a credit rating of A-1 from S&P or P-1 from Moody's, or are of equal credit quality.

FOREIGN CURRENCY TRANSACTION RISKS. Currency transactions, such as forward currency exchange contracts, currency futures and options on such futures, options on currencies, and currency swaps are subject to different risks than other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be negatively affected by government exchange controls, blockages, and manipulations or exchange restrictions imposed by governments. These can result in losses to a fund if it is unable to deliver or receive currency or funds in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. Buyers and sellers of currency futures are subject to the same risks that apply to the use of futures generally. Further, settlement of a currency futures contract for the purchase of most currencies must occur at a bank based in the issuing nation. Trading options on currency futures is relatively new, and the ability to establish and close out positions on such options is subject to the maintenance of a liquid market which may not always be available. Currency exchange rates may fluctuate based on factors extrinsic to that country's economy.

FORWARD CURRENCY EXCHANGE CONTRACTS. AGE, Mutual Shares, Discovery, European, Pacific Growth, Foreign Smaller, Natural Resources, Hard Currency, Global Bond, Bond Fund, Global Government, Greater European, Latin America, Templeton Foreign, Smaller Companies, Developing Markets, and Gold may all, to some degree, engage in foreign currency exchange transactions. The funds will normally conduct foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market (Templeton Foreign and Smaller Companies may engage only in this type of forward foreign currency exchange transaction), or through entering into forward contracts to purchase or sell foreign securities. However, some price spread on these transactions (to cover service charges) will be incurred when a fund converts assets from one currency to another. When a fund is the buyer or seller in such a transaction, it will either cover its position or maintain, in a segregated account with its custodian bank, cash or securities having an aggregate value equal to the amount of such commitment until payment is made. Global Government may construct an investment position by combining a debt security denominated in one currency with a forward contract calling for the exchange of that currency for another currency.

Natural Resources, AGE, Global Bond, Global Government, Greater European and Latin America have no specific limitations on the percentage of assets they may commit to forward contracts, subject to their stated investment objectives and policies, except that the funds will not enter into a forward contract if the amount of assets set aside to cover forward contracts would impede portfolio management or each fund's ability to meet redemption requests. Natural Resources, AGE, Global Bond, Developing Markets, Greater European and Latin America will use forward contracts primarily to protect the funds from adverse currency movements. Developing Markets will not enter into forward currency contracts if, as a result, the fund will have more than 20% of its total assets committed to such contracts.

GNMAS. As with most bonds, in a period of rising interest rates, the value of a GNMA will generally decline. In a period of declining interest rates, however, it is more likely that mortgages contained in GNMA pools will be prepaid, thus reducing the effective yield. This potential for prepayment during periods of declining interest rates may reduce the general upward price increases of GNMAs as compared to the increases experienced by non-callable debt securities over the same periods. Moreover, any premium paid on the purchase of a GNMA will be lost if the obligation is prepaid. Of course, price changes of GNMAs and other securities held by a fund will have a direct impact on the Net Asset Value per share of the fund.

HIGH YIELD, FIXED-INCOME SECURITIES. An investment in an underlying Franklin Templeton fund that has a policy of investing in higher yielding, higher risk fixed-income securities is subject to a higher degree of risk than is present with an investment by such fund in higher rated, lower yielding securities.

The market value of high yield lower-quality, fixed-income securities 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 an underlying Franklin Templeton fund's portfolio defaults, the underlying Franklin Templeton fund may have unrealized losses on the security, which may lower the fund's Net Asset Value. Defaulted securities tend to lose much of their value before they default. Thus, the underlying Franklin Templeton fund's Net Asset Value may be adversely affected before an issuer defaults. In addition, the underlying Franklin Templeton 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 a fund or underlying Franklin Templeton fund. Although these securities are typically not callable for a period of time, usually three to five years from the date of issue, if an issuer calls its securities during periods of declining interest rates, the investment 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. Under the Code and U.S. Treasury regulations, the underlying Franklin Templeton fund may have to accrue income on defaulted securities and distribute the income to shareholders for tax purposes, even though the fund is not currently receiving interest or principal payments on the defaulted securities. To generate cash to satisfy these distribution requirements, the fund may have to sell portfolio securities that it otherwise may have continued to hold or use cash flows from other sources, such as the sale of fund shares.

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

Equity, Growth, Utilities, Gold, Natural Resources, Small Cap, Real Estate, Value, Bond Fund, AGE, Foreign Smaller and Global Government 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 a 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. A 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.

Equity, Growth, Utilities, Gold, Natural Resources, Small Cap, Real Estate, Value, Bond Fund, AGE, Foreign Smaller and Global Government may buy high yield, fixed-income securities during an initial underwriting. These securities involve special risks because they are new issues. The investment manager will carefully review their credit and other characteristics. The funds have no arrangement with their underwriters 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 underlying Franklin Templeton fund's Net Asset Value. In addition, a fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings.

ILLIQUID SECURITIES. An illiquid security is a security that cannot be sold within seven days in the normal course of business for approximately the amount at which the fund has valued the security. Equity, Growth, Utilities, Small Cap, Value, Real Estate, Short-Intermediate, Government Securities, Investment Grade, AGE, Hard Currency, Developing Markets, Templeton Foreign, Smaller Companies, Global Bond, Global Government, Pacific Growth, Foreign Smaller, and Gold may not purchase an illiquid security if, at the time of purchase, the fund would have more than 10% of its total net assets invested in such securities. Bond Fund, Natural Resources, Mutual Shares, Discovery, European, Greater European and Latin America may invest up to 15% of their respective total assets in illiquid securities.

INTEREST RATE FUTURES AND OPTIONS. Value, Pacific Growth, Foreign Smaller, Mutual Shares, Discovery, European, Global Government, Bond Fund and Natural Resources may enter into interest rate futures contracts and options thereon. Investment Grade may purchase options on interest rate futures. Interest rate futures contracts are contracts for the future delivery of U.S. government securities and index-based futures contracts. The value of these instruments changes in response to changes in the value of the underlying security or index, which depend primarily on prevailing interest rates.

INTEREST RATE SWAPS. Interest rate swaps are generally entered into to permit the party seeking a floating rate obligation the opportunity to acquire such 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 such a fixed rate obligation, also frequently at a price lower than is available in the capital markets. The success of such a transaction depends in large part on the availability of fixed rate obligations at a low enough coupon rate to cover the cost involved.

AGE and Global Government may participate in interest rate swaps. AGE intends to participate in interest rate swaps with regard to obligations held in its portfolio. To the extent AGE does not own the underlying obligation, it will maintain, in a segregated account with its custodian, cash or securities having an aggregate value equal to the amount of the fund's outstanding swap obligation.

INVESTMENT COMPANY SECURITIES. Certain of the underlying Franklin Templeton funds may invest in other investment companies to the extent permitted by the 1940 Act and exemptions thereto. To the extent that a fund invests in an investment company, there may be duplication of advisory and other fees.

LOAN PARTICIPATIONS. AGE, Value, Mutual Shares, Discovery, European and Global Government are authorized to acquire loan participations in which the funds will purchase from a lender a portion of a larger loan which it has made to a borrower. Generally, such 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. Such 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 funds will be permitted to purchase such securities which sell at a discount because of the borrower's credit problems. To the extent the borrower's credit problems are resolved, such loan participations may appreciate in value. Loan participations carry substantially the same risks as those for defaulted debt obligations and may cause loss of the entire investment. AGE's investment in loan participations, some of which may be in default, and other defaulted securities will represent no more than 15% of the fund's net assets at the time of investment, subject to AGE's policy concerning illiquid securities to the extent that certain participations are considered to be illiquid. With respect to Value, Mutual Shares, Discovery and European, loan participations will be included in the funds' limitation on illiquid securities.

LOANS OF PORTFOLIO SECURITIES. Equity, Growth, Utilities, Small Cap, Value, Natural Resources, Real Estate, Bond Fund, Short-Intermediate, Investment Grade, AGE, Mutual Shares, Discovery, European, Greater European, Developing Markets, Latin America, Hard Currency, Global Bond, Pacific Growth, Foreign Smaller and Gold may lend securities they have purchased to certain securities dealers or other institutional investors, so long as the total amount of the loans does not exceed 10% of the value of each of Short-Intermediate's, Equity's, Growth's, Real Estate's, Utilities', AGE's and Gold's total assets, 20% of Small Cap's total assets, 25% of Value's total assets, 30% of Investment Grade's, Global Government's, and Hard Currency's total assets, 33% of Natural Resources' total assets and, 33 1/3% of Bond Fund's, Greater European's, Pacific Growth's, Foreign Smaller's, Latin America's, Global Bond's and Developing Markets' total assets. Investment Grade, Mutual Shares, Discovery and European intend to limit such borrowing to 5% of their respective total assets at the time of the most recent loan.

The borrower must deposit with the fund's custodian bank collateral with an initial market value of at least 100% of the market value of the securities loaned, including accrued interest, with the value of the collateral and loaned securities marked-to-market daily to maintain collateral coverage of at least 100% (102% in the case of Short-Intermediate and Global Government). This collateral shall consist of cash, securities issued by the U.S. government, its agencies or instrumentalities, or irrevocable letters of credit. The lending of securities is a common practice in the securities industry. The funds may engage in security loan arrangements with the primary objective of increasing their income either through investing cash collateral in short-term interest-bearing obligations or by receiving a loan premium from the borrower. Under the securities loan agreement, they continue to be entitled to all dividends or interest on any loaned securities. As with any extension of credit, there are risks of delay in recovery and loss of rights in the collateral should the borrower of the security fail financially.

Developing Markets, Greater European and Latin America retain the right to terminate their loans at any time and obtain the return of the securities loaned within five business days.

MORTGAGE-BACKED SECURITIES (INCLUDING CMOS) AND ASSET-BACKED SECURITIES (INCLUDING CARS). Mortgage-backed securities represent an ownership interest in mortgage loans made by banks and other financial institutions to finance purchases of homes, commercial buildings or other real estate. These mortgage loans may have either fixed or adjustable interest rates. The individual mortgage loans are packaged or "pooled" together for sale to investors. As the underlying mortgage loans are paid off, investors receive principal and interest payments. Mortgage-backed securities are issued by U.S. government agencies, foreign government agencies, and private institutions. The payment of interest and principal on securities issued by U.S. government agencies generally is guaranteed either by the full faith and credit of the U.S. government or by the credit of the agency. The guarantee applies only to the timely repayment of principal and interest and not to the market prices and yields of the securities or to the Net Asset Value or performance of the fund, which will vary with changes in interest rates and other market conditions. Mortgage-backed securities issued by foreign government agencies and private institutions are not guaranteed by the U.S. government or its agencies.

A mortgage-backed security differs from conventional debt securities because principal is paid back over the life of the security rather than at maturity. The fund may receive unscheduled prepayments of principal due to voluntary prepayments, refinancing or foreclosure on the underlying mortgage loans. During periods of declining interest rates, the volume of principal prepayments generally increases as borrowers refinance their mortgages at lower rates. The fund may be forced to reinvest returned principal at lower interest rates, reducing the fund's income. For this reason, mortgage-backed securities may be less effective than other types of securities as a means of "locking in" long-term interest rates and may have less potential for capital appreciation during periods of falling interest rates than other investments with similar maturities. A reduction in the anticipated rate of principal prepayments, especially during periods of rising interest rates, may increase the effective maturity of mortgage-backed securities, making them more susceptible than other debt securities to a decline in market value when interest rates rise. This could increase the volatility of the fund's returns and share price.

CMOs may be issued or guaranteed by U.S. government agencies or issued by certain financial institutions and other mortgage lenders. CMOs and REMICs are debt instruments issued by special purpose entities and are secured by pools of mortgages backed by residential and various types of commercial properties. Multi-class pass-through securities are equity interests in a trust composed of mortgage loans or other mortgage-backed securities. Payments of principal and interest on the underlying collateral provides the funds to pay debt service on the CMO or REMIC or make scheduled distributions on the multi-class pass-through securities.

CMOs are collateralized by pools of mortgage loans created by commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other issuers in the U.S. Timely payment of interest and principal (but not the market value and yield) of some of these pools is supported by various forms of insurance or guarantees issued by private issuers, those who pool the mortgage assets and, in some cases, by U.S. government agencies. Prepayments of the mortgages underlying a CMO, which usually increase when interest rates decrease, will generally reduce the life of the mortgage pool, thus impacting the CMO's yield. Under these circumstances, the reinvestment of prepayments will generally be at a rate lower than the rate applicable to the original CMO.

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

REMICs, which are authorized under the Tax Reform Act of 1986, are private entities formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property. REMICs are similar to CMOs in that they issue multiple classes of securities. As with CMOs, the mortgages that collateralize the REMICs in which the fund may invest include mortgages backed by GNMAs or other mortgage pass-throughs issued or guaranteed by the U.S. government, its agencies or instrumentalities or issued by private entities, which are not guaranteed by any government agency.

Yields on privately-issued CMOs have been historically higher than the yields on CMOs issued or guaranteed by U.S. government agencies. However, the risk of loss due to default on such instruments is higher since they are not guaranteed by the U.S. government.

Asset-backed securities are securities backed by credit card eceivables, automobile, mobile home and recreational vehicle loans and leases, and other receivables. Asset-backed securities present certain additional risks that are not presented by mortgage-backed securities because asset-backed securities generally do not have the benefit of a security interest in collateral that is comparable to mortgage assets. There is the possibility that, in some cases, recoveries on repossessed collateral may not be available to support payments on these securities. CARs are asset-backed securities. In the case of automobile receivables, there is a risk that the holders of these receivables may not have either a proper or first security interest in all of the obligations backing the receivables due to the large number of vehicles involved in a typical issuance and technical requirements under state law. Therefore, recoveries on repossessed collateral may not always be available to support payments on the securities.

NATURAL RESOURCES SECTOR RISKS. There are a number of risks associated with investing in the natural resources sector, including gold. The securities of companies in the natural resources sector may experience more price volatility than securities of companies in other industries. Some of the commodities in these industries are subject to limited pricing flexibility because of supply and demand factors. Others are subject to more broad price fluctuations as a result of volatility of the prices for certain raw materials' prices and the instability of supplies of other materials. These factors can affect the profitability of companies in the natural resources sector and, as a result, the value of their securities.

Gold operation companies involve special considerations. Prices of their securities will be affected by the price of gold and precious metals. They may also be affected by changing costs of production. The price of gold may fluctuate substantially over short periods of time so the fund's share price may be more volatile than other types of investments.

The price of gold and other precious metals is affected by several factors including (1) how much of the worldwide supply of gold is held among four major producers. Economic, political, or other conditions affecting one of the major sources could have a substantial effect on the world's gold supply in countries throughout the world; (2) increased environmental, labor or other costs in mining; (3) changes in laws relating to mining or gold production or sales; and (4) unpredictable monetary policies and economic and political conditions in countries throughout the world. For example, if Russia decides to sell some of its gold reserves, the supply would go up, and the price would generally go down.

In addition, changes in U.S. or foreign tax, currency or mining laws may make it more expensive and/or more difficult to pursue the fund's investment strategies.

The value of a company may be affected by factors that affect the company alone, the industry, or the entire country in which it is located.

Because of current conditions in South Africa, Gold's investments in South African companies, approximately 20% of the portfolio as of July 31, 1998, may be subject to somewhat greater risk than investments in companies of countries with more stable political profiles.

NEW OR UNSEASONED COMPANIES. Certain of the underlying Franklin Templeton funds may invest in the securities of relatively new or unseasoned companies which are in their early stages of development or small companies positioned in new and emerging industries where the opportunity for rapid growth is expected to be above average. These companies may have relatively small revenues, limited product lines, and a small share of the market for their products or services. Small companies may lack depth of management and may be unable to generate the funds necessary for growth or potential development. In addition, these companies may be developing or marketing new products and services for which markets are not yet or may never become established. As a result, small companies may suffer significant losses as well as realize substantial growth, and investments in such companies tend to be volatile and, therefore, speculative.

OPTIONS AND FINANCIAL FUTURES. Certain of the underlying Franklin Templeton funds may use certain investment techniques, all of which may be dependent upon a prediction of the future direction of various financial barometers. In this regard, Equity, Small Cap, Real Estate, Gold, Mutual Shares, Discovery, European, Pacific Growth, Foreign Smaller, Global Government, Global Bond, Latin America, Greater European, and Developing Markets may purchase and sell put and call options on securities and securities indices which trade on securities exchanges, which may include foreign exchanges, and in the over-the-counter ("OTC") market. These funds, along with Value and Natural Resources, also may purchase and sell financial futures and options on financial futures with respect to securities and securities indices. AGE may write covered call options without limitation, but does not currently anticipate that it will do so.

Pacific Growth, Foreign Smaller, Global Government and Value may engage in "spread" and "straddle" transactions. A spread transaction is one in which a fund purchases and writes a put or call option on the same underlying security, with the options having different exercise prices and/or expiration dates. In a straddle transaction, the fund purchases or writes combinations of put and call options on the same security.

Growth and Utilities may write (sell) covered call options which are listed for trading on a national securities exchange. Writing a "covered" call option means that the fund will only write (sell) options on securities which it actually owns. When a fund sells covered call options, it will receive a cash premium which can be used in whatever way is felt to be most beneficial to the fund. Growth may also purchase put options on securities. Put options on particular securities may be purchased to protect against a decline in the market value of the underlying security below the exercise price less the premium paid for the option. Growth may sell a put option which it has previously purchased prior to the sale of the securities underlying such option.

Value may write covered call options on securities that are listed on a national securities exchange or traded OTC and purchase listed and OTC call and put options on securities and securities indices. Value may engage in forward conversion transactions whereby the fund will write call options on securities it has purchased and purchase put options on those securities. Pacific Growth, Foreign Smaller, Developing Markets, Global Government, Global Bond, Equity, Real Estate, Small Cap, Greater European and Latin America may write covered call and put options on securities and securities indices that are traded on exchanges or in the OTC market.

Investment Grade may write covered call and put options on any securities it may purchase for its portfolio. The fund may purchase call and put options for the purpose of offsetting its obligations pursuant to previously written options. The fund may purchase put options only on U.S. government securities in its portfolio in anticipation of a decline in the market value of such securities.

Global Government may write options in connection with buy-and-write transactions; that is, it may purchase a security and then write a call option against that security. The exercise price will depend upon the expected price movement and may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the security. Global Government may enter into futures on debt securities that are backed by the U.S. government and may enter into futures on corporate securities and non-U.S. government debt securities when such securities become available.

Mutual Shares', Discovery's and European's OTC option transactions are limited to transactions with U.S. government securities dealers recognized by the Federal Reserve Bank of New York as "primary dealers" or broker-dealers, domestic or foreign banks, or other financial institutions which have received a short term credit rating of A-1 from S&P or P-1 from Moody's, or are of comparable quality. Mutual Shares, Discovery or European may not purchase or sell put options on futures on individual corporate debt and individual equity securities.

Bond Fund may buy and sell financial futures contracts and foreign currency futures contracts and options on these contracts. Under ordinary circumstances, the fund does not expect that it will invest more than 10% of total assets in futures and related options contracts; however, during the fund's initial period of operations it is anticipated that the fund's investments in these contracts will not exceed 25% of total assets.

The options and futures transactions of many of the underlying Franklin Templeton funds, as described above, have limited purposes. For example, as to options and futures, Gold and Value, and as to futures only, Global Bond, Pacific Growth and Foreign Smaller may only engage in such activities for hedging purposes or other appropriate risk management purposes. Real Estate may only engage in options and futures transactions, and Pacific Growth and Foreign Smaller may only engage in options transactions for hedging purposes or to increase income to such funds. Equity may only engage in options and futures transactions for hedging purposes or to accommodate cash flows. Investment Grade may purchase and sell put and call options on interest rate futures contracts solely for hedging purposes. Mutual Shares, Discovery and European may only engage in futures and options for non-hedging purposes if no more than 5% of their respective assets are at risk. For hedging purposes only, Developing Markets may buy and sell financial futures contracts, stock index futures contracts, foreign currency futures contracts and options on any of the foregoing.

The futures activities of each of the underlying Franklin Templeton funds will be accomplished so that no fund is considered to be a commodity pool operator under the laws governing the trading of commodities. All futures and related options activities of the funds are limited to bona fide hedging transactions, or, if not for bona fide hedging purposes, the aggregate initial margin premiums required to establish its futures or related options positions may not exceed 5% of the underlying Franklin Templeton fund's total assets (after taking into account unrealized profits and unrealized losses on such contracts it has entered into; provided however, that, in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5%). In addition, certain of underlying Franklin Templeton funds have committed to limit their options and futures transactions to various percentages.

Options and futures may fail as hedging techniques where the price movements of the securities underlying the options and futures do not follow the price movements of the underlying Franklin Templeton fund's securities which are subject to the hedge. The loss from investing in futures transactions is potentially unlimited. Gains and losses on investments in options and futures depend on the investment manager's ability to predict correctly the direction of securities markets, interest rates, and other economic factors. Also, a liquid secondary market for any particular option or future may not be available when the investment manager wishes to "close out" a position in an option or future. In such a situation, the underlying Franklin Templeton fund will likely be unable to control losses by closing its position.

For a further description of these techniques, see the SAI.

PUBLIC UTILITIES SECURITIES. The risks of investments in the public utilities industry include: risks associated with regulatory changes (including deregulation); risks associated with interest rate fluctuations; the difficulty of obtaining adequate returns on invested capital in spite of frequent rate increases; the difficulty of financing large construction programs during inflationary periods; restrictions on operations and increased costs and delays attributable to environmental considerations; difficulties of the capital markets in absorbing utility debts and equity securities; difficulties in obtaining fuel for electric generation at reasonable prices; risks associated with the operation of nuclear power plants; and general effects of energy conservation.

REIT AND REAL ESTATE-RELATED RISKS. REITs typically invest directly in real estate and/or in mortgages and loans collateralized by real estate. "Equity" REITs are real estate companies that own and manage income-producing properties such as apartments, hotels, shopping centers or office buildings. The income, primarily rent from these properties, is generally passed on to investors in the form of dividends. These companies provide experienced property management and generally concentrate on a specific geographic region or property type. "Mortgage" REITs make loans to commercial real estate developers and earn income from interest payments.

To the extent an underlying Franklin Templeton invests in REITs or securities of companies operating in the real estate industry, it generally is subject to the same risks that affect direct investments in real estate and its performance is closely tied to conditions affecting the real estate industry. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, the strength of specific industries renting properties, and other factors affecting supply and demand for properties. When economic growth is slowing, demand for property decreases and prices may decline. Rising interest rates, which drive up mortgage and financing costs, can restrain construction and buying and selling activity and make other investments more attractive. Property values could decrease because of overbuilding, increases in property taxes and operating expenses, changes in zoning laws, environmental regulations or hazards, uninsured casualty or condemnation losses, or a general decline in neighborhood values.

The value of securities of companies that service the real estate industry will also be affected by changes affecting the real estate market.

REITs. Changes in the market value of an underlying Franklin Templeton fund's investments in REIT securities will also affect its performance. A REIT's performance depends on the types and locations of the properties it owns and on how well it manages those properties. A decline in rental income could occur because of extended vacancies, increased competition from other properties, tenants' failure to pay rent or poor management. A REIT's performance also depends on the company's ability to finance property purchases and renovations and manage its cash flows. Mortgage REITs are subject to the risks that the borrower may be unable to make interest and principal payments on the loan made by the mortgage REIT and that the value of the property may be less than the amount of the loan. Because REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments.

Loss of status as a qualified REIT or changes in the treatment of REITs under the Code could adversely affect the value of a particular REIT or the market for REITs as a whole and the underlying Franklin Templeton fund's performance.

By investing in REITs indirectly, a shareholder will bear not only his proportionate share of the expenses of the fund, but also, indirectly, similar expenses of the REITs.

Equity, Developing Markets, AGE, Small Cap, Mutual Shares, Discovery, European, Natural Resources, Smaller Companies, Foreign, Greater European, Pacific Growth, Foreign Smaller, Global Bond, Real Estate and Latin America may invest in entities which qualify as REITs for federal income tax purposes or in other marketable securities secured by real estate or interests therein.

RESTRICTED SECURITIES. Certain of the underlying Franklin Templeton funds may invest a specific percentage of their total assets in restricted securities. Restricted securities involve certain risks, including the risk that a secondary market may not exist when a holder wants to sell them. In addition, the price and valuation of these securities may reflect a discount because they are perceived as having less liquidity than the same securities that are not restricted. If a fund suddenly has to sell restricted securities, time constraints or lack of interested, qualified buyers may prevent the fund from receiving the value at which the securities are carried on the books of the fund at the time of the sale. Alternatively, the investment manager may sell unrestricted securities it might have retained if the fund had only held unrestricted securities.

REVERSE REPURCHASE AGREEMENTS. Small Cap, Global Government, Short-Intermediate and Natural Resources may enter into reverse repurchase agreements. These agreements involve the sale of securities held by the funds pursuant to an agreement to repurchase the securities at an agreed-upon price, date, and interest payment. When entering into reverse repurchase transactions, cash or securities of a dollar amount equal in value to the funds' obligation under the agreement, including any earned but unpaid interest, will be maintained in a segregated account with each fund's respective custodian bank. The value of the securities subject to the reverse repurchase agreement will be determined daily.

Reverse repurchase agreement transactions involve the risk that the market value of the securities sold by the fund may decline below the repurchase price of the securities subject to the agreement and the risk that a default by the purchaser may cause the fund to experience a loss.

SHORT SALES. Short sales are transactions in which the fund sells a security it does not own in anticipation of a decline in the market value of that security. In a short sale "against the box," the fund owns or has the immediate and unconditional right to acquire at no additional cost the identical security. Possible losses from short sales differ from losses that could be incurred from a purchase of a security because losses from short sales may be unlimited, whereas losses from purchases can equal only the total amount invested.

Value may make short sales and short sales "against the box" up to 25% of its net assets. At any time, it will not have more than 15% of the value of its net assets in deposits or short sales "against the box." Global Government may make short sales "against the box," provided that it will not have more than 10% of its Net Asset Value held as collateral for such short sales. Mutual Shares, Discovery and European may make short sales up to 5% of their respective total net assets, and may sell securities "short against the box" without limit. Bond Fund may also make short sales.

STANDBY COMMITMENT AGREEMENTS. Natural Resources may from time to time enter into standby commitment agreements. Such agreements commit the fund, for a stated period of time, to purchase a stated amount of a security which may be issued and sold to the fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement, the fund is paid a commitment fee, regardless of whether the security is ultimately issued, which is typically approximately 0.5% of the aggregate purchase price of the security which the fund has committed to purchase. The fund will enter into such agreements only for the purpose of investing in the security underlying the commitment at a yield and/or price which is considered advantageous to the fund. The fund will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of the securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale, will not exceed 15% of its net assets, taken at the time of acquisition of such commitment or security. The fund will at all times maintain a segregated account with its custodian bank of cash, cash equivalents, U.S. government securities or other high-grade securities denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the purchase price of the securities underlying the commitment.

There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period.

The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the value of the security will thereafter be reflected in the calculation of the fund's Net Asset Value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment.

STRUCTURED INVESTMENTS. Templeton Foreign, Smaller Companies, Global Bond, Developing Markets, Greater European, Latin America and Bond Fund may invest in structured investments. Structured investments involve entities organized and operated solely for the purpose of restructuring the investment characteristics of various securities. These entities are typically organized by investment banking firms which receive fees in connection with establishing each entity and arranging for the placement of its securities. This type of restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments and the issuance by that entity of one or more classes of securities ("Structured Investments") backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued Structured Investments to create securities with different characteristics such as varying maturities, payment priorities or interest rate provisions; the extent of the payments made with respect to Structured Investments is dependent on the extent of the cash flow on the underlying instruments.

Structured Investments may be of a class that is subordinated or unsubordinated to the right of payment of another class. Subordinated Structured Investments typically have higher yields and present greater risks than unsubordinated Structured Investments. Structured Investments are typically sold in private placement transactions, and there currently is no active trading market for Structured Investments. To the extent such investments are illiquid, they will be subject to a fund's restriction on investments in illiquid securities.

TRADE CLAIMS. AGE, Value, Mutual Shares, Discovery and European may invest a portion of their assets in trade claims. Trade claims are purchased from creditors of companies in financial difficulty. For purchasers such as these funds, 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. In the event that 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. AGE's investment in these instruments will not exceed, and Value intends to limit these investments to no more than, 5% of their respective net assets at the time of purchase. Trade claims are generally liquid as there is a secondary market, but the boards of the funds will monitor their liquidity.

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. Trading in claims is not regulated by federal securities laws or the SEC. Currently, trading in claims is 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.

U.S. TREASURY ROLLS. Investment Grade may enter into "U.S. Treasury rolls" in which the fund sells outstanding U.S. Treasury securities and buys back "when-issued" U.S. Treasury securities of slightly longer maturity for simultaneous settlement on the settlement date of the "when-issued" U.S. Treasury security. During the period prior to settlement date, the fund continues to earn interest on the securities it is selling. It does not earn interest on the securities that it is purchasing until after settlement date.

With respect to these transactions, Investment Grade could suffer an opportunity loss if the counterparty to the roll failed to perform its obligations on settlement date, and if market conditions changed adversely. The fund intends, however, to enter into U.S. Treasury rolls only with government securities dealers recognized by the Federal Reserve Board or with member banks of the Federal Reserve System.

VALUE INVESTING. Value will invest principally in the securities of companies believed by the investment manager to be undervalued. Securities of a company may be undervalued as a result of overreaction by investors to unfavorable news about a company, industry, the stock market in general, or as a result of a market decline, poor economic conditions, tax-loss selling or actual or anticipated unfavorable developments affecting a company. Often these companies are attempting to recover from business setbacks or adverse events (turnarounds), cyclical downturns, or, in certain cases, bankruptcy.

Cyclical stocks in which Value may invest tend to increase in value more quickly during economic upturns than noncyclical stocks, but they also tend to lose value more quickly in economic downturns. As with all investments, there is always the possibility when investing in these securities that the investment manager may be incorrect in its assessment of a particular industry or company or that the investment manager may not purchase these securities at their lowest possible prices or sell them at their highest.

Value's purchase of securities of companies emerging from bankruptcy may present risks that do not exist with other investments. Companies emerging from bankruptcy may have some difficulty retaining customers and suppliers who prefer transacting with solvent organizations. If new management is installed in a company emerging from bankruptcy, the management may be considered untested; if the existing management is retained, the management may be considered incompetent. Further, even when a company has emerged from bankruptcy with a lower level of debt, it may still retain a relatively weak balance sheet. During economic downturns these companies may not have sufficient cash flow to pay their debt obligations and may also have difficulty finding additional financing. In addition, reduced liquidity in the secondary market may make it difficult for the fund to sell the securities or to value them based on actual trades.

Value's policy of investing in securities that may be out of favor, including turnarounds, cyclicals, and companies emerging from bankruptcy, companies reporting poor earnings, and companies whose share prices have declined sharply or which are not widely followed, differs from the approach followed by many other mutual funds. The investment manager believes, however, that these securities may provide a greater total investment return than securities whose prices appear to reflect anticipated favorable developments.

WHEN-ISSUED, DELAYED DELIVERY, AND TO-BE-ANNOUNCED TRANSACTIONS. Natural
Resources, Real Estate, Short-Intermediate, AGE, Global Government and Global Bond may purchase and sell obligations on a "when-issued" or "delayed delivery" basis. Natural Resources, AGE, Short-Intermediate and Global Government are not subject to any percentage limit with respect to these types of obligations. These transactions are arrangements in which a fund purchases securities with payment and delivery scheduled for a future time, generally within two weeks. Although AGE, Real Estate, Natural Resources and Short-Intermediate will generally purchase securities on a when-issued basis with the intention of acquiring the securities, they may sell the securities before the settlement date if it is deemed advisable. When a fund is the buyer in these transactions, it will maintain with its custodian bank, in an account that is separate and apart from its normal custody account, cash or securities having a total value equal to the amount of the fund's commitment until payment for the obligation is made. Government Securities may purchase and sell GNMA certificates on a "To-Be-Announced" ("TBA") and "delayed delivery" basis, and is not subject to any percentage limit with respect to these transactions. These transactions are arrangements under which the fund may purchase securities with payment and delivery scheduled for a future time, generally within 30 to 60 days.

Purchases of securities on a when-issued, delayed delivery or TBA basis are subject to market fluctuation and 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. If the other party to a when-issued, delayed delivery or TBA transaction fails to complete the transaction, the fund could miss a favorable price or yield opportunity. Securities purchased on a when-issued, delayed delivery or TBA basis do not generally earn interest until their scheduled delivery date.

ZERO COUPON AND PAY-IN-KIND BONDS. The credit risk factors pertaining to lower rated securities also apply to lower rated zero coupon, deferred interest, and pay-in-kind bonds. These bonds carry an additional risk in that, unlike bonds that pay interest throughout the period to maturity, the fund will realize no cash until the cash payment date and, if the issuer defaults, the fund may obtain no return at all on its investment. Zero coupon, deferred interest, and pay-in-kind bonds involve additional special considerations.

Zero coupon or deferred interest securities are debt obligations that do not entitle the holder to any periodic payments of interest prior to 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 amounts or par value. The discount varies depending on the time remaining until maturity or cash payment date, 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 of the security approaches. The market prices of zero coupon securities are generally more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do non-zero coupon or deferred interest securities having similar maturities and credit quality.

Mutual Shares, Discovery, European, Smaller Companies, Templeton Foreign, Greater European, Latin America, Global Bond, Bond Fund, AGE and Value may purchase pay-in-kind bonds. Pay-in-kind bonds are securities that pay interest through the issuance of additional bonds. The fund will be deemed to receive interest over the life of such bonds and be treated as if interest were paid on a current basis for federal income tax purposes, although no cash interest payments are received by the fund until the cash payment date or until the bonds mature. Accordingly, during periods when the fund receives no cash interest payments on its zero coupon securities or deferred interest or pay-in-kind bonds, it may be required to dispose of portfolio securities to meet distribution requirements and such sales may be subject to the risk factors discussed above. AGE and Value are not limited in the amount of their assets that may be invested in these securities.

DESCRIPTION OF RATINGS

CORPORATE BOND RATINGS

MOODY'S

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

Aa - Bonds rated Aa are judged to be 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.

S&P

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

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

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

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

BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While 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 may also reflect the filing of a bankruptcy petition under circumstances where debt service payments are continuing. The C1 rating is reserved for income bonds on which no interest is being paid.

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

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

COMMERCIAL PAPER RATINGS

MOODY'S

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

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

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

S&P

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

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

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

FRANKLIN TEMPLETON FUND ALLOCATOR SERIES

FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
FRANKLIN TEMPLETON MODERATE TARGET FUND
FRANKLIN TEMPLETON GROWTH TARGET FUND