TEMPLETON FUNDS INC, N-30D, 1998-05-07

TEMPLETON FUNDS INC
N-30D, 1998-05-07

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SEMI ANNUAL REPORT

FEBRUARY 28, 1998

TEMPLETON FOREIGN FUND

[FRANKLIN TEMPLETON LOGO]

PAGE

[CELEBRATING OVER 50 YEARS LOGO]

Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective, and to expect that mixed in with the good
years can be some bad years. It's important to remember that all securities
markets move both up and down, as do mutual fund share prices. We appreciate
your past support and look forward to serving your investment needs in the years
ahead.

In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently he devotes all of his time and efforts to the John
Templeton Foundation. A major portion of his assets remain invested in the
Templeton funds, which are managed by many of the investment professionals he
selected and trained.

[PHOTO OF MARK HOLOWESKO APPEARS HERE]

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 Worldwide,
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: Templeton Foreign Fund seeks long-term capital growth
through a flexible policy of investing in equity and debt securities of
companies and governments outside the United States.

Dear Shareholder:

We are pleased to bring you this semi-annual report of Templeton Foreign Fund,
which covers the period ended February 28, 1998. The six months under review
proved to be eventful for global investors, as growing investor enthusiasm for
European shares was offset by incredibly volatile price swings in Asian markets.
Within this environment, the Fund's Class I shares provided a six-month
cumulative total return of 2.57%, as discussed in the Performance Summary on
page 6.

During the six months under review, Europe remained our largest geographic
allocation. Potential for corporate improvements increased there, as many
European firms (similar to American companies at the end of the 1980s) announced
plans

You may find a complete listing of the Fund's portfolio holdings, including the
number of shares and dollar value, beginning on page 16 of this report.

CONTENTS

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

Performance Summaries
Class I ................. 6
Class II ................ 8
Advisor Class ........... 10

Financial Highlights &
Statement of Investments ... 13

Financial Statements ....... 25

Notes to the Financial
Statements ................. 28

FUND CATEGORY
[PYRAMID GRAPH]

PAGE

GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
2/28/98
[BAR GRAPH]
<TABLE>
<S> <C>
European Stocks 40.8%
Asian Stocks 18.9%
Latin American Stocks 9.1%
Australian &
New Zealand Stocks 4.5%
North American Stocks 1.3%
Middle Eastern &
African Stocks 1.1%
Fixed-Income Securities 6.0%
Short-Term Investments
& Other Net Assets 18.3%
</TABLE>

to cut costs, improve efficiency, reduce debt burdens and buy back shares. This
led to the rise of many European equity markets, and our holdings of Peugeot SA
and Somerfield Plc. appreciated substantially in value.

Asia, however, presented a different picture. Rapid economic expansion in the
region encouraged massive investment, leading to relatively high asset values
and an excessive supply of manufactured goods. To help make these products more
competitive in overseas markets, many Asian countries were forced to devalue
their currencies. Unfortunately, these devaluations contributed to higher
interest expenses, since much of the debt accumulated by corporations was from
foreign bankers. Rather than increasing competitiveness, the devaluations pushed
many companies to the verge of bankruptcy. Fearing that these firms would be
unable to pay back their loans, many investors sold their shares, and stock
markets in the area plummeted.

Although our exposure to Asia was relatively low, the Fund's performance was
hindered by its holdings there. Our largest Asian weighting was Hong Kong, whose
equity market fell 17.6% during the six months under review.(1) Seeking to take
advantage of these price declines, we added to our existing holdings, including
HSBC Holdings Plc., one of the world's largest banks; Swire Pacific Ltd., a

1. Source: Bloomberg. Market return is measured in U.S. dollars and includes
reinvested dividends.

PAGE

conglomerate that possesses the right to sell Coca Cola in China; and Cathay
Pacific Airways Ltd., the Hong Kong-based airline company.

Looking forward, we are confident about our ability to deal with future
volatility in Asian stock markets. Turbulent markets are not new to us, and
where many people see only risk, we see potential returns. This was the case
when we increased our holdings in Latin America after the Mexican peso crises.
Today, we remain optimistic about the long-term viability of Hong Kong, despite
the Asian currency crisis. At this time, the largest risk to our holdings
appears to be the possible collapse of the Hong Kong dollar's currency peg to
the U.S. dollar. However, we believe that this is unlikely to occur in the near
term. Since 1983, Hong Kong authorities have maintained a link between the Hong
Kong dollar and the U.S. dollar, and have supported the peg with U.S. dollars on
deposit there. Although the peg helped fuel speculation in Hong Kong's property
sector, it has provided a sense of stability missing in other Asian countries.
The peg's importance in maintaining economic stability and confidence, the size
of the foreign exchange reserves in Hong Kong (which exceed the level of U.S.
foreign exchange reserves), and the support of the mainland Chinese government,
all contribute to our belief that the peg should weather devaluation crises in
the region.

TOP 10 EQUITY HOLDINGS
2/28/98
<TABLE>
<CAPTION>
NAME, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------
<S> <C>
HSBC Holdings Plc.
Banking, Hong Kong 2.0%

Philips Electronics NV
Electrical & Electronics,
Netherlands 1.9%

Deutsche Bank AG
Banking, Germany 1.7%

Telecomunicacoes Brasileiras
SA (Telebras), pfd.
Telecommunications, Brazil 1.7%

Telefonos de Mexico
SA (Telmex), L
Telecommunications, Mexico 1.3%

YPF Sociedad Anonima
Energy Sources, Argentina 1.3%

National Australia Bank Ltd.
Banking, Australia 1.2%

British Telecommunications Plc.
Telecommunications,
United Kingdom 1.2%

Axa-UAP
Financial Services, France 1.1%

News Corp. Ltd., pfd.
Broadcasting & Publishing,
Australia 1.1%
</TABLE>

PAGE

TOP 10 INDUSTRIES
2/28/98
<TABLE>
<CAPTION>

% OF TOTAL
INDUSTRY NET ASSETS
- ----------------------------------
<S> <C>
Telecommunications 9.0%

Banking 8.8%

Multi-Industry 6.3%

Utilities Electrical & Gas 5.8%

Forest Products & Paper 5.3%

Energy Sources 5.2%

Metals & Mining 5.2%

Electrical & Electronics 5.0%

Merchandising 3.1%

Industrial Components 2.5%
</TABLE>

The economic outlook for Europe appears bright. If interest rates there fall due
to government attempts to meet European Monetary Union requirements, and taxes
drop, European corporations could deliver positive earnings surprises. In our
opinion, the Fund's high exposure in the region has the potential to be
well-rewarded over time.

Please remember that there are special risks associated with global investing
related to market, currency, economic, social, political, and other factors.
Developing markets involve similar but heightened risks, in addition to those
risks associated with their relatively small size and lesser liquidity. 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 1,268% in the last 15 years, but has suffered five quarterly
declines of more than 20% during that time.(2) These risks and other
considerations are discussed in the Fund's prospectus.

This discussion reflects the strategies we employed for the Fund during the six
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

2. Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended December 31, 1997.

PAGE

circumstances arise. All figures shown are as of February 28, 1998, 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 the securities we purchase or sell for the Fund.

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 G. Holowesko
Mark G. Holowesko, CFA
President
Templeton Foreign Fund

TOP 10 COUNTRIES
REPRESENTED IN THE FUND*
Equity Investments
(75.7% of Total Net Assets)
2/28/98
<TABLE>
<CAPTION>
% OF TOTAL
COUNTRY NET ASSETS
- ------------------------------
<S> <C>
United Kingdom 14.2%

Hong Kong 10.5%

Sweden 4.8%

Netherlands 4.6%

France 4.3%

Brazil 3.7%

Australia 3.6%

Japan 3.3%

Mexico 2.6%

Spain 2.4%
</TABLE>

*Does not include investments in U.S. government securities and short-term
investments and other net assets.

PAGE

PERFORMANCE SUMMARY

CLASS I

Templeton Foreign Fund - Class I produced a 2.57% cumulative total return for
the six-month period ended February 28, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, if any, and does not include the initial sales charge. We have
always maintained a long-term perspective when managing the Fund, and we
encourage shareholders to view their investments in a similar manner. As you can
see from the table on page 7, the Fund's Class I shares delivered a cumulative
total return of more than 253% for the 10-year period ended February 28, 1998.

The Fund's share price, as measured by net asset value, decreased
87 cents ($0.87), from $11.40 on August 31, 1997, to $10.53 on February 28,
1998. During the reporting period, shareholders received per-share distributions
of 32 cents ($0.32) in income dividends, 8.5 cents ($0.085) in short-term
capital gains, and 76 cents ($0.76) in long-term capital 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.

Past performance is not predictive of future results.

PAGE

CLASS I
Periods ended 2/28/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/5/82)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 10.21% 95.26% 253.23% 964.88%
Average Annual Total Return(2) 3.85% 12.98% 12.78% 16.15%
Value of $10,000 Investment(3) $10,385 $18,405 $33,298 $100,342
</TABLE>
<TABLE>
<CAPTION>
2/28/94 2/28/95 2/28/96 2/28/97 2/28/98
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 35.16% -2.74% 16.15% 16.04% 10.21%
</TABLE>

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

2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, 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 periods indicated and include the current, 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: Total returns have been restated to reflect the current, maximum 5.75%
initial sales charge. 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's Class I shares 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 their
relatively small size and lesser liquidity. 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 produced a 2.27% cumulative total return for
the six-month period ended February 28, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, if any, and does not include sales charges.

The Fund's share price, as measured by net asset value, decreased 84 cents
($0.84), from $11.25 on August 31, 1997, to $10.41 on February 28, 1998. During
the reporting period, shareholders received per-share distributions of 25.57
cents ($0.2557) in income dividends, 8.5 cents ($0.085) in short-term capital
gains, and 76 cents ($0.76) in long-term capital 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.

Past performance is not predictive of future results.

PAGE

CLASS II
Periods ended 2/28/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (5/1/95)
- ------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 9.36% 39.60%
Average Annual Total Return(2) 7.25% 12.12%
Value of $10,000 Investment(3) $10,725 $13,824
</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 and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.

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

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
in countries where investments are made. Emerging markets involve heightened
risks related to the same factors, in addition to those associated with their
relatively small size and lesser liquidity. You may have a gain or loss when you
sell your shares.

Past performance is not predictive of future results.

PAGE

ADVISOR CLASS

Templeton Foreign Fund - Advisor Class produced a 2.71% cumulative total return
for the six-month period ended February 28, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any.

The Fund's share price, as measured by net asset value, decreased 88 cents
($0.88), from $11.42 on August 31, 1997, to $10.54 on February 28, 1998. During
the reporting period, shareholders received per-share distributions of 34.58
cents ($0.3458) in income dividends, 8.5 cents ($0.085) in short-term capital
gains, and 76 cents ($0.76) in long-term capital 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.

Past performance is not predictive of future results.

PAGE

ADVISOR CLASS
Periods ended 2/28/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR* 5-YEAR* 10-YEAR* (10/5/82)*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 10.45% 95.88% 254.35% 968.24%
Average Annual Total Return(1) 10.45% 14.39% 13.49% 16.63%
Value of $10,000 Investment(2) $11,433 $29,276 $35,435 $106,824
</TABLE>
<TABLE>
<CAPTION>
2/28/94 2/28/95 2/28/96 2/28/97 2/28/98
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(3),* 35.16% -2.74% 16.15% 16.15% 10.45%
</TABLE>

*On January 2, 1997, the Fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. 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 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 fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was 14.33%.

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 $100,000 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 February 28, 1998.*

DATE INITIAL INCOME INITIAL + CAP GAINS INITIAL + TOTAL VALUE
DIVIDENDS CAP GAINS
<S> <C> <C> <C> <C> <C> <C>
10/5/82 $9,423 $0 $9,423 $0 $9,423 $9,423
12/31/82 $9,823 $0 $9,823 $0 $9,823 $9,823
12/30/83 $13,168 $193 $13,361 $48 $13,217 $13,410
12/31/84 $12,603 $491 $13,094 $156 $12,759 $13,250
12/31/85 $15,489 $1,077 $16,566 $246 $15,735 $16,812
12/31/86 $18,151 $1,752 $19,903 $1,745 $19,896 $21,648
12/31/87 $20,436 $2,816 $23,252 $3,754 $24,190 $27,006
12/30/88 $22,709 $4,156 $26,865 $6,081 $28,790 $32,946
12/29/89 $27,468 $6,387 $33,854 $9,152 $36,619 $43,006
12/31/90 $24,700 $7,170 $31,870 $9,842 $34,541 $41,712
12/31/91 $26,949 $9,249 $36,198 $13,127 $40,077 $49,325
12/31/92 $25,088 $9,876 $34,964 $14,408 $39,496 $49,372
12/31/93 $33,333 $14,060 $47,393 $20,156 $53,489 $67,549
12/30/94 $31,166 $14,231 $45,397 $22,386 $53,552 $67,783
12/29/95 $32,438 $16,772 $49,211 $26,133 $58,571 $75,343
12/31/96 $36,608 $21,301 $57,909 $30,994 $67,602 $88,903
12/31/97 $35,159 $23,062 $58,221 $36,595 $71,754 $94,815
2/28/98 $37,208 $24,406 $61,615 $38,728 $75,936 $100,342
</TABLE>

*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>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 1998 -------------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993+
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE - CLASS I
(For a share outstanding
throughout the period)
Net asset value, beginning of
period............................ $11.40 $9.97 $9.62 $10.01 $8.74 $7.92
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income............ .10 .32 .27 .23 .14 .14
Net realized and unrealized
gain........................... .19 1.56 .69 .05 1.39 1.21
----------------------------------------------------------------------------------------
Total from investment
operations...................... .29 1.88 .96 .28 1.53 1.35
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income............ (.32) (.28) (.25) (.16) (.13) (.19)
Net realized gains............... (.84) (.17) (.36) (.51) (.13) (.34)
----------------------------------------------------------------------------------------
Total distributions............... (1.16) (.45) (.61) (.67) (.26) (.53)
----------------------------------------------------------------------------------------
Net asset value, end of period.... $10.53 $11.40 $9.97 $9.62 $10.01 $8.74
========================================================================================
Total Return*..................... 2.57% 19.55% 10.68% 3.14% 17.94% 18.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's)......................... $14,665,557 $14,367,787 $9,602,209 $6,941,238 $5,014,438 $2,667,771
Ratios to average net assets:
Expenses......................... 1.13%** 1.08% 1.12% 1.15% 1.14% 1.12%
Net investment income............ 2.01%** 3.28% 3.09% 2.81% 1.84% 2.11%
Portfolio turnover rate........... 19.26% 37.28% 15.91% 21.78% 36.75% 21.29%
Average commission rate paid***... $.0073 $.0005 $.0075 -- -- --
</TABLE>

*Total return does not reflect sales commissions and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+Per share amounts for the year ended August 31, 1993 have been restated to
reflect a 3-for-1 stock split effective February 25, 1994.
13

PAGE

TEMPLETON FOREIGN FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 1998 -------------------------------------
(UNAUDITED) 1997 1996 1995+
----------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS II
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $11.25 $9.87 $9.59 $9.16
----------------------------------------------------------
Income from investment operations:
Net investment income...................................... .07 .26 .30 .03
Net realized and unrealized gain........................... .19 1.52 .58 .40
----------------------------------------------------------
Total from investment operations............................ .26 1.78 .88 .43
----------------------------------------------------------
Less distributions from:
Net investment income...................................... (.26) (.23) (.24) --
Net realized gains......................................... (.84) (.17) (.36) --
----------------------------------------------------------
Total distributions......................................... (1.10) (.40) (.60) --
----------------------------------------------------------
Net asset value, end of period.............................. $10.41 $11.25 $9.87 $9.59
==========================================================
Total Return*............................................... 2.27% 18.65% 9.78% 4.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $1,475,281 $1,303,639 $527,443 $63,428
Ratios to average net assets:
Expenses................................................... 1.88%** 1.83% 1.87% 1.90%**
Net investment income...................................... 1.25%** 2.62% 2.63% 1.86%**
Portfolio turnover rate..................................... 19.26% 37.28% 15.91% 21.78%
Average commission rate paid***............................. $.0073 $.0005 $.0075 --
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+For the period May 1, 1995 (effective date) to August 31, 1995.
14

PAGE

TEMPLETON FOREIGN FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, 1998 YEAR ENDED
(UNAUDITED) AUGUST 31, 1997+
----------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE - ADVISOR CLASS
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $11.42 $10.26
----------------------------------------
Income from investment operations:
Net investment income...................................... .17 .07
Net realized and unrealized gain........................... .14 1.09
----------------------------------------
Total from investment operations............................ .31 1.16
----------------------------------------
Less distributions from:
Net investment income...................................... (.35) --
Net realized gains......................................... (.84) --
----------------------------------------
Total distributions......................................... (1.19) --
----------------------------------------
Net asset value, end of period.............................. $10.54 $11.42
========================================
Total Return*............................................... 2.71% 11.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $208,450 $139,100
Ratios to average net assets:
Expenses................................................... .88%** .83%**
Net investment income...................................... 2.22%** 3.37%**
Portfolio turnover rate..................................... 19.26% 37.28%
Average commission rate paid***............................. $.0073 $.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.
15

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 70.1%
AEROSPACE & MILITARY TECHNOLOGY
Hong Kong Aircraft Engineering Co. Ltd. ....................
Hong Kong 1,632,200 $ 3,488,913
---------------
APPLIANCES & HOUSEHOLD DURABLES .7%
Chofu Seisaku Co. Ltd. .....................................
Japan 452,100 6,489,302
*Luks Industrial Co. Ltd. ..................................
Hong Kong 15,574,000 804,598
Sindo Ricoh Co. ............................................
South Korea 449,660 18,311,323
Sony Corp. .................................................
Japan 1,003,800 90,747,978
Thorn Plc. .................................................
United Kingdom 1,925,000 4,804,730
---------------
121,157,931
---------------
AUTOMOBILES 1.1%
Bayerische Motorenwerke AG BMW..............................
Germany 3,375 3,380,675
Fiat SpA, di Risp...........................................
Italy 5,103,340 10,669,491
Peugeot SA..................................................
France 608,100 86,692,872
Volvo AB, B.................................................
Sweden 3,141,000 85,019,254
---------------
185,762,292
---------------
BANKING 8.4%
Bangkok Bank Public Co. Ltd., fgn. .........................
Thailand 22,833,000 77,966,341
*Bank Handlowy W Warszawie SA, GDR, 144A....................
Poland 460,300 7,192,187
Bank Slaski SA W Katowicach.................................
Poland 462,881 34,578,095
*Cho Hung Bank Co. Ltd. ....................................
South Korea 2,177,738 3,400,632
*Daegu Bank Co. Ltd. .......................................
South Korea 169,963 355,954
Deutsche Bank AG............................................
Germany 4,000,000 274,759,503
*Grupo Financiero Banamex Accival SA, B.....................
Mexico 3,130,000 7,875,946
Guoco Group Ltd. ...........................................
Hong Kong 15,164,000 38,583,248
HSBC Holdings Plc. .........................................
Hong Kong 11,042,812 319,482,065
*Kookmin Bank...............................................
South Korea 2,533,601 17,628,153
*Korea Long Term Credit Bank................................
South Korea 140,280 850,442
Krung Thai Bank Public Co. Ltd., fgn. ......................
Thailand 15,000,000 5,313,589
National Australia Bank Ltd. ...............................
Australia 14,530,531 200,240,163
National Australia Cap Sec Plc. ............................
Australia 1,820,553 51,658,191
National Westminster Bank Plc. .............................
United Kingdom 8,259,289 152,332,433
*Nordbanken Holding AB......................................
Sweden 9,100,000 57,454,523
PT Lippo Bank, fgn. ........................................
Indonesia 22,889,000 1,982,008
*Shinhan Bank Co. Ltd. .....................................
South Korea 1,765,152 8,398,794
Thai Farmers Bank Public Co. Ltd., fgn. ....................
Thailand 15,875,950 47,572,533
Unibanco Uniao de Bancos Brasileiros SA, GDR................
Brazil 953,290 32,650,183
Union Bank of Norway, Primary Capital Cert. ................
Norway 972,000 32,454,733
---------------
1,372,729,716
---------------
BEVERAGES & TOBACCO
*Buenos Aires Embotelladora SA, ADR.........................
Argentina 1,200,000 12,000
---------------
BROADCASTING & PUBLISHING .5%
*Apt Satellite Holdings Ltd., ADR...........................
Hong Kong 3,000,000 33,375,000
*Inchcape Marketing Services Ltd., fgn. ....................
Singapore 2,279,100 576,631
Oriental Press Group Limited................................
Hong Kong 63,112,000 16,302,745
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BROADCASTING & PUBLISHING (CONT.)
Sing Tao Holdings Ltd. .....................................
Hong Kong 16,702,500 $ 3,451,598
South China Morning Post Ltd. ..............................
Hong Kong 44,994,400 32,543,576
---------------
86,249,550
---------------
BUILDING MATERIALS & COMPONENTS 1.0%
Gujarat Ambuja Cements Ltd. ................................
India 1,164,100 7,469,765
Gujarat Ambuja Cements Ltd., GDR............................
India 635,300 4,637,690
+Hepworth Plc. .............................................
United Kingdom 21,012,458 77,890,590
*Keumkang Co. Ltd. .........................................
South Korea 221,530 3,581,379
Okumura Corp. ..............................................
Japan 6,260,000 27,849,802
Siam Cement Public Co. Ltd., fgn. ..........................
Thailand 1,578,960 22,446,539
Siam City Cement Public Co. Ltd., fgn. .....................
Thailand 2,280,525 6,621,733
Suez Cement Co., GDR, 144A..................................
Egypt 449,000 8,867,750
---------------
159,365,248
---------------
BUSINESS & PUBLIC SERVICES .2%
Kardex AG, br. .............................................
Switzerland 15,000 4,214,115
*Waste Management International Plc. .......................
United Kingdom 8,015,100 24,230,961
---------------
28,445,076
---------------
CHEMICALS 2.3%
*Beijing Yanhua Petrochemical Company Ltd., ADR.............
China 1,300,000 12,025,000
Courtaulds Plc. ............................................
United Kingdom 18,731,800 108,475,200
+DSM NV.....................................................
Netherlands 1,645,000 164,954,631
European Vinyls Corporation Evc International NV............
Netherlands 450,367 8,327,279
Fauji Fertilizer Co. Ltd. ..................................
Pakistan 4,309,000 8,024,418
Rhone-Poulenc SA, A.........................................
France 1,518,400 70,058,874
Shanghai Petrochemical Co. Ltd., H..........................
China 61,677,000 10,196,521
---------------
382,061,923
---------------
CONSTRUCTION & HOUSING .5%
Daito Trust Construction Co. Ltd. ..........................
Japan 1,912,700 16,988,295
Fletcher Challenge Building Ltd. ...........................
New Zealand 5,754,650 13,693,297
+Hollandsche Beton Groep NV.................................
Netherlands 2,115,629 43,050,440
Kyudenko Corp. .............................................
Japan 776,000 4,990,769
---------------
78,722,801
---------------
ELECTRICAL & ELECTRONICS 5.0%
ABB AB, A...................................................
Sweden 14,061,610 176,682,103
G P Batteries International Ltd. ...........................
Singapore 2,532,698 8,205,285
General Electric Co. Plc. ..................................
United Kingdom 23,279,576 152,837,178
Gold Peak Industries (Holdings) Ltd. .......................
Hong Kong 14,766,000 5,912,121
*Gold Peak Industries (Holdings) Ltd., wts. ................
Hong Kong 1,395,000 106,303
Great Wall Electronic International Ltd. ...................
Hong Kong 34,540,800 1,784,478
Hitachi Ltd. ...............................................
Japan 15,565,600 117,019,737
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS (CONT.)
Matsushita Electric Industrial Co. Ltd. ....................
Japan 3,000,000 $ 43,774,782
Philips Electronics NV......................................
Netherlands 4,088,890 318,014,777
---------------
824,336,764
---------------
ELECTRONIC COMPONENTS & INSTRUMENTS .2%
BICC Plc. ..................................................
United Kingdom 15,948,508 34,289,108
---------------
ENERGY EQUIPMENT & SERVICES .3%
Koninklijke Pakhoed NV......................................
Netherlands 1,302,048 43,436,630
---------------
ENERGY SOURCES 4.9%
Anglo American Coal Corp. Ltd. (Amcoal).....................
South Africa 204,223 9,174,847
Fletcher Challenge Energy Ltd. .............................
New Zealand 3,112,600 11,373,602
Norsk Hydro AS..............................................
Norway 2,607,174 113,890,962
Petron Corporation..........................................
Philippines 31,640,713 4,693,406
*Ranger Oil Ltd. ...........................................
Canada 1,825,205 11,749,757
Repsol SA...................................................
Spain 3,811,000 170,049,824
Saga Petroleum AS, A........................................
Norway 2,737,815 46,610,639
Saga Petroleum AS, B........................................
Norway 1,196,580 17,844,790
Societe Elf Aquitane SA.....................................
France 1,486,000 169,332,895
Transportadora de Gas del Sur SA, ADR, B....................
Argentina 3,590,600 42,189,550
YPF Sociedad Anonima........................................
Argentina 1,475,000 46,928,934
YPF Sociedad Anonima, ADR...................................
Argentina 5,185,300 163,985,113
---------------
807,824,319
---------------
FINANCIAL SERVICES 1.2%
Axa-UAP.....................................................
France 1,866,514 180,773,945
Industrial Finance Corp. of Thailand, fgn. .................
Thailand 15,508,000 10,446,736
---------------
191,220,681
---------------
FOOD & HOUSEHOLD PRODUCTS 2.3%
Albert Fisher Group Plc. ...................................
United Kingdom 28,700,255 13,357,643
*Burns Philp & Co. Ltd. ....................................
Australia 7,263,843 1,183,454
C P Pokphand Co. Ltd. ......................................
Hong Kong 97,769,800 18,941,540
Chareon Pokphand Feedmill Public Co. Ltd., fgn. ............
Thailand 760,800 1,378,453
Grupo Embotellador de Mexico SA de CV, GDR..................
Mexico 1,610,600 20,535,150
Hillsdown Holdings Plc. ....................................
United Kingdom 26,046,153 68,228,580
Illovo Sugar Limited........................................
South Africa 2,300,000 3,956,289
*Industrias Bachoco SA, ADR.................................
Mexico 500,000 8,218,750
McBride Plc. ...............................................
United Kingdom 1,306,200 4,110,254
Panamerican Beverages Inc., A...............................
Mexico 1,435,400 52,302,388
*Showa Sangyo Co. ..........................................
Japan 151,000 337,684
Tate & Lyle Plc. ...........................................
United Kingdom 14,000,000 121,206,630
Vitasoy International Holdings Ltd. ........................
Hong Kong 15,311,000 5,586,513
Vitro SA....................................................
Mexico 8,183,320 30,911,245
Vitro SA, ADR...............................................
Mexico 2,463,840 27,872,190
---------------
378,126,763
---------------
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER 5.3%
Aracruz Celulose SA, ADR....................................
Brazil 3,239,700 $ 44,343,394
Asia Pulp & Paper Co. Ltd., ADR.............................
Indonesia 3,804,500 45,416,219
Assidomaen AB...............................................
Sweden 1,780,900 43,862,887
Carter Holt Harvey Ltd. ....................................
New Zealand 42,697,138 65,152,932
Cartiere Burgo SpA..........................................
Italy 6,155,730 42,411,153
Enso OY, A..................................................
Finland 634,000 5,700,041
Enso OY, R..................................................
Finland 8,687,550 78,579,665
Fletcher Challenge Ltd. Forestry Division...................
New Zealand 17,604,547 13,071,435
Fletcher Challenge Ltd. Forestry Division, AUD..............
New Zealand 331,211 249,575
Fletcher Challenge Paper Ltd. ..............................
New Zealand 27,201,539 36,577,667
Mayr-Melnhof Karton AG......................................
Austria 86,316 5,025,677
Metsa Serla OY, B...........................................
Finland 2,859,000 25,548,345
Mo Och Domsjoe AB, B........................................
Sweden 2,767,000 80,603,988
Munksjo AB..................................................
Sweden 1,100,000 10,176,908
Norske Skogindustrier AS, A.................................
Norway 1,619,000 49,357,150
PT Barito Pacific Timber TBK................................
Indonesia 38,872,000 8,686,480
PT Indah Kiat Pulp & Paper Corp. ...........................
Indonesia 112,826,073 24,582,217
*PT Inti Indorayon Utama....................................
Indonesia 20,000,000 2,681,564
PT Tjiwi Kimia TBK..........................................
Indonesia 19,660,766 3,679,529
*Sappi Ltd. ................................................
South Africa 4,003,500 17,783,431
Stora Kopparbergs Bergslags AB, A...........................
Sweden 2,381,700 34,690,011
Stora Kopparbergs Bergslags AB, B...........................
Sweden 2,348,100 33,907,051
Svenska Cellulosa AB, B.....................................
Sweden 1,762,656 40,107,944
Unipapel SA.................................................
Spain 167,900 4,586,835
UPM-Kymmene Corp. ..........................................
Finland 6,067,834 157,598,921
---------------
874,381,019
---------------
INDUSTRIAL COMPONENTS 2.5%
BTR Plc. ...................................................
United Kingdom 40,000,000 105,934,298
Chudenko Corp. .............................................
Japan 431,000 11,757,653
Sandvik AB, A...............................................
Sweden 1,363,000 38,511,971
Sandvik AB, B...............................................
Sweden 2,395,000 67,072,576
Sanyo Electric Co. Ltd. ....................................
Japan 12,000,000 32,355,274
SKF AB, B...................................................
Sweden 4,790,976 99,131,903
Yamato Kogyo Co. Ltd. ......................................
Japan 5,970,000 48,290,246
---------------
403,053,921
---------------
INSURANCE .2%
HIH Winterthur International Holdings Ltd. .................
Australia 5,973,777 11,841,467
National Mutual Asia Ltd. ..................................
Hong Kong 3,032,000 2,702,073
Ste Centrale Du Groupe Des Asurances Nationales.............
France 880,009 21,690,923
---------------
36,234,463
---------------
LEISURE & TOURISM .4%
Grand Hotel Holdings Ltd. ..................................
Hong Kong 24,685,000 5,483,784
Harbour Centre Development Ltd. ............................
Hong Kong 11,606,000 9,593,594
Mandarin Oriental Intl. Ltd. ...............................
Singapore 29,986,000 25,038,310
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
LEISURE & TOURISM (CONT.)
*Shangri-La Asia Ltd. ......................................
Hong Kong 11,442,000 $ 10,270,830
Thistle Hotels Plc. ........................................
United Kingdom 5,361,600 16,429,826
---------------
66,816,344
---------------
MACHINERY & ENGINEERING .8%
Makita Corp. ...............................................
Japan 531,000 6,147,978
New Holland NV..............................................
Netherlands 2,900,900 71,797,275
Rauma OY....................................................
Finland 175,517 2,871,418
Valmet OY...................................................
Finland 217,500 3,266,994
Van Der Horst Ltd. .........................................
Singapore 2,900,000 1,440,605
Vickers Plc. ...............................................
United Kingdom 13,017,814 45,252,871
---------------
130,777,141
---------------
MERCHANDISING 3.1%
Best Denki Co. Ltd. ........................................
Japan 124,500 755,293
Dairy Farm International Holdings Ltd. .....................
Hong Kong 56,773,759 68,128,511
*Gucci Group NV.............................................
Netherlands 1,500,000 62,906,250
Kwik Save Group Plc. .......................................
United Kingdom 6,050,119 34,487,811
*Lojas Americanas SA, ADR...................................
Brazil 197,000 1,237,623
Matsuzakaya Co. Ltd. .......................................
Japan 2,841,600 13,520,698
Safeway Plc. ...............................................
United Kingdom 11,603,978 68,823,224
Somerfield Plc. ............................................
United Kingdom 20,000,000 99,344,295
Storehouse Plc. ............................................
United Kingdom 6,700,000 28,754,654
+W.H. Smith Group...........................................
United Kingdom 15,190,400 123,254,012
*Yaohan Hongkong Corp. Ltd. ................................
Hong Kong 10,000,000 555,376
---------------
501,767,747
---------------
METALS & MINING 4.8%
Alcan Aluminum Ltd. ........................................
Canada 4,309,870 133,391,727
Alcan Aluminum Ltd., USD....................................
Canada 502,356 15,604,433
Anglo American Platinum Corp. Ltd. .........................
South Africa 4,000,000 56,986,745
British Steel Plc. .........................................
United Kingdom 70,630,800 169,891,871
Companhia Siderurgica Nacional CSN, ADR.....................
Brazil 1,483,275 37,823,512
Elkem AS....................................................
Norway 1,889,450 24,187,912
Eramet SA...................................................
France 144,432 6,077,472
Grupo Mexico SA de CV, B....................................
Mexico 11,198,000 38,620,588
*Industrias Penoles SA......................................
Mexico 806,000 3,403,836
Ingwe Coal Corp. Ltd. ......................................
South Africa 100,000 339,978
Maanshan Iron & Steel Co. Ltd., H...........................
China 156,486,000 16,775,380
*Minorco SA, ADR............................................
Luxembourg 2,929,241 51,261,718
Outokumpu OY, A.............................................
Finland 1,101,400 14,403,269
Pechiney SA, A..............................................
France 1,736,105 77,077,752
*Pohang Iron & Steel Co. Ltd. ..............................
South Korea 921,460 57,764,623
RGC Ltd. ...................................................
Australia 8,344,797 11,329,727
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING (CONT.)
South African Iron & Steel Industrial Corp. Ltd. ...........
South Africa 44,417,900 $ 14,831,435
Trelleborg AB, B............................................
Sweden 1,030,084 14,552,665
*Union Miniere NPV..........................................
Belgium 500,000 37,002,404
---------------
781,327,047
---------------
MISCELLANEOUS MATERIALS & COMMODITIES .5%
Agrium Inc. ................................................
Canada 3,545,500 47,199,469
De Beers Centenary Linked Units.............................
South Africa 929,800 18,439,826
De Beers Centenary Linked Units, ADR........................
South Africa 800,000 15,950,000
---------------
81,589,295
---------------
MULTI-INDUSTRY 6.3%
Alfa SA de CV, A............................................
Mexico 267,300 1,520,799
Amoy Properties Ltd. .......................................
Hong Kong 32,084,500 27,142,845
Broken Hill Proprietary Co. Ltd. ...........................
Australia 13,000,000 127,963,179
Cheung Kong Holdings Ltd. ..................................
Hong Kong 22,250,000 155,900,872
+*Elementis Plc. ...........................................
United Kingdom 28,200,000 60,165,079
First Pacific Co. ..........................................
Hong Kong 70,197,800 35,812,891
Hicom Holdings Bhd. ........................................
Malaysia 20,865,600 12,310,422
Hutchison Whampoa Ltd. .....................................
Hong Kong 17,000,000 120,213,109
Inchcape Plc. ..............................................
United Kingdom 27,938,745 86,764,859
Jardine Matheson Holdings Ltd. .............................
Hong Kong 18,468,396 86,432,093
Jardine Strategic Holdings Ltd. ............................
Hong Kong 14,674,764 41,823,077
Marine Wendel SA............................................
France 329,293 46,836,873
Murray & Roberts Hldgs. Ltd. ...............................
South Africa 15,000,000 23,221,694
Pilkington Plc. ............................................
United Kingdom 37,500,000 71,048,469
Saha Union Public Co. Ltd., fgn. ...........................
Thailand 689,000 608,177
Swire Pacific Ltd., A.......................................
Hong Kong 16,780,400 100,996,660
Swire Pacific Ltd., B.......................................
Hong Kong 29,670,700 29,891,051
---------------
1,028,652,149
---------------
REAL ESTATE 1.2%
+Bail Investissement........................................
France 164,380 24,596,859
Hang Lung Development Co. Ltd. .............................
Hong Kong 38,302,000 56,148,234
Hon Kwok Land Investment Co. Ltd. ..........................
Hong Kong 48,971,000 8,981,443
New Asia Realty and Trust Co. Ltd., A.......................
Hong Kong 4,834,000 9,739,800
New World Development Co. Ltd. .............................
Hong Kong 14,000,000 51,624,152
PT Jaya Properties, fgn. ...................................
Indonesia 3,615,000 191,858
Ryoden Development Ltd. ....................................
Hong Kong 20,000,000 3,358,088
Union du Credit Bail Immobilier Unibail.....................
France 121,381 13,252,813
Wereldhave NV...............................................
Netherlands 450,000 27,206,692
---------------
195,099,939
---------------
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
RECREATION & OTHER CONSUMER GOODS 1.0%
Fila Holding SpA, ADR.......................................
Italy 439,500 $ 9,614,062
Nintendo Co. Ltd. ..........................................
Japan 1,107,700 101,897,859
Yue Yuen Industrial (Holdings) Ltd. ........................
Hong Kong 22,881,400 44,033,950
---------------
155,545,871
---------------
TELECOMMUNICATIONS 7.3%
Asia Satellite Telecommunications Hldgs. Ltd. ..............
Hong Kong 8,945,000 16,520,956
Asia Satellite Telecommunications Hldgs. Ltd., ADR..........
Hong Kong 425,000 7,756,250
British Telecommunications Plc. ............................
United Kingdom 19,000,000 191,571,386
*Digital Telecommunications Philippines Inc. ...............
Philippines 124,707,800 7,211,262
Hong Kong Telecommunications Ltd. ..........................
Hong Kong 44,027,500 92,689,474
PT Indosat TBK, ADR.........................................
Indonesia 932,700 13,990,500
SK Telecom Co. Ltd., ADR....................................
South Korea 8,541,849 73,673,448
Smartone Telecommunications Holdings Ltd. ..................
Hong Kong 3,637,500 9,419,680
Tele Danmark AS, B..........................................
Denmark 1,255,700 81,369,128
Telecom Argentina Stet-France SA, ADR.......................
Argentina 2,964,800 108,771,100
Telecom Italia SpA, di Risp.................................
Italy 32,200,275 155,970,786
*Telecomunicacoes de Minas Gerais SA........................
Brazil 159,747,107 14,841,788
Telefonica de Argentina SA, B, ADR..........................
Argentina 678,600 24,429,600
Telefonica de Espana SA.....................................
Spain 3,431,700 118,080,480
Telefonica del Peru SA, B...................................
Peru 10,829,856 20,177,225
Telefonica del Peru SA, B, ADR..............................
Peru 1,829,200 34,640,475
Telefonos de Mexico SA (Telmex), L..........................
Mexico 13,623,481 34,200,539
Telefonos de Mexico SA (Telmex), L, ADR.....................
Mexico 3,600,200 182,485,138
---------------
1,187,799,215
---------------
TEXTILES & APPAREL .2%
Courtaulds Textiles Plc. ...................................
United Kingdom 3,750,000 21,098,306
*Daehan Synthetic Fiber Co. Ltd. ...........................
South Korea 21,740 776,143
Dawson International Plc. ..................................
United Kingdom 8,713,400 7,392,996
Fountain Set Holdings Ltd. .................................
Hong Kong 5,657,000 993,674
PT Indorama Synthetics......................................
Indonesia 21,600,000 6,033,520
*Tae Kwang Industrial Co. Ltd. .............................
South Korea 15,760 3,522,596
---------------
39,817,235
---------------
TRANSPORTATION 2.2%
Air New Zealand Ltd., B.....................................
New Zealand 10,255,000 15,288,699
Cathay Pacific Airways Ltd. ................................
Hong Kong 50,060,000 42,996,319
Great Eastern Shipping Co. Ltd. ............................
India 4,000,000 4,223,634
Great Eastern Shipping Co. Ltd., GDR........................
India 543,000 3,556,650
Great Eastern Shipping Co. Ltd., GDR, 144A..................
India 652,500 4,273,875
Guangshen Railway Co. Ltd., ADR.............................
China 502,620 6,502,646
Hitachi Zosen Corp. ........................................
Japan 8,512,000 19,440,571
IMC Holdings Ltd. ..........................................
Hong Kong 11,982,000 2,785,612
Koninklijke Nedlloyd Groep NV...............................
Netherlands 99,250 2,315,761
*Korean Air.................................................
South Korea 156,776 894,766
Kvaerner Industrier AS, A...................................
Norway 1,200,000 43,551,708
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TRANSPORTATION (CONT.)
Malaysian International Shipping Corp., fgn. ...............
Malaysia 3,936,000 $ 7,243,518
Orient Overseas International Ltd. .........................
Hong Kong 13,936,000 6,119,780
Peninsular & Oriental Steam Navigation Co. .................
United Kingdom 4,185,828 53,790,007
Shun Tak Holdings...........................................
Hong Kong 45,666,000 11,088,418
Singapore Airlines Ltd., fgn. ..............................
Singapore 14,316,000 106,011,725
Transport Development Group Plc. ...........................
United Kingdom 1,000,000 3,871,627
*Transportacion Maritima Mexicana SA de CV, ADR, A..........
Mexico 831,300 5,039,756
*Transportacion Maritima Mexicana SA de CV, ADR, L..........
Mexico 789,400 5,476,463
Vosper Thornycroft Holdings Plc. ...........................
United Kingdom 1,200,000 15,193,252
---------------
359,664,787
---------------
UTILITIES ELECTRICAL & GAS 5.6%
BG Plc. ....................................................
United Kingdom 28,953,000 145,127,521
*CEZ AS.....................................................
Czech Republic 1,107,563 31,744,603
CLP Holdings Ltd. ..........................................
Hong Kong 14,999,900 77,881,302
Electrabel SA...............................................
Belgium 280,133 68,031,231
Guangdong Electric Power Development Co Ltd., B, 144A.......
China 5,198,052 3,141,993
Hong Kong Electric Holdings Ltd. ...........................
Hong Kong 27,499,900 97,674,814
Iberdrola SA................................................
Spain 6,905,592 99,941,084
*Korea Electric Power Corp. ................................
South Korea 6,275,020 83,769,404
Mosenergo...................................................
Russia 26,500,000 34,662,000
*Mosenergo, ADR.............................................
Russia 450,000 17,887,500
Mosenergo, ADR, 144A........................................
Russia 450,000 17,887,500
National Grid Group Plc. ...................................
United Kingdom 17,000,000 96,065,768
Shandong Huaneng Power Development Co. Ltd., ADR............
China 3,000,000 25,312,500
Thames Water Group Plc. ....................................
United Kingdom 8,393,326 122,723,596
---------------
921,850,816
---------------
WHOLESALE & INTERNATIONAL TRADE .1%
Inchcape Motores Ltd., fgn. ................................
Singapore 2,279,100 3,445,724
Sime Darby Hongkong Ltd. ...................................
Hong Kong 10,435,400 5,189,059
---------------
8,634,783
---------------
TOTAL COMMON STOCKS (COST $10,764,323,882).................. 11,470,241,487
---------------
PREFERRED STOCKS 5.6%
Ballast Nedam NV, ctf., conv., pfd. ........................
Netherlands 292,358 15,158,827
Banco Bradesco SA, pfd. ....................................
Brazil 6,996,200,000 59,428,854
Centrais Eletricas Brasileiras SA (Eletrobras), ADR, pfd....
Brazil 869,000 20,376,499
Cia Vale do Rio Doce, ADR, pfd. ............................
Brazil 1,500,000 32,650,533
Embotelladora Andina SA, B, ADR, pfd. ......................
Chile 1,265,950 22,470,612
*Ericsson Telecomunicacoes SA, pfd. ........................
Brazil 201,032,000 6,748,299
Fiat SpA, pfd. .............................................
Italy 59,004,500 115,206,414
Krones AG Herman Kronseder Maschinen Fabrik, pfd. ..........
Germany 27,700 8,627,856
News Corp. Ltd., pfd. ......................................
Australia 32,382,538 176,962,168
Petroleo Brasileiro SA (Petrobras), pfd. ...................
Brazil 170,000,000 38,508,163
Telecomunicacoes Brasileiras SA (Telebras), pfd. ...........
Brazil 572,200,000 69,870,017
Telecomunicacoes Brasileiras SA (Telebras), ADR, pfd........
Brazil 1,650,000 202,021,875
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS (CONT.)
Usinas Siderurgicas De Minas Gerais SA, pfd. ...............
Brazil 6,087,150 $ 41,203,997
Volkswagen AG, pfd. ........................................
Germany 206,684 100,724,196
---------------
TOTAL PREFERRED STOCKS (COST $693,137,030).................. 909,958,310
---------------

<CAPTION>
PRINCIPAL
AMOUNT**
--------------
<S> <C> <C> <C>
BONDS 6.0%
U.S. Treasury Bonds:
14.00%, 11/15/11..........................................
United States $ 97,000,000 150,925,986
7.875%, 2/15/21...........................................
United States 128,500,000 158,175,533
6.25%, 8/15/23............................................
United States 155,303,000 160,544,632
U.S. Treasury Notes:
6.125%, 3/31/98...........................................
United States 200,000,000 200,187,600
6.375%, 7/15/99...........................................
United States 102,500,000 103,653,228
6.00%, 10/15/99...........................................
United States 103,000,000 103,708,228
6.375%, 1/15/00...........................................
United States 103,000,000 104,448,489
---------------
TOTAL BONDS (COST $952,930,566)............................. 981,643,696
---------------
SHORT TERM INVESTMENTS 17.6%
U.S. Treasury Bills, 4.93% to 5.245%
with maturities to 5/28/98................................
United States 2,497,841,000 2,479,317,691
U.S. Treasury Notes, 6.00% to 9.00%,
with maturities to 5/31/98................................
United States 400,000,000 401,375,300
---------------
TOTAL SHORT TERM INVESTMENTS (COST $2,883,129,847).......... 2,880,692,991
---------------
TOTAL INVESTMENTS (COST $15,293,521,325) 99.3%.............. 16,242,536,484
OTHER ASSETS, LESS LIABILITIES .7%.......................... 106,750,813
---------------
TOTAL NET ASSETS 100.0%..................................... $16,349,287,297
===============
</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 securites. Investments in "affiliated companies" at February
28, 1998 were $493,911,611.
See Notes to Financial Statements.
24

PAGE

TEMPLETON FOREIGN FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998 (UNAUDITED)

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost
$15,293,521,325).......................................... $16,242,536,484
Receivables:
Investment securities sold................................ 129,933,748
Capital shares sold....................................... 80,936,319
Dividends and interest.................................... 47,824,279
---------------
Total assets.......................................... 16,501,230,830
---------------
Liabilities:
Payables:
Investment securities purchased........................... 75,508,567
Capital shares redeemed................................... 40,855,291
To affiliates............................................. 14,089,902
Distributions to shareholders.............................. 822,550
Funds advanced by custodian................................ 13,315,650
Other liabilities.......................................... 7,351,573
---------------
Total liabilities..................................... 151,943,533
---------------
Net assets, at value........................................ $16,349,287,297
===============
Net assets consist of:
Undistributed net investment income........................ $ 39,265,479
Net unrealized appreciation................................ 949,015,159
Accumulated net realized gain.............................. 698,135,892
Capital shares............................................. 14,662,870,767
---------------
Net assets, at value........................................ $16,349,287,297
===============
CLASS I:
Net asset value per share ($14,665,556,626 / 1,392,692,528
shares outstanding)....................................... $10.53
===============
Maximum offering price per share ($10.53 / 94.25%)......... $11.17
===============
CLASS II:
Net asset value per share ($1,475,280,600 / 141,697,922
shares outstanding)*...................................... $10.41
===============
Maximum offering price per share ($10.41 / 99.00%)......... $10.52
===============
ADVISOR CLASS:
Net asset value and maximum offering price per share
($208,450,071 / 19,769,571 shares outstanding)............ $10.54
===============
</TABLE>

*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
25

PAGE

TEMPLETON FOREIGN FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $12,789,098)
Dividends.................................................. $128,603,815
Interest................................................... 118,873,964
------------
Total investment income............................... $ 247,477,779
Expenses:
Management fees (Note 3)................................... 47,922,257
Administrative fees (Note 3)............................... 6,103,175
Distribution fees (Note 3)
Class I.............................................. 17,813,322
Class II............................................. 6,841,403
Transfer agent fees (Note 3)............................... 9,811,851
Custodian fees............................................. 3,338,091
Reports to shareholders.................................... 1,221,000
Registration and filing fees............................... 723,000
Professional fees (Note 3)................................. 35,201
Directors' fees and expenses............................... 20,000
Other...................................................... 90,867
------------
Total expenses........................................ 93,920,167
-------------
Net investment income........................... 153,557,612
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 969,780,541
Foreign currency transactions............................. (3,256,944)
------------
Net realized gain...................................... 966,523,597
Net unrealized depreciation on investments............. (722,206,564)
-------------
Net realized and unrealized gain............................ 244,317,033
-------------
Net increase in net assets resulting from operations........ $ 397,874,645
=============
</TABLE>

See Notes to Financial Statements.
26

PAGE

TEMPLETON FOREIGN FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, 1998 YEAR ENDED
(UNAUDITED) AUGUST 31, 1997
---------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 153,557,612 $ 422,425,549
Net realized gain from investments and foreign currency
transactions............................................ 966,523,597 959,628,401
Net unrealized appreciation (depreciation) on
investments.............................................. (722,206,564) 828,449,706
---------------------------------------
Net increase in net assets resulting from operations.... 397,874,645 2,210,503,656
Distributions to shareholders from:
Net investment income:
Class I.................................................. (418,375,110) (277,426,851)
Class II................................................. (31,958,641) (13,861,585)
Advisor Class............................................ (4,891,723) --
Net realized gains:
Class I.................................................. (1,102,122,389) (174,274,273)
Class II................................................. (105,685,929) (10,429,068)
Advisor Class............................................ (11,863,197) --
Capital share transactions (Note 2):
Class I.................................................. 1,457,143,358 3,139,139,968
Class II................................................. 278,330,040 665,437,465
Advisor Class............................................ 80,309,825 141,784,663
---------------------------------------
Net increase in net assets.............................. 538,760,879 5,680,873,975
Net assets:
Beginning of period........................................ 15,810,526,418 10,129,652,443
---------------------------------------
End of period.............................................. $16,349,287,297 $15,810,526,418
=======================================
Undistributed net investment income included in net assets:
End of period.............................................. $ 39,265,479 $ 340,933,341
=======================================
</TABLE>

See Notes to Financial Statements.
27

PAGE

TEMPLETON FOREIGN FUND
Notes to Financial Statements (unaudited)

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 outside the United States. The following summarizes
the Fund's significant accounting policies.

a. SECURITY VALUATION:

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
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 in 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 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

PAGE

TEMPLETON FOREIGN FUND
Notes to Financial Statements (unaudited) (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
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.

Common expenses incurred by the Company are allocated among the funds based on
the ratio of net assets of each fund to the combined net assets. Other expenses
are charged to each fund on a specific identification basis.

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 STOCK

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.

At February 28, 1998, there were 3.7 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>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold....................................... 261,695,415 $ 2,766,547,051 492,650,269 $ 5,300,198,785
Shares issued on reinvestment of distributions.... 123,812,889 1,328,959,551 38,938,243 386,869,780
Shares redeemed................................... (253,754,223) (2,638,363,244) (234,044,276) (2,547,928,597)
-----------------------------------------------------------------------
Net increase...................................... 131,754,081 $ 1,457,143,358 297,544,236 $ 3,139,139,968
=======================================================================
</TABLE>

PAGE

TEMPLETON FOREIGN FUND
Notes to Financial Statements (unaudited) (continued)

2. CAPITAL STOCK (CONT.)

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold........................................... 31,768,997 $ 335,236,503 67,411,120 $721,149,292
Shares issued on reinvestment of distributions........ 9,500,880 100,972,206 1,728,829 17,020,675
Shares redeemed....................................... (15,428,340) (157,878,669) (6,707,008) (72,732,502)
------------------------------------------------------------------
Net increase.......................................... 25,841,537 $ 278,330,040 62,432,941 $665,437,465
==================================================================
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997*
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADVISOR CLASS SHARES:
Shares sold........................................... 10,304,859 $ 108,194,931 12,681,374 $147,529,611
Shares issued on reinvestment of distributions........ 260,105 3,064,066 -- --
Shares redeemed....................................... (2,978,085) (30,949,172) (498,682) (5,744,948)
------------------------------------------------------------------
Net increase.......................................... 7,586,879 $ 80,309,825 12,182,692 $141,784,663
==================================================================
</TABLE>

*Effective date of Advisor Class shares was January 2, 1997.

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Fund are also officers or directors 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>

PAGE

TEMPLETON FOREIGN FUND
Notes to Financial Statements (unaudited) (continued)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
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 the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Under the Class I
distribution plan, costs exceeding the maximum may be reimbursed in subsequent
periods. At February 28, 1998, unreimbursed costs were $2,809,133. Distributors
received net commissions from sales of fund shares, and received contingent
deferred sales charges for the period of $262,910 and $302,280, respectively.

Included in professional fees are legal fees of $12,660 that were paid to a law
firm in which a partner is an officer of the Fund.

4. INCOME TAXES

The cost of securities for income tax purposes is the same as that shown in the
Statement of Investments. At February 28, 1998, the net unrealized appreciation
based on cost of investments for income tax purposes was as follows:

<TABLE>
<S> <C>
Unrealized appreciation.................................... $ 2,191,090,829
Unrealized depreciation.................................... (1,242,075,670)
---------------
Net unrealized appreciation................................ $ 949,015,159
===============
</TABLE>

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended February 28, 1998 aggregated $3,638,422,146 and $2,537,658,663,
respectively.

PAGE

This page intentionally left blank
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
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)

* These funds are now closed to new accounts, with the exception of retirement
accounts.

** 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.
10/97.1

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 value of
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
its investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept this risk 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 S98 04/98 [RECYCLED LOGO] Printed on recycled paper