TEMPLETON FUNDS INC, N-30D, 1997-11-10

TEMPLETON FUNDS INC
N-30D, 1997-11-10

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ANNUAL REPORT

AUGUST 31, 1997

TEMPLETON FOREIGN FUND

[PHOTO OF SEXTANT]
FRANKLIN TEMPLETON

<PAGE>
[LOGO]

CELEBRATING 50 YEARS

This year marks 50 years of business for Franklin Templeton. Over these years,
we have experienced profound changes in technology, regulations and customer
expectations within the mutual fund industry. As one of the largest mutual fund
families, we're proud to be an innovative industry leader, providing people like
you with an opportunity to invest in companies and governments around the globe.

In addition, we want to stress that all securities markets move both up and
down. Mixed in with the good years can be some bad years. Accordingly, mutual
fund share prices also move up and down. Every investor should expect such
fluctuations, which can be wide. When markets are going down, as well as up, we
encourage investors to maintain a long-term perspective. We thank you for your
past support and look forward to serving your investment needs in the years
ahead.

[PHOTO OF MARK HOLOWESKO]
MARK HOLOWESKO
Portfolio Manager
Templeton Foreign Fund

Mark Holowesko is the president and portfolio manager of Templeton Foreign Fund,
as well as several other Templeton funds. He joined the Templeton organization
in 1985 in Nassau, Bahamas, and serves as chief investment officer of equity
research worldwide, as well as an officer and director of Templeton Wordwide,
Inc. Mr. Holowesko received a B.A. in economics from Holy Cross College and an
M.B.A. from Babson College. He is a Chartered Financial Analyst and a former
director of the International Society of Financial Analysts.

<PAGE>
SHAREHOLDER LETTER

Your Fund's Objective: The Templeton Foreign Fund seeks long-term capital growth
through a flexible policy of investing in stocks and debt obligations of
companies and governments outside the United States.

Dear Shareholder:

This annual report of the Templeton Foreign Fund covers the 12 months ended
August 31, 1997. We are pleased to announce that the Fund's Class I shares
provided a 12-month cumulative total return of 19.55%, as discussed in the
Performance Summary on page 8. The unmanaged Morgan Stanley Capital
International(R) Europe, Australasia, Far East (MSCI EAFE) Index delivered a
total return of 9.36% for the same period.

We have always maintained that value investing relies on a certain amount of
faulty, and frequently irrational, stock market reactions, which drive share
prices in the short term away from the true worth or value of a corporation.
Emotions generally play an important role in most investment mistakes. However,
these emotions also create opportunities for investors who accurately determine
when stock prices might overly discount negative or positive news and who are
willing and patient enough to adopt a long-term perspective. With so many
negative reports about Asian equities during the year under review, and a
seemingly abundant supply of positive press concerning North America, it is
important to rationally analyze the potential impact of this news and recognize
the opportunities and risks that exist in today's stock markets.

CONTENTS

Shareholder Letter .............. 1

Interview with
Portfolio Manager ................. 6

Performance Summaries
Class I ......................... 8
Class II ........................ 11
Advisor Class ................... 13

Financial Highlights
and Statement of Investments ...... 17

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

Notes to the Financial Statements.. 30

Independent
Auditor's Report .................. 33

Tax Designation ................... 34

[PYRAMID GRAPHIC]

FUND CATEGORY

GLOBAL

GROWTH

GROWTH
& INCOME

INCOME

TAX-FREE INCOME

<PAGE>
TOTAL RETURN INDEX COMPARISON
12-Month Performance
(8/31/96 - 8/31/97)

[BAR CHART]

19.55%
Templeton
Foreign Fund
Class 1(1)

9.36%
MSCI
EAFE
Index(2)

1. Fund performance does not include the initial sales charge and represents the
change in value of an investment during the period shown. Total return assumes
reinvestment of dividends and capital gains at net asset value. The historical
data shown above pertain only to Class I shares of the Fund. The Fund offers
other classes of shares, subject to different fees and expenses, which affect
their performance. Please see the prospectus for more details. Past performance
is not predictive of future results.

2. Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

MARKET OVERVIEW

First, let us look back on equity market activity during the reporting period.
Many financial assets rose in value, with returns in many developed and emerging
markets surpassing historical levels. The one exception was Asia, where weak
currencies, large problem loans in the banking sector, and above-average
overseas borrowing by companies there unsettled the region's equity markets. The
mighty "roar" of the Asian "Tigers" was reduced to a "meow," as the Malaysian,
Philippine, and Indonesian markets fell more than 25% and the Thai market
plummeted 65%.(1) On August 31, 1997, many Asian emerging markets were 30% below
their peak levels during the fiscal year, with the Malaysian market 46.4% off
its high and Thailand's down 66.2%.(2) China, Hong Kong, and Taiwan were among
the few Asian markets that strengthened during the period. Japan, the area's
largest economy and equity market, continued its struggle to absorb the
financial shock of severe price declines in its real estate sector and stock
market during the past four to five years.

Many other emerging-market equity returns were strong during the reporting
period. Although the Czech and Polish markets declined, the majority of Eastern
European markets appreciated at least 30% to 40%.(3) Latin American markets also
strengthened considerably, as improving economies and reduced concerns about
financial and currency stability encouraged foreign investment.

In Western Europe, corporate debt levels decreased, management cut work forces,
and unions appeared more concerned with negotiating for job security than for
higher wages. Many European companies were able to compete on a global basis,
and stock markets there generally performed very well.

FUND ACTIVITY

We avoided most of the pitfalls in Asia during the fiscal year. With the
exception of Hong Kong, whose stock market rose 30.1%(4), the Fund was
substantially underweighted in this region compared with the MSCI EAFE Index. At
the beginning of the period, Asian stocks comprised 12.9% of the Fund's total
net

1. Price depreciation is measured in U.S. dollars, and includes reinvested
dividends.

2. Price depreciation is measured in U.S. dollars.

3. Price appreciation is measured in U.S. dollars, and includes reinvested
dividends.

4. Price appreciation is measured in U.S. dollars, and includes reinvested
dividends.

<PAGE>
assets, with Hong Kong representing over half its exposure. By the end of the
period, given the magnitude of price declines, we believed that the region
provided opportunity. Therefore, we initiated some new positions and added to
our existing holdings, which slightly boosted the Fund's Asian exposure. In our
opinion, many of the problems of the area have already been discounted in stock
prices, and Asia offers the possibility of strong economic growth, rising
standards of living, increased consumption and investment, and rapidly
developing capital markets. As these economies have grown and expanded they have
become more efficient and competitive, capturing greater industry market share
worldwide. In most cases, the economic growth rates of these countries are
almost double that of developed nations and could continue, yet equity
valuations are in some instances half that of U.S. levels.

PORTFOLIO TURNOVER

Large exposure to strong emerging markets contributed to the Fund's performance
during the fiscal year. The markets of Mexico, Argentina and Brazil, in
particular, delivered stellar returns. Most of the Fund's holdings in these
countries were established after the December 1994 peso crisis had driven equity
prices down to what we considered to be attractive levels.

Consistent with our history of low portfolio turnover, we made no significant
changes to the Fund's weightings during the 12 months under review. On a
regional basis, most of the Fund's adjustments were subtle. For example, our
exposure to Asia increased from 12.9% to 13.5% of total net assets and to Latin
America from 7.3% to 8.8%, while our exposure to Europe decreased from 43.4% to
41.8%. One major increase was in the United Kingdom (6.2% to 14.1%), where good
dividend yields and low price-to-earnings ratios encouraged us to purchase
shares in several new companies.

As in all reporting periods, we held some positions that helped and some that
hurt the Fund's performance. The stock prices of Philips Electronics NV*
(Netherlands) and Telebras-Telecomunicacoes Brasilieras SA, pfd. (Brazil)
appreciated considerably during the fiscal year, while those of BICC, a U.K.
provider of construction and engineering services, and the W.H. Smith Group, a
large book

*A complete listing of all stocks in the portfolio as of August 31, 1997 begins
on page 20.

GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
8/31/97

[BAR CHART]

<TABLE>
<S> <C>
European Stocks................................. 41.8%
Asian Stocks.................................... 13.5%
Latin American Stocks........................... 8.8%
Australian & New Zealand Stocks................. 4.1%
Middle Eastern & African Stocks................. 1.0%
North American Stocks........................... 0.8%
Fixed-Income Securities......................... 9.2%
Short-Term Obligations & Other Net Assets....... 20.8%
</TABLE>

<PAGE>
TOP 10 EQUITY HOLDINGS
8/31/97

COMPANY
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- ----------------------------------------

Philips Electronics NV
Electrical & Electronics,
Netherlands 1.7%

BG Plc
Utilities - Electric & Gas,
United Kingdom 1.3%

Telebras-Telecomunicacoes
Brasileiras SA, pfd
Telecommunications,
Brazil 1.3%

Telmex-Telefonos
de Mexico SA, L
Telecommunications,
Mexico 1.2%

HSBC Holdings Plc
Banking,
Hong Kong 1.2%

Telefonica de Espana SA
Telecommunications,
Spain 1.2%

YPF Sociedad Anonima
Energy Sources,
Argentina 1.1%

British Telecommunications Plc
Telecommunications,
United Kingdom 1.1%

British Steel Plc
Metals & Mining,
United Kingdom 1.1%

Telecom Italia SpA
Telecommunications,
Italy 1.1%

For a complete list of portfolio holdings, please see page 20 of this report.

and newspaper retailer based in the U.K., did not meet our expectations. New
additions to the Fund included Deutsche Bank AG, a leading German financial
institution with more than 2,400 branches worldwide; Fiat SpA, a major Italian
car manufacturer; and BTR Plc., a diversified industrial products company based
in the U.K.

This discussion reflects the strategies we employed for the Fund during the 12
months under review, and includes our opinions as of the close of the period.
Because economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings may
change as new circumstances arise. All figures shown are as of August 31, 1997,
and the Fund's holdings can be expected to change with market developments and
management of the portfolio. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.

There are, of course, special risks associated with global investing related to
market, currency, economic, social, political, and other factors. Emerging
markets involve similar but heightened risks, in addition to risks associated
with the relatively small size and lesser liquidity of these markets. Although
short-term volatility can be disconcerting, declines of as much as 40% to 50%
are not unusual in emerging markets. For example, the Hong Kong equity market
has increased 1,089% in the last 15 years, but has suffered five quarterly
declines of more than 20% during that time.(5) These risks and other
considerations are discussed in the Fund's prospectus.

(5) Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended June 30, 1997.

<PAGE>
LOOKING FORWARD

Our investment approach is based on a philosophy comprising four basic
principles: the patience to look beyond the emotions of the moment to the
longer-term value of a security, the discipline to subject an idea to rigorous
and detailed analysis, the courage to think independently, and the common sense
to know that share prices become cheap under the pressure of selling, or
expensive during periods of "irrational exuberance." We will consistently use
this approach in the future in our efforts to protect the Fund's assets and
increase profits for our shareholders.

We thank you for your continued investment in the Fund and would like to
reaffirm our dedication and commitment to searching the world for the best
possible securities for the Fund's portfolio.

Sincerely,

/s/ Mark Holowesko

Mark Holowesko, CFA
President
Templeton Foreign Fund

TOP 10 COUNTRIES
REPRESENTED IN THE FUND*
Equity Investments
8/31/97

% OF TOTAL
COUNTRY NET ASSETS
- -------------------------

United Kingdom 14.1%

Hong Kong 6.7%

France 5.3%

Sweden 5.0%

Spain 3.9%

Netherlands 3.6%

Mexico 3.2%

Brazil 2.9%

Australia 2.8%

Japan 2.2%

*Does not include investments in U.S. government securities and short-term
obligations and other net assets. See portfolio holdings beginning on page 20.

<PAGE>
Q&A

THE FOLLOWING IS AN INTERVIEW WITH MARK HOLOWESKO, PORTFOLIO MANAGER OF
TEMPLETON FOREIGN FUND:

Q: How do you find an undervalued stock before other investors are aware of its
potential?

A: Frequently, investors are aware of a stock's potential, but are unwilling to
assume the short-term risks that we are willing to take. One of the main reasons
a stock becomes undervalued is the pressure of selling. Investors typically sell
a stock because of short-term concerns, believing that these concerns will
negatively impact the price of the stock. We try to determine if these
considerations are valid or are short term in nature. If we believe this
temporary selling creates a long-term opportunity, we will try to purchase the
security for long-term returns. This often means we buy too early and initially
suffer losses, since it is impossible to predict the bottom of stock prices
accurately. Some investors are much more short-term oriented and are reluctant
to experience initial losses, so they refrain from looking longer term.

Q: Were there any sectors that performed particularly well for the Fund during
the year under review?

A: Financial stocks generally performed very well. Relatively stable interest
rates and healthy business conditions provided a favorable environment for these
equities. We took advantage of this by selling some of our banking holdings at a
profit.

Q: At the end of the reporting period, over six percent of the Fund's total net
assets were invested in Hong Kong. How do you think its reversion to Chinese
control this past July will affect Hong Kong?

A: We believe there is a better-than-even chance that the transition will be
positive in the long term. In a purely selfish way, the Chinese need Hong Kong
to prosper. For example, during the 1990s, half of all foreign investment came
into China through Hong Kong. There is also a vast amount of trade to China
through Hong Kong. Because China "needs" Hong Kong, I believe they will try to
maintain its economic strength. However, that is not to say China will make no
mistakes there.

<PAGE>
Q: Do you think the currency crises experienced by many Asian countries this
past summer will have a lasting effect on Asian economies or world financial
markets?

A: The currency fluctuations in Asia and their impact are a very interesting
topic. Initially, these turbulent currency markets eroded investor confidence in
the region, which resulted in billions of dollars in lost wealth and the
collapse of some stock markets. Most likely, the long-term impact will be felt
both inside and outside Asia. Within Asia, the cost of capital rises. Businesses
raise capital to build plants by borrowing money or by issuing stock. If a
country's currency loses value, foreign borrowing becomes more expensive because
devaluation increases the amount of money needed to repay foreign debt. And if
local interest rates are boosted to protect the currency, the cost of borrowing
locally rises.

If a business tries to raise capital by issuing stock, and the price of its
stock drops, the cost of selling the stock to the public increases. For example,
if you want to raise $100 million and your stock priced at $15 declines to $10,
you have to issue 50% more shares to obtain the $100 million. If the cost of
capital changes in Asia, those industries requiring large amounts of it will
experience more difficulty delivering the same level of profits.

On the other hand, devaluation of local currencies makes Asian exports more
competitive around the world. Because the U.S. dollar buys more in Asia than it
did before this crisis, these products have become cheaper in the U.S. As a
result of inexpensive Asian goods entering the U.S. market, domestic companies
competing with Asian firms could be subjected to pricing pressures. And U.S.
multinational companies could experience sales declines in Asian markets,
causing their stock prices to fall.

<PAGE>
PERFORMANCE SUMMARY

Class I

Templeton Foreign Fund - Class I produced a cumulative total return of 19.55%
for the 12-month period ended August 31, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the Fund, and encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 10, the Fund delivered a cumulative total return of more than
200% for the 10-year period ended August 31, 1997.

The price of the Fund's shares increased $1.43, from $9.97 on August 31, 1996,
to $11.40 on August 31, 1997. During this time, shareholders received
distributions of 27.5 cents ($0.275) per share in dividend income and 17.5 cents
($0.175) per share in capital gains, of which 14.5 cents ($0.145) represented
long-term gains and 3 cents ($0.03) represented short-term gains. Distributions
will vary depending on income earned by the Fund and any profits realized from
the sale of securities in the portfolio, as well as the level of the Fund's
operating expenses.

The graph on the following page compares the performance of the Fund's Class I
shares over the past ten years with that of the unmanaged Morgan Stanley Capital
International(R) Europe, Australasia, Far East (MSCI EAFE) Index, which includes
approximately 1,000 companies representing the stock markets of 20 countries
including Germany, France, Australia, New Zealand, and Japan. It also shows the
Fund's performance versus the Consumer Price Index (CPI), a commonly used
measure of inflation. Please remember that the Fund's performance differs from
that of an index because an index is not managed according to any investment
strategy, does not contain cash (the Fund generally carries a certain percentage
of cash at any given time), and includes no sales charges or management
expenses. Of course, one cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.

Past performance is not predictive of future results.

<PAGE>
CLASS I
Total Return Index Comparison
$10,000 Investment (8/31/87 - 8/31/97)

<TABLE>
<CAPTION>
Templeton MSCI EAFE Consumer
Foreign Fund* Index** Price Index***

____ Templeton Foreign Fund* ---- MSCI EAFE Index** .... Consumer Price
Index***

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/5/82)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return**** 12.68% 12.47% 10.96% 16.53%
</TABLE>

THE HISTORICAL PERFORMANCE DATA SHOWN PERTAINS ONLY TO THE FUND'S CLASS I
SHARES. THE FUND OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND
EXPENSES, WHICH AFFECT THEIR PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE
DETAILS.

*Performance figures represent the change in value of an investment over the
periods shown, and have been restated to include the maximum 5.75% initial sales
charge, assuming reinvestment of dividends and capital gains at net asset value.
Prior to July 1, 1992, Fund shares were offered at a higher initial sales
charge, and on January 1, 1993, the Fund implemented a Rule 12b-1 plan. Such
expenses will affect subsequent performance. This was a period of generally
rising security prices.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

***Source: U.S. Bureau of Labor Statistics (9/30/97).

****Please see table on page 10.

Past performance is not predictive of future results.

<PAGE>
CLASS I
Periods ended 8/31/97

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/5/82)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) 19.55% 90.97% 200.14% 938.20%

Average Annual Total Return(2) 12.68% 12.47% 10.96% 16.53%

Value of $10,000 Investment(3) $11,266 $18,000 $28,285 $97,828

8/31/93 8/31/94 8/31/95 8/31/96 8/31/97
- ------------------------------------------------------------------------------------------
One-Year Total Return(4) 18.65% 17.94% 3.14% 10.68% 19.55%
</TABLE>

1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge. See Note below.

2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 5.75% initial
sales charge. See Note below.

3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the specified periods and include the maximum 5.75% initial sales
charge. See Note below.

4. One-year total return represents the change in value of an investment over
the one-year periods ended on the dates indicated and does not include the sales
charge.

Note: Prior to July 1, 1992, Fund shares were offered at a higher initial sales
charge. Thus, actual total returns would have been lower. On January 1, 1993,
the Fund implemented a Rule 12b-1 plan, which affects subsequent performance.

All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. Emerging markets involve heightened
risks related to the same factors, in addition to those associated with the
relatively small size and lesser liquidity of these markets. You may have a gain
or loss when you sell your shares.

Past performance is not predictive of future results.

<PAGE>
CLASS II

Templeton Foreign Fund - Class II provided a cumulative total return of 18.65%
for the 12-month period ended August 31, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, and does not include sales charges.

The price of the Fund's shares increased $1.38, from $9.87 on August 31, 1996,
to $11.25 on August 31, 1997. During this time, shareholders received
distributions of 22.61 cents ($0.2261) per share in dividend income and 17.5
cents ($0.175) per share in capital gains, of which 14.5 cents ($0.145)
represented long-term gains and 3 cents ($0.03) represented short-term gains.
Distributions will vary depending on income earned by the Fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the Fund's operating expenses.

The graph on the following page compares the performance of the Fund's Class II
shares since inception with that of the unmanaged Morgan Stanley Capital
International(R) Europe, Australasia, Far East (MSCI EAFE) Index, which includes
approximately 1,000 companies representing the stock markets of 20 countries
including Germany, France, Australia, New Zealand, and Japan. It also shows the
Fund's performance versus the Consumer Price Index (CPI), a commonly used
measure of inflation. Please remember that the Fund's performance differs from
that of an index because an index is not managed according to any investment
strategy, does not contain cash (the Fund generally carries a certain percentage
of cash at any given time), and includes no sales charges or management
expenses. Of course, one cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.

Past performance is not predictive of future results.

<PAGE>
CLASS II
Total Return Index Comparison
$10,000 Investment (5/1/95 - 8/31/97)

[LINE GRAPH]
<TABLE>
<CAPTION>
TEMPLETON MSCI CPI
FOREIGN FUND- EAFE
CLASS II INDEX
<S> <C> <C> <C>
5/1/95 $ 9,903 $10,000 $10,000
5/95 $10,119 $ 9,883 $10,020
6/95 $10,162 $ 9,713 $10,040
7/95 $10,617 $10,320 $10,039
8/95 $10,379 $ 9,929 $10,067
9/95 $10,541 $10,125 $10,086
10/95 $10,261 $ 9,856 $10,119
11/95 $10,386 $10,132 $10,118
12/95 $10,551 $10,544 $10,111
1/96 $10,897 $10,589 $10,171
2/96 $10,978 $10,628 $10,204
3/96 $11,024 $10,856 $10,256
4/96 $11,313 $11,174 $10,296
5/96 $11,416 $10,972 $10,316
6/96 $11,463 $11,036 $10,322
7/96 $11,139 $10,716 $10,342
8/96 $11,393 $10,742 $10,362
9/96 $11,520 $11,030 $10,395
10/96 $11,654 $10,920 $10,428
11/96 $12,084 $11,357 $10,448
12/96 $12,353 $11,214 $10,448
1/97 $12,509 $10,824 $10,480
2/97 $12,641 $11,004 $10,512
3/97 $12,761 $11,046 $10,544
4/97 $12,833 $11,108 $10,554
5/97 $13,242 $11,833 $10,543
6/97 $13,686 $12,489 $10,554
7/97 $14,059 $12,693 $10,565
8/97 $13,518 $11,748 $10,586
</TABLE>

TOTAL RETURN: 35.18%

NOTE - Includes sales charge
NOTE All currencies are in US Dollars

THE HISTORICAL PERFORMANCE DATA SHOWN PERTAINS ONLY TO THE FUND'S CLASS II
SHARES. THE FUND OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND
EXPENSES, WHICH AFFECT THEIR PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE
DETAILS.

*Performance figures represent the change in value of an investment over the
periods shown and include all sales charges, assuming reinvestment of dividends
and capital gains at net asset value. This was a period of generally rising
security prices.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

***Source: U.S. Bureau of Labor Statistics (9/30/97).

CLASS II
Periods ended 8/31/97

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (5/1/95)
-------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 18.65% 36.51%

Average Annual Total Return(2) 16.47% 13.78%

Value of $10,000 Investment(3) $11,647 $13,518
</TABLE>

1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.

2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. It includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within the first 18 months of investment.

3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the specified periods and include all sales charges.

Past performance is not predictive of future results.

<PAGE>
ADVISOR CLASS

Templeton Foreign Fund - Advisor Class produced a cumulative total return of
11.31% for the period from January 2, 1997 (commencement of sales), through
August 31, 1997. The price of the Fund's shares increased $1.16, from $10.26 to
$11.42 over the same period.

The graph on the following page compares the performance of the Fund's Advisor
Class shares over a ten-year period with that of the unmanaged Morgan Stanley
Capital International(R) Europe, Australasia, Far East (MSCI EAFE) Index. For
periods prior to January 2, 1997, the Fund performance is that of the Fund's
Class I shares, excluding the initial sales charge, but including Class I
expenses. The MSCI EAFE Index includes approximately 1,000 companies
representing the stock markets of 20 countries including Germany, France,
Australia, New Zealand, and Japan. The graph also shows the Fund's performance
versus the Consumer Price Index (CPI), a commonly used measure of inflation.
Please remember that the Fund's performance differs from that of an index
because an index is not managed according to any investment strategy, does not
contain cash (the Fund generally carries a certain percentage of cash at any
given time), and includes no management expenses. Of course, one cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.

Past performance is not predictive of future results.

<PAGE>
ADVISOR CLASS
Total Return Index Comparison
$10,000 Investment (8/31/87 - 8/31/97)

[LINE GRAPH]

Templeton Foreign MSCI EAFE CPI
8/87 $10,000 $10,000 $10,000
9/87 $ 9,957 $ 9,844 $10,049
10/87 $ 7,966 $ 8,467 $10,075
11/87 $ 7,772 $ 8,552 $10,089
12/87 $ 8,286 $ 8,808 $10,088
1/88 $ 8,363 $ 8,967 $10,113
2/88 $ 8,716 $ 9,568 $10,139
3/88 $ 9,103 $10,158 $10,183
4/88 $ 9,189 $10,307 $10,235
5/88 $ 9,289 $ 9,979 $10,271
6/88 $ 9,322 $ 9,718 $10,315
7/88 $ 9,337 $10,025 $10,357
8/88 $ 9,122 $ 9,375 $10,401
9/88 $ 9,513 $ 9,787 $10,472
10/88 $ 9,941 $10,626 $10,506
11/88 $10,087 $11,261 $10,516
12/88 $10,109 $11,326 $10,533
1/89 $10,701 $11,528 $10,586
2/89 $10,565 $11,589 $10,628
3/89 $10,712 $11,364 $10,689
4/89 $11,005 $11,472 $10,760
5/89 $10,780 $10,850 $10,821
6/89 $10,906 $10,669 $10,848
7/89 $11,786 $12,011 $10,874
8/89 $11,949 $11,473 $10,892
9/89 $12,358 $11,998 $10,926
10/89 $11,989 $11,518 $10,979
11/89 $12,353 $12,100 $11,004
12/89 $13,195 $12,549 $11,022
1/90 $13,224 $12,085 $11,126
2/90 $13,252 $11,244 $11,170
3/90 $13,444 $10,075 $11,213
4/90 $13,144 $ 9,998 $11,248
5/90 $14,248 $11,141 $11,266
6/90 $14,378 $11,046 $11,335
7/90 $14,978 $11,204 $11,388
8/90 $13,903 $10,119 $11,484
9/90 $12,703 $ 8,712 $11,562
10/90 $12,912 $10,072 $11,641
11/90 $12,816 $ 9,481 $11,667
12/90 $12,798 $ 9,638 $11,710
1/91 $13,189 $ 9,953 $11,781
2/91 $14,092 $11,023 $11,798
3/91 $13,799 $10,364 $11,816
4/91 $14,031 $10,468 $11,833
5/91 $14,257 $10,581 $11,867
6/91 $13,628 $ 9,806 $11,904
7/91 $14,458 $10,290 $11,921
8/91 $14,464 $10,084 $11,956
9/91 $14,763 $10,655 $12,009
10/91 $14,723 $10,809 $12,026
11/91 $14,502 $10,307 $12,061
12/91 $15,134 $10,843 $12,070
1/92 $15,319 $10,615 $12,087
2/92 $15,571 $10,238 $12,131
3/92 $15,306 $ 9,565 $12,192
4/92 $15,875 $ 9,612 $12,210
5/92 $16,768 $10,259 $12,227
6/92 $16,464 $ 9,776 $12,271
7/92 $16,034 $ 9,528 $12,298
8/92 $15,716 $10,129 $12,332
9/92 $15,392 $ 9,932 $12,367
10/92 $14,856 $ 9,415 $12,411
11/92 $14,919 $ 9,506 $12,428
12/92 $15,149 $ 9,558 $12,420
1/93 $15,412 $ 9,560 $12,482
2/93 $15,767 $ 9,851 $12,525
3/93 $16,393 $10,713 $12,570
4/93 $16,927 $11,732 $12,604
5/93 $17,325 $11,983 $12,622
6/93 $17,111 $11,799 $12,639
7/93 $17,510 $12,215 $12,639
8/93 $18,641 $12,877 $12,674
9/93 $18,491 $12,590 $12,700
10/93 $19,499 $12,981 $12,753
11/93 $19,172 $11,849 $12,762
12/93 $20,726 $12,707 $12,761
1/94 $21,685 $13,784 $12,797
2/94 $21,311 $13,749 $12,841
3/94 $20,718 $13,159 $12,885
4/94 $21,070 $13,720 $12,903
5/94 $21,070 $13,645 $12,911
6/94 $20,652 $13,841 $12,955
7/94 $21,421 $13,977 $12,989
8/94 $21,993 $14,311 $13,042
9/94 $21,641 $13,863 $13,077
10/94 $21,942 $14,328 $13,086
11/94 $21,148 $13,643 $13,104
12/94 $20,797 $13,731 $13,104
1/95 $20,444 $13,207 $13,155
2/95 $20,727 $13,173 $13,208
3/95 $20,892 $13,998 $13,252
4/95 $21,599 $14,528 $13,296
5/95 $22,094 $14,359 $13,322
6/95 $22,189 $14,111 $13,348
7/95 $23,203 $14,993 $13,348
8/95 $22,684 $14,424 $13,384
9/95 $23,061 $14,710 $13,409
10/95 $22,477 $14,318 $13,454
11/95 $22,724 $14,720 $13,453
12/95 $23,117 $15,318 $13,444
1/96 $23,873 $15,384 $13,523
2/96 $24,074 $15,440 $13,567
3/96 $24,200 $15,772 $13,637
4/96 $24,830 $16,234 $13,689
5/96 $25,081 $15,939 $13,715
6/96 $25,207 $16,033 $13,724
7/96 $24,527 $15,568 $13,750
8/96 $25,107 $15,606 $13,777
9/96 $25,384 $16,024 $13,821
10/96 $25,691 $15,865 $13,864
11/96 $26,658 $16,500 $13,891
12/96 $27,278 $16,292 $13,891
1/97 $27,646 $15,725 $13,935
2/97 $27,962 $15,986 $13,976
3/97 $28,251 $16,048 $14,018
4/97 $28,436 $16,137 $14,032
5/97 $29,384 $17,191 $14,018
6/97 $30,384 $18,143 $14,032
7/97 $31,253 $18,440 $14,046
8/97 $30,069 $17,067 $14,074

THE HISTORICAL PERFORMANCE DATA SHOWN PERTAINS ONLY TO THE FUND'S ADVISOR CLASS
SHARES. THE FUND OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND
EXPENSES, WHICH AFFECT THEIR PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE
DETAILS.

*Performance figures represent the change in value of an investment over the
periods shown, assuming reinvestment of dividends and capital gains at net asset
value. Effective January 2, 1997, the Fund began offering Advisor Class shares
to certain eligible investors as described in its prospectus. This share class
does not have sales charges or Rule 12b-1 plans. Performance quotations have
been calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the Fund's Class I performance, excluding the effect of the Class I
maximum initial sales charge, but including the effect of the Class I expenses,
including Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures
reflect actual Advisor Class performance including the deduction of all fees and
expenses applicable only to that class. This was a period of generally rising
security prices.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

***Source: U.S. Bureau of Labor Statistics (9/30/97).

Past performance is not predictive of future results.

<PAGE>
ADVISOR CLASS
Periods ended 8/31/97

<TABLE>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/5/82)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) 19.76% 91.32% 200.69% 940.02%

Average Annual Total Return(1) 19.76% 13.86% 11.64% 17.01%

Value of $10,000 Investment(2) $11,976 $19,132 $30,069 $104,002

8/31/93 8/31/94 8/31/95 8/31/96 8/31/97
----------------------------------------------------------------------------------------
One-Year Total Return(3) 18.65% 17.94% 3.14% 10.68% 19.76%
</TABLE>

Effective January 2, 1997, the Fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges or Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the Fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 11.31%.

1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.

2. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.

3. One-year total return represents the change in value of an investment over
the one-year periods ended on the dates indicated.

Past performance is not predictive of future results.

<PAGE>
TEMPLETON FOREIGN FUND

CLASS I

If you had invested $10,000 in Templeton Foreign Fund - Class I at inception, it
would be worth more than $97,000 today. The chart below illustrates the
cumulative total return of a hypothetical $10,000 investment in the Fund on
October 5, 1982 (inception), with income dividends and capital gains reinvested
through August 31, 1997.*

$97,828 Total value of investment 8/31/97

$10,000 Cost of investment 10/5/82

Initial net asset value $9,423

<S> <C> <C> <C> <C> <C>
Date Principal Income Principal+Incc Cap Gains Principal + Cap
10/5/82 $9,423 $0 $67,938 $0 $33,969
12/31/82 $9,823 $0 $9,823 $0 $9,823
12/30/83 $13,168 $193 $13,361 $48 $13,217
12/31/84 $12,603 $491 $13,094 $156 $12,759
12/31/85 $15,489 $1,077 $16,566 $246 $15,735
12/31/86 $18,151 $1,752 $19,903 $1,745 $19,896
12/31/87 $20,436 $2,816 $23,252 $3,754 $24,190
12/30/88 $22,709 $4,156 $26,865 $6,081 $28,790
12/29/89 $27,468 $6,387 $33,854 $9,152 $36,619
12/31/90 $24,700 $7,170 $31,870 $9,842 $34,541
12/31/91 $26,949 $9,249 $36,198 $13,127 $40,077
12/31/92 $25,088 $9,876 $34,964 $14,408 $39,496
12/31/93 $33,333 $14,060 $47,393 $20,156 $53,489
12/30/94 $31,166 $14,231 $45,397 $22,386 $53,552
12/29/95 $32,438 $16,772 $49,211 $26,133 $58,571
12/31/96 $36,608 $21,301 $57,909 $30,994 $67,602
8/31/97 $40,283 $23,440 $63,722 $34,106 $74,388
</TABLE>

____ Total Value of Investment with Capital Gains and Dividends
Reinvested

---- Value of Investment with Capital Gains Reinvested

.... Value of Investment with Dividends Reinvested

*Cumulative total return represents the change in value of an investment over
the indicated period. All figures have been restated to reflect the maximum
5.75% initial sales charge; thus actual total return for purchasers of shares
during the periods shown may differ. Prior to July 1, 1992, these shares were
offered at a higher initial sales charge. On January 1, 1993, the Fund's Class I
shares implemented a plan of distribution under Rule 12b-1, which will affect
subsequent performance.

All figures assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, and you may have a gain or loss when you sell your shares. This was
a period of generally rising securities prices.

The historical data shown above pertain only to Class I shares of the Fund. The
Fund offers other share classes, subject to different fees and expenses, which
will affect their performance. Please see the prospectus for more details.

Past performance is not predictive of future results.

<PAGE>

TEMPLETON FOREIGN FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+
(for a share outstanding throughout the year)
Net asset value, beginning of year................. $9.97 $9.62 $10.01 $8.74 $7.92
----------------------------------------------------------------------
Income from investment operations:
Net investment income............................. .32 .27 .23 .14 .14
Net realized and unrealized gains................. 1.56 .69 .05 1.39 1.21
----------------------------------------------------------------------
Total from investment operations................... 1.88 .96 .28 1.53 1.35
----------------------------------------------------------------------
Less distributions:
Dividends from net investment income.............. (.28) (.25) (.16) (.13) (.19)
Distributions from net realized gains............. (.17) (.36) (.51) (.13) (.34)
----------------------------------------------------------------------
Total distributions................................ (.45) (.61) (.67) (.26) (.53)
----------------------------------------------------------------------
Net asset value, end of year....................... $11.40 $9.97 $9.62 $10.01 $8.74
======================================================================
Total return*...................................... 19.55% 10.68% 3.14% 17.94% 18.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000)...................... $14,367,787 $9,602,209 $6,941,238 $5,014,438 $2,667,771
Ratios to average net assets:
Expenses.......................................... 1.08% 1.12% 1.15% 1.14% 1.12%
Net investment income............................. 3.28% 3.09% 2.81% 1.84% 2.11%
Portfolio turnover rate............................ 37.28% 15.91% 21.78% 36.75% 21.29%
Average commission rate paid***.................... $.0005 $.0075 -- -- --
</TABLE>

*Total return does not reflect sales commissions.
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
+Per share amounts for years ended prior to August 31, 1994 have been restated
to reflect a 3-for-1 stock split effective February 25, 1994.

<PAGE>

TEMPLETON FOREIGN FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS II
-------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------
1997 1996 1995++
-------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year....................................................... $9.87 $9.59 $9.16
-------------------------------
Income from investment operations:
Net investment income................................................................... .26 .30 .03
Net realized and unrealized gains....................................................... 1.52 .58 .40
-------------------------------
Total from investment operations......................................................... 1.78 .88 .43
-------------------------------
Less distributions:
Dividends from net investment income.................................................... (.23) (.24) --
Distributions from net realized gains................................................... (.17) (.36) --
-------------------------------
Total distributions...................................................................... (.40) (.60) --
-------------------------------
Net asset value, end of year............................................................. $11.25 $9.87 $9.59
===============================
Total return*............................................................................ 18.65% 9.78% 4.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000)............................................................ $1,303,639 $527,443 $63,428
Ratios to average net assets:
Expenses................................................................................ 1.83% 1.87% 1.90%**
Net investment income................................................................... 2.62% 2.63% 1.86%**
Portfolio turnover rate.................................................................. 37.28% 15.91% 21.78%
Average commission rate paid***.......................................................... $.0005 $.0075 --
</TABLE>

*Total return does not reflect sales commissions or the deferred contingent
sales charge and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996, disclosure of average commission rate was not required.
++For the period May 1, 1995 (effective date) to August 31, 1995.

<PAGE>

TEMPLETON FOREIGN FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
ADVISOR CLASS
------------
1997++
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period....................................................................... $10.26
-----------
Income from investment operations:
Net investment income..................................................................................... .07
Net realized and unrealized gains......................................................................... 1.09
-----------
Total from investment operations........................................................................... 1.16
-----------
Net asset value, end of period............................................................................. $11.42
===========
Total return*.............................................................................................. 11.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............................................................................ $139,100
Ratios to average net assets:
Expenses.................................................................................................. .83%**
Net investment income..................................................................................... 3.37%**
Portfolio turnover rate.................................................................................... 37.28%
Average commission rate paid***............................................................................ $.0005
</TABLE>

*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
++For the period January 2 1997, (effective date) to August 31, 1997.
See notes to financial statements.

<PAGE>

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 66.5%
AEROSPACE & MILITARY TECH 0.0%
Hong Kong Aircraft Engineering Co. Ltd. ............................. Hong Kong 1,430,600 $ 4,707,439
------------
APPLIANCES & HOUSEHOLD DURABLES 1.2%
Chofu Seisaku Co. Ltd. .............................................. Japan 452,100 6,920,852
Electrolux AB, B..................................................... Sweden 638,000 45,355,066
Email Ltd............................................................ Australia 8,035,676 24,755,516
Fisher & Paykel Ltd.................................................. New Zealand 4,476,971 15,015,618
*Luks Industrial Co. Ltd............................................. Hong Kong 25,880,000 4,040,880
Sony Corp. .......................................................... Japan 1,003,800 87,214,729
------------
183,302,661
------------
AUTOMOBILES 1.8%
Bayerische Motorenwerke (BMW)........................................ Germany 13,675 9,740,266
Fiat SpA, di Risp.................................................... Italy 5,103,340 8,458,111
Peugeot SA........................................................... France 608,100 68,176,237
Regie Nationale des Usines Renault SA................................ France 2,346,651 59,494,955
Tofas Turk Otomobil Fabrikasi AS, GDR................................ Turkey 50,925,000 13,749,750
Volvo AB, B.......................................................... Sweden 4,616,000 118,367,989
------------
277,987,308
------------
BANKING 7.6%
Argentaria Corporacion Bancaria de Espana SA......................... Spain 1,790,914 88,946,457
Banco Popular Espanol SA............................................. Spain 280,154 62,622,010
Bangkok Bank Public Co. Ltd., fgn. .................................. Thailand 12,332,500 60,959,125
Bank Slaski SA W Katowicach.......................................... Poland 462,881 34,235,677
Banque Nationale de Paris............................................ France 1,664,626 70,978,587
Cho Hung Bank........................................................ South Korea 2,177,738 10,689,617
Credit Commercial de France.......................................... France 902,394 44,672,529
Daegu Bank Co. Ltd. ................................................. South Korea 169,963 1,052,735
Deutsche Bank AG..................................................... Germany 2,700,000 157,468,845
*Grupo Financiero Banamex Accival SA, B.............................. Mexico 15,000,000 40,188,897
HSBC Holdings Plc. .................................................. Hong Kong 6,363,712 193,797,797
Kookmin Bank......................................................... South Korea 611,102 9,564,339
Korea Long Term Credit Bank.......................................... South Korea 45,240 517,156
Krung Thai Bank...................................................... Thailand 9,619,000 6,119,136
National Australia Bank Ltd. ........................................ Australia 10,843,988 150,690,675
National Australia Cap Sec Plc. ..................................... Australia 1,820,553 51,999,545
National Westminster Bank Plc. ...................................... United Kingdom 11,807,470 150,681,143
PT Bank Bali, fgn. .................................................. Indonesia 485,500 736,847
Shinhan Bank Co. Ltd. ............................................... South Korea 1,535,627 15,743,792
Thai Farmers Bank Public Co. Ltd., fgn. ............................. Thailand 9,777,300 28,025,019
Union Bank of Norway, Primary Capital Cert. ......................... Norway 972,000 29,376,947
------------
1,209,066,875
------------
BEVERAGES & TOBACCO 0.0%
*Buenos Aires Embotelladora SA, ADR.................................. Argentina 1,200,000 12,000
------------
BROADCASTING & PUBLISHING 1.1%
*APT Satellite Holdings Ltd., ADR.................................... Hong Kong 3,000,000 44,625,000
Marieberg Tidnings AB, A............................................. Sweden 483,950 12,471,355
News Corp. Ltd....................................................... Australia 26,613,178 101,554,610
Sing Tao Holdings Ltd. .............................................. Hong Kong 16,702,500 8,890,614
Wace Group Plc. ..................................................... United Kingdom 960,500 420,255
------------
167,961,834
------------
BUILDING MATERIALS & COMPONENTS 0.7%
Gujarat Ambuja Cements Ltd. ......................................... India 468,800 3,914,715
+Hepworth Plc. ...................................................... United Kingdom 18,317,180 61,295,721
Keumkang Co. Ltd. ................................................... South Korea 226,530 11,445,726
Pilkington Plc. ..................................................... United Kingdom 7,074,000 16,679,366
</TABLE>

<PAGE>

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
BUILDING MATERIALS & COMPONENTS (CONT.)
Siam City Cement, fgn. .............................................. Thailand 1,457,500 $ 4,859,754
Suez Cement Co., GDR 144A............................................ Egypt 449,000 9,327,975
------------
107,523,257
------------
BUSINESS & PUBLIC SERVICES 0.5%
Kardex AG, br. ...................................................... Switzerland 15,000 4,223,081
Lex Service Plc. .................................................... United Kingdom 5,200,000 37,330,049
*Waste Management International Plc. ................................ United Kingdom 8,015,100 32,666,186
------------
74,219,316
------------
CHEMICALS 2.5%
*Beijing Yanhua Petrochemical Company Ltd., ADR...................... China 977,850 20,534,850
Courtaulds Plc....................................................... United Kingdom 15,250,000 77,721,645
DSM NV............................................................... Netherlands 1,095,000 103,169,742
European Vinyls Corp. EVC International NV........................... Netherlands 450,367 10,303,599
Fauji Fertilizer Co. Ltd. ........................................... Pakistan 4,309,000 9,580,405
Imperial Chemical Industries Plc. ................................... United Kingdom 4,331,800 70,091,920
Rhone-Poulenc SA, A.................................................. France 2,041,900 74,896,335
Shanghai Petrochemical Co. Ltd., H................................... China 61,677,000 25,468,275
------------
391,766,771
------------
CONSTRUCTION & HOUSING 0.8%
Daito Trust Construction Co. Ltd. ................................... Japan 121,900 1,341,556
Dragados y Construcciones SA......................................... Spain 1,015,522 19,021,882
Fletcher Challenge Building Ltd. .................................... New Zealand 5,754,650 16,102,476
Hollandsche Beton Groep NV........................................... Netherlands 1,564,150 34,630,627
Redland Plc.......................................................... United Kingdom 13,000,000 61,093,195
------------
132,189,736
------------
ELECTRICAL & ELECTRONICS 3.4%
ABB AB, A............................................................ Sweden 7,661,610 111,363,438
Alphatec Electronics Pub. Co. Ltd., fgn. ............................ Thailand 558,100 244,852
G P Batteries International Ltd. .................................... Singapore 2,532,698 6,870,038
*Gold Peak Industries (Holdings) Ltd., wts. ......................... Hong Kong 2,518,000 243,693
Gold Peak Industries (Holdings) Ltd. ................................ Hong Kong 14,421,000 8,653,158
Great Wall Electronic International Ltd. ............................ Hong Kong 34,540,800 4,590,880
Hitachi Ltd. ........................................................ Japan 15,565,600 142,969,102
Philips Electronics NV............................................... Netherlands 3,710,890 264,189,807
Tadiran Ltd., ADR.................................................... Israel 102,920 3,557,173
------------
542,682,141
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 0.3%
BICC................................................................. United Kingdom 15,948,508 43,548,325
------------
ENERGY EQUIPMENT & SERVICES 0.3%
Koninklijke Pakhoed NV............................................... Netherlands 1,302,048 44,522,675
------------
ENERGY SOURCES 5.3%
Fletcher Challenge Energy Ltd. ...................................... New Zealand 5,444,150 19,198,566
MOL Magyar Olay-Es Gazipari RT, GDS 144A............................. Hungary 1,325,000 26,466,875
Norsk Hydro AS....................................................... Norway 2,207,174 119,542,837
Rao Gazprom, ADR, 144A............................................... Russia 249,000 4,836,825
Repsol SA............................................................ Spain 3,811,000 150,519,748
Saga Petroleum AS, A................................................. Norway 1,828,740 38,640,347
Saga Petroleum AS, B................................................. Norway 826,380 15,913,813
Societe Elf Aquitane SA.............................................. France 1,386,000 154,020,283
Total SA, B.......................................................... France 1,124,760 105,361,766
Transportadora de Gas del Sur SA, ADR B.............................. Argentina 2,562,000 30,103,500
YPF Sociedad Anonima................................................. Argentina 1,475,000 48,122,536
YPF Sociedad Anonima, ADR............................................ Argentina 3,985,300 129,774,857
------------
842,501,953
------------
</TABLE>

<PAGE>

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
FINANCIAL SERVICES 0.9%
Axa-UAP SA........................................................... France 1,169,514 $ 74,512,186
Julius Baer Holdings AG.............................................. Switzerland 20,380 28,757,265
Manhattan Card Co. Ltd. ............................................. Hong Kong 2,734,000 1,005,471
Peregrine Investments Holdings Ltd. ................................. Hong Kong 19,459,000 36,158,410
------------
140,433,332
------------
FOOD & HOUSEHOLD PRODUCTS 3.0%
Albert Fisher Group Plc. ............................................ United Kingdom 28,700,255 17,905,975
Burns Philp & Co. Ltd. .............................................. Australia 8,473,843 14,890,657
C.P. Pokphand Co. Ltd. .............................................. Hong Kong 77,769,800 25,339,537
Cafe de Coral Holdings Ltd. ......................................... Hong Kong 25,329,100 6,700,388
Chareon Pokphand Feedmill Public Co. Ltd., fgn. ..................... Thailand 714,600 1,630,266
Grupo Embotellador de Mexico SA de CV, GDR........................... Mexico 1,683,500 25,883,813
Hazlewood Foods Plc. ................................................ United Kingdom 2,743,319 6,001,524
Hillsdown Holdings Plc. ............................................. United Kingdom 26,046,153 68,165,968
McBride Plc. ........................................................ United Kingdom 5,216,200 12,510,292
National Foods Ltd. ................................................. Australia 8,626,000 12,177,166
Northern Foods Plc. ................................................. United Kingdom 15,636,311 55,618,634
Panamerican Beverages Inc., A........................................ Mexico 2,935,400 88,245,463
Pepsi-Gemex SA de CV................................................. Mexico 569,700 1,478,790
Tate & Lyle Plc. .................................................... United Kingdom 10,300,500 68,353,964
Vitasoy International Holdings Ltd. ................................. Hong Kong 15,311,000 7,754,781
Vitro SA............................................................. Mexico 8,183,320 35,648,233
Vitro SA, ADR........................................................ Mexico 2,263,840 29,146,940
------------
477,452,391
------------
FOREST PRODUCTS & PAPER 5.9%
Aracruz Celulose SA, ADR............................................. Brazil 2,714,950 55,317,106
Asia Pulp & Paper Co. Ltd., ADR...................................... Indonesia 3,032,600 39,234,263
Assidomaen AB........................................................ Sweden 2,138,200 64,872,902
Carter Holt Harvey Ltd. ............................................. New Zealand 20,889,200 43,238,086
Cartiere Burgo SpA................................................... Italy 6,155,730 35,275,720
Enso OY, A........................................................... Finland 634,000 5,534,014
Enso OY, R........................................................... Finland 6,553,650 57,084,606
Fletcher Challenge Ltd. Forestry Division............................ New Zealand 17,604,547 20,693,899
Fletcher Challenge Ltd. Forestry Division, AUD....................... New Zealand 331,211 384,767
Fletcher Challenge Paper Ltd. ....................................... New Zealand 28,052,939 56,632,416
Mayr-Melnhof Karton AG............................................... Austria 400,000 23,022,716
Metsa Serla OY, B.................................................... Finland 2,859,000 23,641,993
Mo Och Domsjoe AB, B................................................. Sweden 2,600,800 85,841,521
Munksjo AB........................................................... Sweden 1,100,000 11,869,399
Norske Skogindustrier AS, A.......................................... Norway 1,310,350 48,539,919
Portucel Industrial Empresa Product de Celulose SA................... Portugal 1,068,000 8,016,564
PT Barito Pacific Timber, fgn. ...................................... Indonesia 19,634,000 11,753,912
PT Indah Kiat Pulp & Paper Corp. TBK, fgn. .......................... Indonesia 84,187,073 32,652,659
*PT Indah Kiat Pulp & Paper Corp., wts. ............................. Indonesia 5,336,742 404,980
*PT Inti Indorayon Utama, fgn. ...................................... Indonesia 20,000,000 7,082,631
PT Pabrik Kertas Tjiwi Kimia, fgn. .................................. Indonesia 19,660,766 10,609,520
Sappi Ltd. .......................................................... South Africa 3,508,900 32,460,036
Stora Kopparbergs Bergslags AB, A.................................... Sweden 2,381,700 37,793,244
Stora Kopparbergs Bergslags AB, B.................................... Sweden 2,348,100 36,663,912
Svenska Cellulosa AB, B.............................................. Sweden 1,762,656 39,046,319
Unipapel SA.......................................................... Spain 167,900 3,651,676
UPM-Kymmene Corp. ................................................... Finland 6,067,834 142,502,331
------------
933,821,111
------------
HEALTH & PERSONAL CARE 0.0%
Nycomed ASA, B....................................................... Norway 398,100 7,267,027
------------
</TABLE>

<PAGE>

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
INDUSTRIAL COMPONENTS 2.2%
BTR Plc. ............................................................ United Kingdom 33,566,200 $ 118,579,650
*Graenges AB......................................................... Sweden 450,000 6,740,803
Sandvik AB, A........................................................ Sweden 1,363,000 40,920,799
Sandvik AB, B........................................................ Sweden 2,395,000 72,816,221
SKF AB, B............................................................ Sweden 3,150,000 85,174,042
Yamato Kogyo Co. Ltd. ............................................... Japan 2,612,000 22,694,249
------------
346,925,764
------------
INSURANCE 0.7%
*Baloise-Holding..................................................... Switzerland 30,208 78,551,964
HiH Winterthur International Holdings Ltd. .......................... Australia 6,248,600 14,977,381
*Ste Centrale Du Groupe Des Asurances Nationales..................... France 880,009 20,282,714
------------
113,812,059
------------
LEISURE & TOURISM 0.1%
Grand Hotel Holdings Ltd. ........................................... Hong Kong 20,286,000 7,918,595
Harbour Centre Development Ltd. ..................................... Hong Kong 6,902,000 10,643,125
------------
18,561,720
------------
MACHINERY & ENGINEERING 0.6%
New Holland NV....................................................... Netherlands 2,517,670 67,662,381
Van Der Horst Ltd. .................................................. Singapore 2,900,000 4,163,414
Vickers Plc. ........................................................ United Kingdom 7,796,000 25,014,309
------------
96,840,104
------------
MERCHANDISING 2.3%
Coles Myer Ltd., A................................................... Australia 4,855,771 22,631,560
Dairy Farm International Holdings Ltd. .............................. Hong Kong 56,773,759 47,689,958
Kwik Save Group Plc. ................................................ United Kingdom 6,050,119 31,618,781
*Lojas Americanas SA, ADR............................................ Brazil 197,000 2,598,992
Sa des Galeries Lafayette............................................ France 18,097 6,584,302
Safeway Plc. ........................................................ United Kingdom 11,603,978 70,516,323
+Somerfield Plc. .................................................... United Kingdom 19,110,000 60,232,624
Storehouse Plc. ..................................................... United Kingdom 6,700,000 24,754,898
+W.H. Smith Group.................................................... United Kingdom 14,822,300 90,794,364
*Yaohan Hongkong Corp. Ltd. ......................................... Hong Kong 10,000,000 619,395
------------
358,041,197
------------
METALS & MINING 4.6%
Alcan Aluminum Ltd. ................................................. Canada 3,009,410 105,129,387
Alcan Aluminum Ltd., USD ............................................ Canada 500,000 17,468,750
Anglo American Platinum Corp. ....................................... South Africa 829,864 14,106,715
British Steel Plc. .................................................. United Kingdom 60,130,800 168,575,547
Companhia Siderurgica Nacional ADR................................... Brazil 1,074,275 36,416,102
Elkem AS............................................................. Norway 1,524,000 27,106,196
Eramet SA............................................................ France 144,432 6,966,938
Grupo Mexico SA de CV, B............................................. Mexico 5,013,700 19,714,626
Maanshan Iron & Steel Co. Ltd., H.................................... China 180,614,000 57,101,013
Outokumpu OY, A...................................................... Finland 1,114,600 17,717,097
Pechiney SA, A....................................................... France 1,736,105 74,998,181
Pohang Iron & Steel Co. Ltd. ........................................ South Korea 613,221 53,602,480
RGC Ltd. ............................................................ Australia 1,797,028 5,086,876
South African Iron & Steel Industrial Corp. Ltd. .................... South Africa 44,417,900 27,361,767
Trelleborg AB, B..................................................... Sweden 1,052,084 16,160,429
*Union Miniere NPV................................................... Belgium 500,000 41,395,505
Vale do Rio Doce, ADR................................................ Brazil 1,500,000 34,906,093
------------
723,813,702
------------
</TABLE>

<PAGE>

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
MISC MATERIALS & COMMODITIES 0.3%
De Beers Consolidated Mines Ltd. .................................... South Africa 929,800 $ 29,629,138
De Beers, centenary linked units, ADR................................ South Africa 575,000 18,435,937
------------
48,065,075
------------
MULTI-INDUSTRY 3.9%
Alfa SA de CV, A..................................................... Mexico 3,819,300 29,790,736
Alfa SA de CV, A 144A................................................ Mexico 3,323,000 25,919,571
Cheung Kong Holdings Ltd. ........................................... Hong Kong 8,486,000 89,793,148
+Harrisons & Crosfield Plc. ......................................... United Kingdom 36,000,000 64,463,855
Hicom Holdings BHD................................................... Malaysia 17,724,600 24,006,641
Inchcape Plc. ....................................................... United Kingdom 10,202,123 45,878,059
Jardine Matheson Holdings Ltd. (Singapore)........................... Hong Kong 16,068,996 112,482,972
Jardine Strategic Holdings Ltd. (Singapore).......................... Hong Kong 11,430,649 42,293,401
Marine Wendel........................................................ France 329,293 33,719,707
Murray & Roberts Hldgs. Ltd. ........................................ South Africa 7,755,900 20,747,425
Pacific Dunlop Ltd. ................................................. Australia 14,683,395 37,785,926
PT Bimantara Citra, fgn. ............................................ Indonesia 9,573,000 8,555,970
Saha Union Public Co. Ltd., fgn. .................................... Thailand 689,000 403,042
Swire Pacific Ltd., A................................................ Hong Kong 6,780,400 51,840,596
Swire Pacific Ltd., B................................................ Hong Kong 22,805,700 32,812,898
------------
620,493,947
------------
REAL ESTATE 0.8%
+Bail Investissement................................................. France 164,380 20,350,624
Hang Lung Development Co. Ltd. ...................................... Hong Kong 23,875,000 43,131,815
Hon Kwok Land Investment Co. Ltd. ................................... Hong Kong 24,870,000 10,189,335
New Asia Realty and Trust Co. Ltd., A................................ Hong Kong 149,000 546,048
PT Jaya Properties, fgn. ............................................ Indonesia 3,615,000 2,438,449
Ryoden Development Ltd. ............................................. Hong Kong 20,000,000 11,291,051
Union du Credit Bail Immobilier Unibail.............................. France 150,000 14,372,263
Wereldhave NV........................................................ Netherlands 348,040 21,233,437
------------
123,553,022
------------
RECREATION & OTHER CONSUMER GOODS 0.8%
Fila Holding SpA, ADR................................................ Italy 395,400 12,084,413
Nintendo Co. Ltd. ................................................... Japan 1,107,700 90,742,491
Yue Yuen Industrial (Holdings) Ltd. ................................. Hong Kong 8,656,400 19,492,120
------------
122,319,024
------------
TELECOMMUNICATIONS 6.5%
Asia Satellite Telecommunications Hldgs, Ltd., ADR................... Hong Kong 425,000 12,218,750
*Asia Satellite Telecommunications Hldgs. Ltd. ...................... Hong Kong 1,526,500 4,254,778
British Telecommunications Plc. ..................................... United Kingdom 26,500,000 171,559,254
Cpt-Telefonica del Peru SA, B........................................ Peru 10,829,856 25,304,355
Cpt-Telefonica del Peru SA, ADR B.................................... Peru 929,200 21,720,050
*Digital Telecommunications Philippines Inc. ........................ Philippines 16,732,300 1,259,480
Hong Kong Telecommunications Ltd. ................................... Hong Kong 17,183,100 36,142,271
*Seat SpA............................................................ Italy 1,315,500 488,884
*Seat SpA, di Risp................................................... Italy 15,686,500 3,824,220
Tele Danmark AS, B................................................... Denmark 1,454,100 76,129,783
Telecom Argentina Stet France SA, ADR................................ Argentina 2,664,800 73,615,100
Telecom Italia SpA................................................... Italy 47,200,275 165,466,313
*Telecomunicacoes de Minas Gerais SA................................. Brazil 107,799,994 16,789,738
Telefonica de Argentina SA, B, ADR................................... Argentina 1,355,000 47,001,563
Telefonica de Espana SA.............................................. Spain 7,031,700 182,228,152
Telmex-Telefonos de Mexico SA, L..................................... Mexico 13,623,481 31,266,432
Telmex-Telefonos de Mexico SA, L, ADR................................ Mexico 3,600,200 165,159,175
------------
1,034,428,298
------------
TEXTILES & APPAREL 0.2%
Ceramico Corp. Ltd. ................................................. New Zealand 2,000,000 2,044,323
Courtaulds Textiles Plc. ............................................ United Kingdom 1,330,250 7,081,416
</TABLE>

<PAGE>

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
TEXTILES & APPAREL (CONT.)
Daehan Synthetic Fiber Co. Ltd. ..................................... South Korea 21,740 $ 1,854,825
Dawson International Plc. ........................................... United Kingdom 2,218,000 2,695,717
Fountain Set Holdings Ltd. .......................................... Hong Kong 5,657,000 1,292,069
PT Indorama Synthetics, fgn. ........................................ Indonesia 21,600,000 11,655,987
Tae Kwang Industrial Co. Ltd......................................... South Korea 15,760 6,461,163
------------
33,085,500
------------
TRANSPORTATION 1.8%
Air New Zealand Ltd., B.............................................. New Zealand 10,255,000 27,712,498
Cathay Pacific Airways Ltd........................................... Hong Kong 40,060,000 65,392,477
Great Eastern Shipping Co. Ltd....................................... India 4,000,000 4,669,688
Great Eastern Shipping Co. Ltd., GDR................................. India 543,000 3,393,750
Great Eastern Shipping Co. Ltd., GDR 144A............................ India 652,500 4,078,125
IMC Holdings Ltd. ................................................... Hong Kong 11,982,000 5,720,808
Koninklijke Nedlloyd NV.............................................. Netherlands 99,250 2,939,656
*Korean Air.......................................................... South Korea 156,776 2,362,497
Kvaerner Industrier AS, A............................................ Norway 600,000 31,934,953
Malaysian International Shipping Corp. Bhd., fgn. ................... Malaysia 3,936,000 8,077,298
Orient Overseas International Ltd. .................................. Hong Kong 13,936,000 9,441,125
Qantas Airways Ltd., ADR, 144A....................................... Australia 481,700 10,510,694
Shun Tak Holdings.................................................... Hong Kong 45,666,000 25,780,857
Singapore Airlines Ltd., fgn. ....................................... Singapore 5,595,000 40,717,830
*Stena Line AB, B free............................................... Sweden 2,000,000 8,403,788
Transport Development Group Plc. .................................... United Kingdom 1,000,000 2,698,148
Transportacion Maritima Mexicana SA de CV, A, ADR.................... Mexico 831,300 4,312,369
Transportacion Maritima Mexicana SA de CV, L, ADR.................... Mexico 789,400 5,525,800
Vosper Thornycroft Holdings Plc...................................... United Kingdom 1,200,000 15,459,657
------------
279,132,018
------------
UTILITIES ELECTRICAL & GAS 6.3%
BG Plc............................................................... United Kingdom 46,774,000 204,653,778
British Energy Ltd. ................................................. United Kingdom 4,749,615 13,200,003
British Energy Ltd., 144A............................................ United Kingdom 11,050,385 30,710,934
*Centrica Plc........................................................ United Kingdom 43,774,000 62,955,849
*CEZ................................................................. Czech Republic 1,107,563 34,405,253
Electrabel SA........................................................ Belgium 220,000 43,158,672
Hong Kong Electric Holdings Ltd. .................................... Hong Kong 14,684,400 51,351,344
Iberdrola SA......................................................... Spain 10,331,215 115,905,902
Korea Electric Power Corp. .......................................... South Korea 3,945,350 103,169,263
Mosenergo............................................................ Russia 26,500,000 40,810,000
Mosenergo, ADR, 144A................................................. Russia 450,000 20,767,500
National Grid Holdings Plc. ......................................... United Kingdom 20,000,000 86,211,088
Shandong Huaneng Power............................................... China 3,000,000 35,812,500
Thames Water Group Plc. ............................................. United Kingdom 11,500,000 147,689,154
------------
990,801,240
------------
WHOLESALE & INTERNATIONAL TRADE 0.1%
Inchcape Bhd., fgn. ................................................. Singapore 1,989,100 6,645,686
Sime Darby Hongkong Ltd. ............................................ Hong Kong 10,435,400 11,311,357
------------
17,957,043
------------
TOTAL COMMON STOCKS AND WARRANTS (COST $9,036,897,779)............... 10,508,795,865
------------
PREFERRED STOCKS 3.5%
*Aracruz Celulose SA, pfd., ADR...................................... Brazil 35,050 714,144
Banco Bradesco SA, pfd. ............................................. Brazil 6,538,700,000 64,698,085
*Bank Austria AG, new, pfd., 144A.................................... Austria 400,000 15,086,020
Ballast Nedam NV, ctf., conv., pfd. ................................. Netherlands 205,798 10,226,616
Embotelladora Andina SA, A, pfd., ADR................................ Chile 1,265,950 31,094,897
Embotelladora Andina SA, B, pfd., ADR................................ Chile 1,265,950 29,275,094
Fiat SpA, pfd. ...................................................... Italy 41,470,600 64,409,859
</TABLE>

<PAGE>

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS (CONT.)
Jardine Strategic Holdings Ltd., conv., 7.50%, 5/7/49................ Hong Kong 9,900,000 $ 12,028,500
Krones AG Herman Kronseder Maschinen Fabrik, pfd. ................... Germany 30,000 11,647,743
Petrobras-Petroleo Brasileiro SA, pfd. .............................. Brazil 28,211,000 6,900,904
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR.................. Brazil 1,100,000 129,800,000
Telecomunicacoes Brasileiras SA (Telebras), pfd. .................... Brazil 572,200,000 67,363,903
Usinas Siderurgicas De Minas Gerais SA, pfd., reg. .................. Brazil 4,000,000 40,677,966
Volkswagen AG, pfd. ................................................. Germany 123,000 65,604,542
------------
TOTAL PREFERRED STOCKS (COST $349,376,030)........................... 549,528,273
------------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT**
--------------
<S> <C> <C> <C>
BONDS 9.2%
U.S. TREASURY NOTES
6.00%, 5/31/98..................................................... United States $ 100,000,000 100,218,800
6.00%, 10/15/99.................................................... United States 103,000,000 103,193,228
6.125%, 5/15/98.................................................... United States 100,000,000 100,312,600
6.375%, 1/15/00.................................................... United States 103,000,000 103,901,353
6.375%, 7/15/99.................................................... United States 102,500,000 103,332,915
7.25%, 2/15/98..................................................... United States 100,000,000 100,718,800
7.875%, 4/15/98.................................................... United States 100,000,000 101,375,100
9.00%, 5/15/98..................................................... United States 100,000,000 102,250,100
6.125%, 3/31/98.................................................... United States 200,000,000 200,687,600
---------------
1,015,990,496
---------------
U.S. TREASURY BONDS
14.00%, 11/15/11................................................... United States 97,000,000 147,106,611
6.25%, 8/15/23..................................................... United States 155,303,000 147,004,074
7.875%, 2/15/21.................................................... United States 128,500,000 146,249,191
---------------
440,359,876
---------------
TOTAL BONDS (COST $1,458,211,816).................................... 1,456,350,372
---------------
SHORT TERM OBLIGATIONS 20.9%
Federal Home Loan Bank, 5.34%, 10/24/97.............................. United States 50,000,000 49,608,550
Federal Home Loan Mortgage Corp., 5.34% to 5.38%, with maturities to
11/18/97........................................................... United States 357,950,000 355,150,152
Federal National Mortgage Assn., 5.37%, with maturities to
11/21/97........................................................... United States 137,000,000 135,469,204
U S Treasury Bills, 4.90% to 5.16%, with maturities to 11/28/97...... United States 2,793,540,000 2,778,022,748
---------------
TOTAL SHORT TERM OBLIGATIONS (COST $3,317,217,816)................... 3,318,250,654
---------------
TOTAL INVESTMENTS 100.1% (COST $14,161,703,441)...................... 15,832,925,164
LIABILITIES IN EXCESS OF OTHER ASSETS (0.1%)......................... (22,398,746)
---------------
TOTAL NET ASSETS 100.0%.............................................. $15,810,526,418
===============
</TABLE>

*Non-income producing.
**Securities traded in U.S. dollars.
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in affiliated companies at August
31, 1997 were $297,137,188.
See notes to financial statements.

<PAGE>

TEMPLETON FOREIGN FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost $14,161,703,441)........................ $15,832,925,164
Cash......................................................................................... 12,978,347
Receivables:
Investment securities sold.................................................................. 43,717,344
Capital shares sold......................................................................... 64,344,166
Dividends and interest...................................................................... 79,365,164
---------------
Total assets............................................................................. 16,033,330,185
---------------
Liabilities:
Payables:
Investment securities purchased............................................................. 175,323,390
Capital shares redeemed..................................................................... 28,007,222
Accrued expenses............................................................................. 19,473,155
---------------
Total liabilities........................................................................ 222,803,767
---------------
Net assets, at value.................................................................... $15,810,526,418
===============
Net assets consist of:
Undistributed net investment income.......................................................... $ 340,933,341
Net unrealized appreciation.................................................................. 1,671,221,723
Accumulated net realized gain................................................................ 951,283,810
Capital shares............................................................................... 12,847,087,544
---------------
Net assets, at value.................................................................... $15,810,526,418
===============
CLASS I
Net asset value per share ($14,367,787,431 / 1,260,938,447 shares outstanding)............... $11.40
===============
Maximum offering price ($11.40 / 94.25%)..................................................... $12.10
===============
CLASS II
Net asset value per share ($1,303,638,613 / 115,856,385 shares outstanding).................. $11.25
===============
Maximum offering price ($11.25 / 99.00%)..................................................... $11.36
===============
ADVISOR CLASS
Net asset value and offering price per share ($139,100,374 / 12,182,692 shares
outstanding)............................................................................... $11.42
===============
</TABLE>

See notes to financial statements.

<PAGE>

TEMPLETON FOREIGN FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1997

<TABLE>
<S> <C> <C>
Investment income:
(net of $36,406,764 foreign taxes withheld)
Dividends....................................................................... $350,195,802
Interest........................................................................ 219,542,877
------------
Total investment income..................................................... $ 569,738,679
Expenses:
Management fees (Note 3)........................................................ 79,502,378
Administrative fees (Note 3).................................................... 10,173,083
Distribution Fees (Note 3)
Class I........................................................................ 30,313,892
Class II....................................................................... 8,892,845
Transfer agent fees (Note 3).................................................... 9,038,300
Custodian fees.................................................................. 5,619,000
Reports to shareholders......................................................... 2,346,531
Professional fees (Note 3)...................................................... 61,200
Registration and filing fees.................................................... 1,168,800
Directors' fees and expenses.................................................... 108,300
Other........................................................................... 88,801
------------
Total expenses.............................................................. 147,313,130
------------
Net investment income...................................................... 422,425,549
------------
Realized and unrealized gain (loss):
Net realized gain (loss) from:
Investments.................................................................... 962,782,281
Foreign currency transactions.................................................. (3,153,880)
------------
Net realized gain............................................................... 959,628,401
Net unrealized appreciation on investments...................................... 828,449,706
------------
Net realized and unrealized gain................................................. 1,788,078,107
------------
Net increase in net assets resulting from operations............................. $2,210,503,656
============
</TABLE>

See notes to financial statements.

<PAGE>

TEMPLETON FOREIGN FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
-------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income...................................................... $ 422,425,549 $ 259,023,848
Net realized gain on investment and foreign currency transactions.......... 959,628,401 261,925,623
Net unrealized appreciation on investments................................. 828,449,706 309,726,009
-------------------------------------
Net increase in net assets resulting from operations................... 2,210,503,656 830,675,480
Distributions to shareholders:
From net investment income
Class I................................................................... (277,426,851) (185,409,586)
Class II.................................................................. (13,861,585) (2,866,694)
From net realized gain
Class I................................................................... (174,274,273) (267,921,946)
Class II.................................................................. (10,429,068) (4,593,277)
Capital share transactions (Note 2)
Class I................................................................... 3,139,139,968 2,308,641,984
Class II.................................................................. 665,437,465 446,460,741
Advisor Class............................................................. 141,784,663 --
-------------------------------------
Net increase in net assets............................................. 5,680,873,975 3,124,986,702
Net assets:
Beginning of year........................................................... 10,129,652,443 7,004,665,741
-------------------------------------
End of year................................................................. $15,810,526,418 $10,129,652,443
=====================================
Undistributed net investment income included in net assets:
Beginning of year........................................................... $ 209,796,228 $ 139,048,660
=====================================
End of year................................................................. $ 340,933,341 $ 209,796,228
=====================================
</TABLE>

See notes to financial statements.

<PAGE>

TEMPLETON FOREIGN FUND
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton Foreign Fund (the Fund) is a separate diversified series of Templeton
Funds, Inc. (the Company) which is an open-end investment company registered
under the Investment Company Act of 1940. The Fund seeks long-term capital
growth through a flexible policy of investing in stocks and debt obligations of
companies and governments of any nation. The following summarizes the Fund's
significant accounting policies.

a. SECURITIES VALUATIONS:

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.

b. FOREIGN CURRENCY TRANSLATION:

Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
portfolio securities and income items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. When the Fund purchases or sells foreign securities it will customarily
enter into a foreign exchange contract to minimize foreign exchange risk from
the trade date to the settlement date of such transactions.

The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included with the net realized and unrealized gain or loss from investments.

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.

Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.

e. ACCOUNTING ESTIMATES:

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.

2. CAPITAL SHARES

The Fund offers three classes of shares: Class I, Class II and Advisor Class
shares. The shares differ by their initial sales load, distribution fees, voting
rights on matters affecting a single class and the exchange privilege of each
class.

<PAGE>

TEMPLETON FOREIGN FUND
Notes to Financial Statements (cont.)

2. CAPITAL SHARES (CONT.)
At August 31, 1997, there were 3.2 billion shares of capital stock authorized
($1.00 par value) of which 2.0 billion shares have been classified as Fund
shares as follows: 1.5 billion Class I shares, 300 million Class II shares and
200 million Advisor Class shares. Transactions in the Fund's shares were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------
CLASS I SHARES: SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold.............................................. 492,650,269 $ 5,300,198,785 351,052,593 $ 3,372,527,051
Shares issued on reinvestment of distributions........... 38,938,243 386,869,780 42,603,776 387,492,970
Shares redeemed.......................................... (234,044,276) (2,547,928,597) (151,516,955) (1,451,378,037)
-----------------------------------------------------------------------
Net increase............................................. 297,544,236 $ 3,139,139,968 242,139,414 $ 2,308,641,984
=======================================================================
</TABLE>

<TABLE>
<CAPTION>
CLASS II SHARES: SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold.............................................. 67,411,120 $ 721,149,292 48,025,414 $ 458,405,634
Shares issued on reinvestment of distributions........... 1,728,829 17,020,675 580,233 5,247,258
Shares redeemed.......................................... (6,707,008) (72,732,502) (1,794,465) (17,192,151)
-----------------------------------------------------------------------
Net increase............................................. 62,432,941 $ 665,437,465 46,811,182 $ 446,460,741
=======================================================================
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997*
-------------------------------
ADVISOR CLASS SHARES: SHARES AMOUNT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold.............................................. 12,681,374 $ 147,529,611
Shares redeemed.......................................... (498,682) (5,744,948)
-------------------------------
Net increase............................................. 12,182,692 $ 141,784,663
===============================
*Effective date of Advisor Class Shares was January 2, 1997.
</TABLE>

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Fund are also directors or officers of Templeton Global
Advisors Ltd. (TGAL), Franklin Templeton Services, Inc. (FT Services), Franklin
Templeton Distributors, Inc. (Distributors), and Franklin Templeton Investor
Services, Inc. (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter, and transfer agent, respectively.

The Fund pays an investment management fee to TGAL based on the average daily
net assets of the Fund as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.75% First $200 million
0.675% Over $200 million, up to and including $1.3 billion
0.60% Over $1.3 billion
</TABLE>

The Fund pays its allocated share of an administrative fee to FT Services based
on the Company's aggregate average daily net assets as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>

The Fund reimburses Distributors up to 0.25% and 1.00% per year of its average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's shares. Under the Class I distribution plan,
costs exceeding the maximum may be reimbursed in subsequent periods. At August
31, 1997, unreimbursed costs were $2,253,047.

<PAGE>

TEMPLETON FOREIGN FUND
Notes to Financial Statements (cont.)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
Distributors received net commissions from the sale of Fund shares, and received
contingent deferred sales charges for the period of $1,528,144 and $372,630,
respectively.

During the year ended August 31, 1997, legal fees of $5,125 were paid to a law
firm in which an officer of the Fund is a partner.

4. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1997 aggregated $6,425,514,486 and $3,698,170,524,
respectively.

5. INCOME TAXES

At August 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $14,161,709,148 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation....................... $2,162,078,186
Unrealized depreciation....................... (490,862,170)
--------------
Net unrealized appreciation................... $1,671,216,016
==============
</TABLE>

<PAGE>

TEMPLETON FOREIGN FUND
Independent Auditor's Report

THE BOARD OF DIRECTORS AND SHAREHOLDERS
TEMPLETON FOREIGN FUND

We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton Foreign Fund series of Templeton
Funds, Inc. as of August 31, 1997, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for the periods
indicated in the accompanying financial statements. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton Foreign Fund series of Templeton Funds, Inc. as of August 31, 1997,
the results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles.

[McGladrey & Pullen, LLP Signature]

New York, New York
September 26, 1997

<PAGE>

TEMPLETON FOREIGN FUND
Tax Designation

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $866,700,000 as a capital gain dividend for the fiscal year ended
August 31, 1997.

<PAGE>

LITERATURE REQUEST

For a free brochure and prospectus, which contain more complete
information, including charges and expenses, call Franklin Fund
Information, toll free, at 1-800/DIAL BEN (1-800/342-5236). Please read
the prospectus carefully before you invest or send money. To ensure the
highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.

FRANKLIN TEMPLETON GROUP

GLOBAL GROWTH

Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global
Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund

GLOBAL GROWTH AND INCOME

Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton Global
Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund

GLOBAL INCOME

Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High Income
Currency Fund
Templeton Americas Government
Securities Fund

GROWTH

Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
Mutual Discovery Fund

GROWTH AND INCOME

Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.

Fund Allocator Series

Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund

INCOME

Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund

For Corporations

Franklin Corporate Qualified
Dividend Fund

FRANKLIN FUNDS SEEKING
TAX-FREE INCOME

Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund

FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME

Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**

VARIABLE ANNUITIES+

Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)

*Two or more fund options available: long-term portfolio,
intermediate-term portfolio, a portfolio of insured municipal securities,
and/or a high yield portfolio (CA) and a money market portfolio (CA and
NY).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
+Franklin Valuemark and Franklin Templeton Valuemark Income Plus are
issued by Allianz Life Insurance Company of North America or by its
wholly owned subsidiary, Preferred Life Insurance Company of New York,
and distributed by NALAC Financial Plans, LLC.

09/97.1

<PAGE>

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<PAGE>

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<PAGE>
LITERATURE REQUEST

For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Fund Information, toll free, at
1-800/DIAL BEN (1-800/342-5236). Please read the prospectus carefully before you
invest or send money. To ensure the highest quality of service, telephone calls
to or from our service departments may be monitored, recorded and accessed.
These calls can be determined by the presence of a regular beeping tone.

FRANKLIN TEMPLETON GROUP

GLOBAL GROWTH
Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global
Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater
European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund

GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton Global
Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund

GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High Income
Currency Fund
Templeton Americas Government
Securities Fund

GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
Mutual Discovery Fund

GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.

Fund Allocator Series
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund

INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund

For Corporations
Franklin Corporate Qualified
Dividend Fund

FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free
Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund

FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**

VARIABLE ANNUITIES+
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)

**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.

***Portfolio of insured municipal securities.

+Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC.

09/97.1

<PAGE>
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404-1585

SHAREHOLDER SERVICES
1-800/632-2301

FUND INFORMATION
1-800/342-5236

This report must be preceded or accompanied by the current prospectus for the
Templeton Foreign Fund, which contains more complete information including risk
factors, charges and expenses. Like any investment in securities, the Fund's
portfolio will be subject to the risk of loss from market, currency, economic,
political and other factors, as well as investment decisions by the Investment
Manager, which will not always be profitable or wise. The Fund and Fund
investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept the risk of such losses should not invest
in shares of the Fund.

To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.

104 A97 10/97
TL104 A97 [LOGO] Printed on recycled paper