TEMPLETON GLOBAL SMALLER COMPANIES FUND INC, N-30D, 1997-11-10

TEMPLETON GLOBAL SMALLER COMPANIES FUND INC
N-30D, 1997-11-10

Previous: CORPORATE PROPERTY ASSOCIATES 3, 10-Q, 1997-11-10

Next: CENTRUM INDUSTRIES INC, 10-Q, 1997-11-10

ANNUAL REPORT

AUGUST 31, 1997

TEMPLETON GLOBAL
SMALLER COMPANIES FUND, INC.

[Franklin Templeton LOGO]

<PAGE>
[50 YEAR CELEBRATING SEAL]

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 Peter Nori]

PETER NORI
Portfolio Manager
Templeton Global Smaller Companies Fund, Inc.

<PAGE>
SHAREHOLDER LETTER

- --------------------------------------------------------------------------------
Your Fund's Objective: The Templeton Global Smaller Companies Fund seeks to
achieve long-term capital growth by investing in common stocks and all types of
common stock equivalents, including rights, warrants, and preferred stock, of
companies of various nations throughout the world. The Fund seeks to achieve its
objective by investing primarily in securities of smaller companies globally.
- --------------------------------------------------------------------------------

Dear Shareholder:

We are pleased to bring you the annual report of the Templeton Global Smaller
Companies Fund for the 12 months ended August 31, 1997. Spurred by stable
interest rates, relatively subdued levels of inflation, and healthy corporate
profits, global stock markets generally turned in strong performances. However,
small cap equities, for the most part, did not fare as well as their large cap
counterparts. Despite the lower prices of many small cap shares, a significant
number of investors sought the safety and liquidity of well-known large cap
stocks. Within this environment, Templeton Global Smaller Companies Fund Class I
shares provided a 12-month cumulative total return of 24.20%, as discussed in
the Performance Summary on page 6, outperforming its benchmark, the unmanaged
Morgan Stanley Capital International(R) (MSCI) World Index, which delivered a
total return of 22.85% for the same period.

CONTENTS

<TABLE>
<S> <C>
Shareholder Letter .................................................... 1

Performance Summaries
Class I ............................................................ 6
Class II ........................................................... 10
Advisor Class ...................................................... 13

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

Financial Statements .................................................. 28

Notes to the Financial Statements ..................................... 31

Independent Auditor's Report .......................................... 34

Tax Designation ....................................................... 35
</TABLE>

[FUND CATEGORY GRAPH]

<PAGE>
[GEOGRAPHIC DISTRIBUTION CHART]

Europe was our largest geographic exposure during the reporting period. Most
European stock markets appreciated as government efforts to meet standards for
membership in the European Monetary Union contributed to lower interest rates,
and privatization and restructuring helped many European companies generate
healthy earnings. During the fiscal year, our holdings of Tiszai Vegyi Kombinat
RT(*) (Hungary) rose substantially in value, and we realized profits by
liquidating our position in Koninklijke Ahrend NV (Netherlands) and by selling
some of our shares of Adecco SA (Switzerland). We purchased stock in Weir Group
Plc., a leading U.K. manufacturer of engineering products, because we felt this
company offers exciting prospects for growth.

In the U.S., investors continued to pour money into stocks, despite Alan
Greenspan's December 1996 warning about "irrational exuberance." Although a
0.25% increase in the federal funds rate by the Federal Reserve Board in March
1997 sent share prices skidding, inflation remained benign, the economy grew
moderately, and the market recovered. In July, Greenspan distanced himself from
his December remarks as he commented on the remarkable productivity improvements
achieved by U.S. corporations and the lack of inflationary pressures in the
economy. By the end of the reporting period, the unmanaged Dow Jones(R)
Industrial Average was up 38.6% from its level at the beginning of the
period.(1) Rising stock prices of Quantum Corp., Gencorp Inc., Alex Brown Inc.,
and Airborne Freight Corp. provided solid gains for the Fund. However,
identifying investment bargains in the U.S. became increasingly difficult for
us, and our domestic exposure declined from 22.5% of total net assets on August
31, 1996, to 21.7% on August 31, 1997.

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

(1.) Price appreciation includes reinvested dividends. Dow Jones Industrial
Average's total return is calculated by Wilshire Associates, Inc.

<PAGE>
During the 12 months under review, strong corporate profits, improved economic
fundamentals, and renewed interest from foreign investors contributed to the
significant advance of many Latin American equity markets. The
telecommunications industry generally performed well, benefiting our positions
in Telebras-Telecomunicacoes Brasileiras SA and Telmex-Telefonos de Mexico SA.
In our opinion, demand for telecommunication services should continue to grow,
and deregulation of Brazil's telephone industry could position Telebras for
further growth potential.

Asian equity markets posted mixed results for the reporting period. Hong Kong's
market, buoyed by investor optimism concerning the colony's handover to China,
appreciated 30.1%, and our holdings of Wing Hang Bank and the Hung Hing Printing
Group Ltd. rose in value.(2) However, we continued to limit our exposure to
Japan, whose stock market fell 18% in U.S. dollar terms during the fiscal
year.(3) Based on standard measures such as price/earnings ratios, we believe
that Japanese stocks remain among the world's most expensive, and we do not
anticipate increasing our weighting there unless valuations fall substantially,
or other circumstances change.

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

TOP 10 HOLDINGS
8/31/97

<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ----------------------------------------------------------------------------------
<S> <C>
News Corporation Ltd. Broadcasting & Publishing, Australia 1.7%

Gesa-Gas Y Electridad SA Utilities - Electrical & Gas, Spain 1.1%

Conseco Inc. Insurance, U.S. 1.1%

Internatio-Mueller NV Health & Personal Care, Netherlands 1.0%

Fairfax Financial Holdings Ltd. Insurance, Canada 1.0%

Weir Group Plc. Industrial Components, United Kingdom 1.0%

Hollandsche Beton Groep NV Construction & Housing, Netherlands 1.0%

Wing Hang Bank Banking, Hong Kong 0.9%

Banco de Andalucia Banking, Spain 0.9%

Yizheng Chemical Fibre Co. Ltd., H Textiles & Apparel, China 0.9%
</TABLE>

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

(2.) Price appreciation is measured in U.S. dollars, and includes reinvested
dividends.

(3.) Price depreciation includes reinvested dividends.

<PAGE>
TOP 10 INDUSTRIES
8/31/97

<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------------------------------------
<S> <C>
Food & Household Products 5.9%

Banking 5.5%

Transportation 5.4%

Insurance 5.1%

Metals & Mining 5.0%

Merchandising 4.7%

Health & Personal Care 4.5%

Forest Products & Paper 4.1%

Textile & Apparel 3.8%

Construction & Housing 3.7%
</TABLE>

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.

It is important to remember that there are special risks associated with foreign
investments in smaller companies, which are heightened in emerging markets.
These include political, social and economic uncertainties, price volatility,
illiquidity, currency fluctuation and limited product lines, markets, or
financial and management resources. In addition, emerging markets are relatively
small and less liquid. Although the short-term price volatility of smaller
companies and emerging markets can be disconcerting, declines of as much as 40%
to 50% are not unusual in emerging markets. For example, Hong Kong's equity
market has increased 1,089% in the last 15 years, but has suffered five
quarterly declines of more than 20% during that time.(4) These special risks and
other considerations are discussed in the Fund's prospectus.

Looking forward, we remain optimistic about the long-term potential of global
equity markets, but are concerned with short-term stock valuations. Our team of
analysts will continue to scour the globe looking for out-of-favor securities
trading at depressed levels relative to long-term "normalized" earnings. To us,
normalized earnings represent what a company could earn in the middle of a
typical economic cycle, and their calculation requires us to estimate earnings
and cash flow for the next five years. We then purchase stocks that we consider
undervalued and on average hold them for five years. In our opinion, this
approach should produce attractive returns over the long term.

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

<PAGE>
We appreciate your support, welcome your comments, and look forward to serving
you in the future.

Sincerely,

/s/ Peter A. Nori
Peter A. Nori, CFA
Portfolio Manager
Templeton Global Smaller Companies Fund, Inc.

The lead portfolio manager of the Fund since June 1997 is Peter A. Nori. Mr.
Nori is a vice president of Templeton Investment Counsel, Inc. He holds a BS in
finance and an MBA with an emphasis in finance from the University of San
Francisco. He is a Chartered Financial Analyst and a member of the Association
for Investment Management and Research. Mr. Nori completed Franklin's management
training program before moving into portfolio research in 1990 as an equity
analyst and co-portfolio manager of the Franklin Convertible Securities Fund. He
joined the Templeton organization in 1994. As a portfolio manager and research
analyst, Mr. Nori currently manages several separate accounts and a variable
annuity product. He has global research responsibilities for the steel and data
processing industries, and country coverage of Austria.

Simon Rudolph exercises secondary portfolio management responsibilities for the
Fund. Mr. Rudolph is a vice president of Templeton Investment Counsel, Inc. He
holds a BA in economic history from Durham University in England, and is a
Chartered Accountant and a member of the Institute of Chartered Accountants of
England and Wales. Mr. Rudolph has been a securities analyst since 1986. Before
joining the Franklin Templeton organization in 1997, he was an executive
director with Morgan Stanley and was responsible for analysis of continental
European insurance companies. Currently, Mr. Rudolph has research
responsibilities for the shipping industry, small-cap Asian companies and
country coverage of India.

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

<TABLE>
<CAPTION>
% OF TOTAL
COUNTRY NET ASSETS
- ----------------------------------------------------------------
<S> <C>
United States 21.7%

Hong Kong 9.9%

Netherlands 7.0%

United Kingdom 5.9%

Spain 4.6%

Switzerland 4.0%

Sweden 3.8%

Canada 3.7%

China 3.5%

Australia 3.2%
</TABLE>

*Does not include short-term obligations and other net assets. See portfolio
holdings beginning on page 20.

<PAGE>
PERFORMANCE SUMMARY

CLASS I

Templeton Global Smaller Companies Fund - Class I produced a cumulative total
return of 24.20% 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 9, the Fund delivered a cumulative total return of
more than 173% for the 10-year period ended August 31, 1997.

The price of the Fund's shares increased 98 cents ($0.98), from $8.55 on August
31, 1996, to $9.53 on August 31, 1997. During this time, shareholders received
distributions of 12.5 cents ($0.125) per share in dividend income and 79 cents
($0.79) per share in capital gains, of which 78 cents ($0.78) represented
long-term gains and 1 cent ($0.01) 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 page 8 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) (MSCI) World Index,

Past performance is not predictive of future results.

<PAGE>
which includes approximately 1,500 companies representing the stock markets of
22 countries, including the U.S., Canada, the United Kingdom, 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)

___ Templeton Global ..... MSCI World Index** ----- Consumer
Smaller Companies Price Index***
Fund*

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).

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 (6/1/81)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) 24.20% 108.60% 173.57% 886.27%
Average Annual Total Return(2) 17.08% 14.48% 9.93% 14.71%
Value of $10,000 Investment(3) $ 11,708 $ 19,660 $ 25,784 $ 92,940

8/31/93 8/31/94 8/31/95 8/31/96 8/31/97
- -------------------------------------------------------------------------------------------------------------------
One-Year Total Return(4) 22.71% 12.22% 9.20% 11.69% 24.20%
</TABLE>

1. Cumulative total return represents the change in value of an investment over
the indicated periods 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 indicated periods 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 indicated 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 Global Smaller Companies Fund - Class II produced a cumulative total
return of 23.42% 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 95 cents ($0.95), from $8.47 on August
31, 1996, to $9.42 on August 31, 1997. During this time, shareholders received
distributions of 8.25 cents ($0.0825) per share in dividend income and 79 cents
($0.79) per share in capital gains, of which 78 cents ($0.78) represented
long-term gains and 1 cent ($0.01) 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) (MSCI) World Index, which includes approximately 1,500
companies representing the stock markets of 22 countries, including the U.S.,
Canada, the United Kingdom, 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

Past performance is not predictive of future results.

<PAGE>
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.

<TABLE>
<CAPTION>
TEMPLETON GLOBAL MSCI CPI
SMALLER COMPANIES WORLD
FUND - ADVISOR CLASS INDEX

<S> <C> <C> <C>
8/87 $10,000 $10,000 $10,000
9/87 $ 9,771 $ 9,827 $10,049
10/87 $ 7,152 $ 8,160 $10,075
11/87 $ 6,841 $ 7,964 $10,089
12/87 $ 7,188 $ 8,310 $10,088
1/88 $ 7,624 $ 8,514 $10,113
2/88 $ 8,256 $ 9,010 $10,139
3/88 $ 8,495 $ 9,284 $10,183
4/88 $ 8,559 $ 9,403 $10,235
5/88 $ 8,416 $ 9,217 $10,271
6/88 $ 9,004 $ 9,205 $10,315
7/88 $ 9,112 $ 9,380 $10,357
8/88 $ 8,841 $ 8,867 $10,401
9/88 $ 9,160 $ 9,244 $10,472
10/88 $ 9,364 $ 9,861 $10,506
11/88 $ 9,148 $10,206 $10,516
12/88 $ 9,260 $10,300 $10,533
1/89 $ 9,704 $10,675 $10,586
2/89 $ 9,653 $10,609 $10,628
3/89 $ 9,819 $10,543 $10,689
4/89 $10,162 $10,788 $10,760
5/89 $10,530 $10,525 $10,821
6/89 $10,492 $10,408 $10,848
7/89 $11,013 $11,586 $10,874
8/89 $11,356 $11,308 $10,892
9/89 $11,267 $11,629 $10,926
10/89 $10,760 $11,243 $10,979
11/89 $10,800 $11,694 $11,004
12/89 $10,913 $12,071 $11,022
1/90 $10,232 $11,510 $11,126
2/90 $10,545 $11,018 $11,170
3/90 $10,804 $10,355 $11,213
4/90 $10,545 $10,207 $11,248
5/90 $11,322 $11,284 $11,266
6/90 $11,308 $11,205 $11,335
7/90 $11,145 $11,309 $11,388
8/90 $ 9,823 $10,253 $11,484
9/90 $ 8,897 $ 9,173 $11,562
10/90 $ 8,698 $10,032 $11,641
11/90 $ 8,935 $ 9,869 $11,667
12/90 $ 9,203 $10,078 $11,710
1/91 $ 9,864 $10,448 $11,781
2/91 $10,893 $11,417 $11,798
3/91 $11,431 $11,082 $11,816
4/91 $11,569 $11,171 $11,833
5/91 $12,030 $11,426 $11,867
6/91 $11,677 $10,722 $11,904
7/91 $12,214 $11,230 $11,921
8/91 $12,445 $11,197 $11,956
9/91 $12,414 $11,492 $12,009
10/91 $12,410 $11,681 $12,026
11/91 $12,113 $11,174 $12,061
12/91 $12,840 $11,989 $12,070
1/92 $13,369 $11,769 $12,087
2/92 $13,711 $11,568 $12,131
3/92 $13,284 $11,025 $12,192
4/92 $13,472 $11,180 $12,210
5/92 $13,881 $11,627 $12,227
6/92 $13,574 $11,239 $12,271
7/92 $13,420 $11,270 $12,298
8/92 $13,147 $11,547 $12,332
9/92 $12,942 $11,443 $12,367
10/92 $12,889 $11,135 $12,411
11/92 $12,974 $11,337 $12,428
12/92 $13,314 $11,431 $12,420
1/93 $13,877 $11,471 $12,482
2/93 $14,159 $11,744 $12,525
3/93 $14,766 $12,428 $12,570
4/93 $14,962 $13,006 $12,604
5/93 $15,243 $13,308 $12,622
6/93 $15,048 $13,198 $12,639
7/93 $15,157 $13,472 $12,639
8/93 $16,132 $14,092 $12,674
9/93 $16,197 $13,834 $12,700
10/93 $16,763 $14,217 $12,753
11/93 $16,654 $13,415 $12,762
12/93 $17,554 $14,074 $12,761
1/94 $18,499 $15,005 $12,797
2/94 $18,169 $14,813 $12,841
3/94 $17,532 $14,177 $12,885
4/94 $17,686 $14,617 $12,903
5/94 $17,620 $14,658 $12,911
6/94 $16,895 $14,619 $12,955
7/94 $17,444 $14,900 $12,989
8/94 $18,103 $15,351 $13,042
9/94 $17,927 $14,951 $13,077
10/94 $17,743 $15,378 $13,086
11/94 $16,944 $14,715 $13,104
12/94 $16,748 $14,860 $13,104
1/95 $16,298 $14,639 $13,155
2/95 $16,636 $14,856 $13,208
3/95 $16,996 $15,575 $13,252
4/95 $17,740 $16,120 $13,296
5/95 $18,281 $16,261 $13,322
6/95 $18,777 $16,259 $13,348
7/95 $19,701 $17,076 $13,348
8/95 $19,769 $16,699 $13,384
9/95 $20,017 $17,189 $13,409
10/95 $19,331 $16,921 $13,454
11/95 $19,478 $17,512 $13,453
12/95 $19,705 $18,028 $13,444
1/96 $20,247 $18,356 $13,523
2/96 $20,841 $18,471 $13,567
3/96 $21,151 $18,782 $13,637
4/96 $21,667 $19,227 $13,689
5/96 $22,081 $19,247 $13,715
6/96 $22,235 $19,348 $13,724
7/96 $21,332 $18,668 $13,750
8/96 $22,081 $18,887 $13,777
9/96 $22,442 $19,629 $13,821
10/96 $22,764 $19,770 $13,864
11/96 $23,403 $20,881 $13,891
12/96 $24,057 $20,551 $13,891
1/97 $24,517 $20,801 $13,935
2/97 $24,776 $21,044 $13,976
3/97 $24,661 $20,632 $14,018
4/97 $24,632 $21,309 $14,032
5/97 $25,812 $22,629 $14,018
6/97 $26,819 $23,760 $14,032
7/97 $27,567 $24,859 $14,046
8/97 $27,481 $23,200 $14,074

TOTAL RETURN: 174.81%

NOTE - All currencies are in US Dollars
</TABLE>

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Annual Total Return**** 21.13% 19.10%
</TABLE>

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).

****Please see table on page 12.

Past performance is not predictive of future results.

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

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (5/1/95)
- -----------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 23.42% 51.96%
Average Annual Total Return(2) 21.13% 19.10%
Value of $10,000 Investment(3) $12,113 $15,044
</TABLE>

(1.) Cumulative total return represents the change in value of an investment
over the indicated periods 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 periods indicated and include all sales charges.

Past performance is not predictive of future results.

<PAGE>
ADVISOR CLASS

Templeton Global Smaller Companies Fund - Advisor Class produced a cumulative
total return of 14.65% for the period from January 2, 1997 (commencement of
sales), through August 31, 1997. The price of the Fund's shares increased $1.22,
from $8.33 to $9.55 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) (MSCI) World 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 World Index
includes approximately 1,500 companies representing the stock markets of 22
countries, including the U.S., Canada, the United Kingdom, 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)

<TABLE>
<CAPTION>
TEMPLETON GLOBAL MSCI CPI
SMALLER COMPANIES WORLD
FUND - CLASS II INDEX

<S> <C> <C> <C>
5/1/95 $ 9,899 $10,000 $10,000
5/95 $10,202 $10,088 $10,020
6/95 $10,479 $10,086 $10,040
7/95 $10,982 $10,593 $10,039
8/95 $11,020 $10,359 $10,067
9/95 $11,146 $10,663 $10,086
10/95 $10,747 $10,497 $10,119
11/95 $10,829 $10,863 $10,118
12/95 $10,936 $11,183 $10,111
1/96 $11,238 $11,387 $10,171
2/96 $11,570 $11,458 $10,204
3/96 $11,728 $11,651 $10,256
4/96 $12,002 $11,927 $10,296
5/96 $12,232 $11,940 $10,316
6/96 $12,319 $12,002 $10,322
7/96 $11,800 $11,581 $10,342
8/96 $12,203 $11,716 $10,362
9/96 $12,405 $12,177 $10,395
10/96 $12,565 $12,264 $10,428
11/96 $12,920 $12,953 $10,448
12/96 $13,271 $12,748 $10,448
1/97 $13,510 $12,904 $10,480
2/97 $13,654 $13,054 $10,512
3/97 $13,558 $12,799 $10,554
4/97 $13,542 $13,219 $10,554
5/97 $14,166 $14,038 $10,543
6/97 $14,726 $14,739 $10,554
7/97 $15,109 $15,421 $10,565
8/97 $15,061 $14,392 $10,586

TOTAL RETURN: 50.61%

NOTE - Includes sales charge
NOTE - All currencies are in US Dollars
</TABLE>

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>
<CAPTION>
SINCE
INCEPTION
OF THE FUND
1-YEAR 5-YEAR 10-YEAR (6/1/81)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) 24.46% 109.03% 174.81% 888.34%
Average Annual Total Return(1) 24.46% 15.89% 10.64% 15.14%
Value of $10,000 Investment(2) $ 12,446 $ 20,903 $ 27,481 $ 98,834
8/31/93 8/31/94 8/31/95 8/31/96 8/31/97
- -------------------------------------------------------------------------------------------------------------------
One-Year Total Return(3) 22.71% 12.22% 9.20% 11.69% 24.46%
</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 14.65%.

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

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

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

Past performance is not predictive of future results.

<PAGE>
TEMPLETON GLOBAL SMALLER
COMPANIES FUND

CLASS I

If you had invested $10,000 in Templeton Global Smaller Companies Fund - Class I
at inception, it would be worth more than $92,000 today. The chart below
illustrates the cumulative total return of a hypothetical $10,000 investment in
the Fund on June 1, 1981 (inception), with income dividends and capital gains
reinvested through August 31, 1997.*

6/ 1/81 $ 9,423 $ 0 $ 0 $ 9,423
12/31/81 $ 9,152 $ 201 $ 9,352 $ 4 $ 9,156 $ 9,356
12/31/82 $11,507 $ 706 $12,214 $ 506 $12,013 $12,720
12/30/83 $14,065 $ 1,266 $15,331 $ 2,342 $16,407 $17,674
12/31/84 $13,015 $ 1,588 $14,603 $ 3,143 $16,157 $17,746
12/31/85 $15,317 $ 2,405 $17,722 $ 5,464 $20,781 $23,186
12/31/86 $16,808 $ 3,341 $20,149 $ 7,413 $24,221 $27,562
12/31/87 $13,456 $ 3,450 $16,905 $ 7,457 $20,912 $24,362
12/30/88 $15,012 $ 4,681 $19,693 $11,688 $26,701 $31,381
12/29/89 $16,495 $ 6,039 $22,534 $14,451 $30,946 $36,984
12/31/90 $12,335 $ 5,325 $17,660 $13,529 $25,865 $31,190
12/31/91 $15,486 $ 7,503 $22,989 $20,526 $36,012 $43,515
12/31/92 $12,644 $ 7,076 $19,720 $25,400 $38,044 $45,120
12/31/93 $16,454 $ 9,750 $26,204 $33,286 $49,740 $59,490
12/30/94 $15,301 $ 9,825 $25,125 $31,636 $46,937 $56,761
12/29/95 $15,713 $11,015 $26,727 $40,052 $55,765 $66,780
12/31/96 $17,216 $13,202 $30,417 $51,112 $68,328 $81,529
8/31/97 $19,625 $15,049 $34,674 $58,265 $77,890 $92,940

*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 GLOBAL SMALLER COMPANIES FUND, INC.
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............ $8.55 $8.77 $8.24 $7.44 $7.70
--------------------------------------------------------------------------
Income from investment operations:
Net investment income........................ .13 .16 .11 .09 .10
Net realized and unrealized gains............ 1.77 .72 .62 .81 1.23
--------------------------------------------------------------------------
Total from investment operations.............. 1.90 .88 .73 .90 1.33
--------------------------------------------------------------------------
Less distributions:
Dividends from net investment income......... (.13) (.12) (.11) (.07) (.15)
Distributions from net realized gains........ (.79) (.98) (.09) (.03) (1.41)
In excess of net realized gains.............. -- -- -- (.03)
--------------------------------------------------------------------------
Total distributions........................... (.92) (1.10) (.20) (.10) (1.59)
--------------------------------------------------------------------------
Net asset value, end of year.................. $9.53 $8.55 $8.77 $8.24 $7.44
==========================================================================
Total return*................................. 24.20% 11.69% 9.20% 12.22% 22.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)............... $1,881,547 $1,544,214 $1,447,155 $1,409,494 $1,129,848
Ratios to average net assets:
Expenses..................................... 1.30% 1.27% 1.36% 1.36% 1.29%
Net investment income........................ 1.43% 1.93% 1.32% 1.17% 1.70%
Portfolio turnover rate....................... 25.60% 32.71% 18.79% 28.06% 28.73%
Average commission rate paid**................ $.0009 $.0068 -- -- --
</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.

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
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............................................ $8.47 $8.75 $7.87
---------------------------------
Income from investment operations:
Net investment income........................................................ .07 .13 --
Net realized and unrealized gains............................................ 1.75 .67 .88
---------------------------------
Total from investment operations.............................................. 1.82 .80 .88
---------------------------------
Less distributions:
Dividends from net investment income......................................... (.08) (.10) --
Distributions from net realized gains........................................ (.79) (.98) --
---------------------------------
Total distributions........................................................... (.87) (1.08) --
---------------------------------
Net asset value, end of year.................................................. $9.42 $8.47 $8.75
=================================
Total return*................................................................. 23.42% 10.74% 11.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)............................................... $43,071 $15,483 $2,569
Ratios to average net assets:
Expenses..................................................................... 2.05% 2.07% 2.11%***
Net investment income........................................................ .75% 1.23% .16%***
Portfolio turnover rate....................................................... 25.60% 32.71% 18.79%
Average commission rate paid**................................................ $.0009 $.0068 --
</TABLE>

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

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
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............................................................. $8.33
------------
Income from investment operations:
Net investment income........................................................................... .10
Net realized and unrealized gain................................................................ 1.12
-----------
Total from investment operations................................................................. 1.22
-----------
Net asset value, end of period................................................................... $9.55
===========
Total return*.................................................................................... 14.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)................................................................ $ 7,895
Ratios to average net assets:
Expenses........................................................................................ 1.05%***
Net investment income........................................................................... 2.18%***
Portfolio turnover rate.......................................................................... 25.60%
Average commission rate paid**................................................................... $ .0009
</TABLE>

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

See notes to financial statements.

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, RIGHTS AND WARRANTS 85.9%
AEROSPACE & MILITARY TECHNICAL SYSTEMS 0.7%
*Banner Aerospace Inc....................................... United States 325,000 $ 3,514,062
Celsius AB, B............................................... Sweden 450,000 8,397,441
Hong Kong Aircraft Engineering Co. Ltd...................... Hong Kong 709,800 2,335,622
--------------
14,247,125
--------------
APPLIANCES & HOUSEHOLD DURABLES 2.0%
Chofu Seisaku Co. Ltd....................................... Japan 78,500 1,201,696
Fisher & Paykel Ltd......................................... New Zealand 2,267,709 7,605,824
Guangdong Kelon Electrical Hldgs Ltd., H, 144A.............. China 11,152,000 13,886,935
*Mohawk Industries.......................................... United States 200,000 5,175,000
+Rival Co................................................... United States 555,000 10,198,125
--------------
38,067,580
--------------
AUTOMOBILES 1.3%
Bertrand Faure.............................................. France 19,250 938,066
Catena, A................................................... Sweden 320,000 4,549,725
Ciadea SA................................................... Argentina 441,960 1,136,724
Jardine International Motor Holdings Ltd.................... Hong Kong 2,057,000 2,335,841
Qing Ling Motors Co. Ltd., H................................ China 10,525,000 5,941,916
Tofas Turk Otomobil Fabrikasi AS, GDR....................... Turkey 25,226,775 6,811,229
Weifu Fuel Injection Co. Ltd................................ China 4,745,850 2,755,833
--------------
24,469,334
--------------
BANKING 5.1%
Banco de Andalucia.......................................... Spain 110,000 17,472,117
Banco de Valencia SA........................................ Spain 101,828 2,131,159
Banco Pastor SA............................................. Spain 51,000 3,580,239
BPI Socieda de Gestora de Participacoes Socias SA........... Portugal 301,230 5,922,572
Commercial Intl Bank Ltd., GDR, 144A........................ Egypt 450,000 11,250,000
Fokus Bank AS............................................... Norway 774,300 6,057,551
Fokus Bank AS, 144A......................................... Norway 223,400 1,747,717
*Golden State Bancorp Inc................................... United States 120,000 3,465,000
Korea Long Term Credit Bank................................. South Korea 191,980 2,194,597
National Bank of Canada..................................... Canada 893,200 11,516,030
Pacific Century Financial Corp.............................. United States 68,067 3,356,554
Singapore Finance Ltd., fgn................................. Singapore 1,036,000 1,302,283
Union Bank of Norway, Primary Capital Cert.................. Norway 314,000 9,490,084
Wing Hang Bank.............................................. Hong Kong 4,200,000 17,885,025
--------------
97,370,928
--------------
BEVERAGES & TOBACCO 0.5%
Sinocan Holdings Ltd........................................ Hong Kong 21,764,000 8,987,006
--------------
BROADCASTING & PUBLISHING 3.0%
Cordiant Plc................................................ United Kingdom 1,096,480 2,096,690
Hollinger International Inc., A............................. United States 180,000 2,317,500
Marieberg Tidnings AB, A.................................... Sweden 370,700 9,552,911
News Corp. Ltd.............................................. Australia 8,332,115 31,795,040
Sing Tao Holdings Ltd....................................... Hong Kong 1,881,140 1,001,317
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, RIGHTS AND WARRANTS (CONT.)
BROADCASTING & PUBLISHING (CONT.)
South China Morning Post Holdings Ltd....................... Hong Kong 12,150,000 $ 9,799,019
+Wace Group Plc............................................. United Kingdom 4,831,400 2,113,919
--------------
58,676,396
--------------
BUILDING MATERIALS & COMPONENTS 3.4%
Anglian Group Plc........................................... United Kingdom 283,730 1,080,500
Congoleum Corp., A.......................................... United States 320,000 3,680,000
Cristaleria Espanola SA..................................... Spain 82,550 6,417,908
Gujarat Ambuja Cements Ltd.................................. India 194,000 1,619,997
Hepworth Plc................................................ United Kingdom 1,128,400 3,776,023
Keumkang Co. Ltd............................................ South Korea 29,300 1,480,421
*Mirgor SA Comercial Industrial Financiera Inmobi Sponsored
ADR C..................................................... Argentina 359,000 1,068,025
*Mirgor SA Comercial Industrial Financiera Inmobi Sponsored
ADR C, 144A............................................... Argentina 431,000 1,282,225
Pioneer International Ltd................................... Australia 3,000,000 10,102,347
Sarna Kunststoff Holding AG................................. Switzerland 6,570 7,571,006
Schuttersveld NV............................................ Netherlands 220,694 5,342,261
+Shelter Components Corp.................................... United States 510,000 6,885,000
Siam City Cement, fgn....................................... Thailand 1,160,600 3,869,798
Suez Cement Co., GDR, 144A.................................. Egypt 188,000 3,905,700
Uralita SA.................................................. Spain 814,000 8,144,272
--------------
66,225,483
--------------
BUSINESS & PUBLIC SERVICES 3.2%
Adecco SA................................................... Switzerland 12,000 4,089,427
*Healthcare Services Group Inc.............................. United States 365,100 4,951,669
*ISS International Service System AS,B...................... Denmark 331,500 9,786,725
Kardex AG, br............................................... Switzerland 940 264,646
Koninklijke Ahrend NV....................................... Netherlands 340,720 11,147,788
Lex Service Plc............................................. United Kingdom 1,681,000 12,067,656
*Magellan Health Services Inc............................... United States 250,000 7,625,000
*Novacare Inc............................................... United States 296,300 4,463,019
Scribona AB, A.............................................. Sweden 225,400 2,646,749
Scribona AB, B.............................................. Sweden 480,400 5,641,074
--------------
62,683,753
--------------
CHEMICALS 2.4%
Crompton & Knowles Corp..................................... United States 163,383 4,125,421
Energia e Industrias Aragonesas Eia S....................... Spain 1,641,000 11,196,956
European Vinyls Corp. EVC International NV.................. Netherlands 42,381 969,602
Gurit Heberlein AG Wattwil SG, br........................... Switzerland 4,000 13,438,602
Tessenderlo Chemie.......................................... Belgium 150,000 7,205,636
Tiszai Vegyi Kombinat RT, GDR, 144A......................... Hungary 439,655 8,529,307
--------------
45,465,524
--------------
CONSTRUCTION & HOUSING 3.5%
Dragados y Construcciones SA................................ Spain 208,000 3,896,077
Grupo Acciona SA............................................ Spain 23,051 2,896,120
Halla Engineering & Construction Corporation................ South Korea 132,200 4,365,163
*Halla Engineering & Construction Corporation, rts.......... South Korea 31,752 288,495
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, RIGHTS AND WARRANTS (CONT.)
CONSTRUCTION & HOUSING (CONT.)
Hollandsche Beton Groep NV.................................. Netherlands 850,920 $ 18,839,557
Kaufman & Broad Home Corp................................... United States 625,000 12,500,000
Kumagai Gumi Hong Kong Ltd.................................. Hong Kong 6,889,000 12,934,376
*Kumagai Gumi Hong Kong Ltd., wts........................... Hong Kong 155,200 154,209
*+Schuler Homes Inc......................................... United States 1,032,000 6,063,000
*Sociedade Construcoes Soares da Costa SA................... Portugal 115,000 892,106
Wai Kee Holdings Ltd........................................ Hong Kong 17,848,000 4,721,388
*Wai Kee Holdings Ltd., wts................................. Hong Kong 2,677,200 345,467
--------------
67,895,958
--------------
DATA PROCESSING & REPRODUCTION 1.2%
Axime SA.................................................... France 87,942 9,164,546
*Quantum Corp............................................... United States 410,000 14,375,625
--------------
23,540,171
--------------
ELECTRICAL & ELECTRONICS 0.8%
Dongfang Electrical Machinery Co. Ltd., H................... China 4,648,000 2,189,199
GP Batteries International Ltd.............................. Singapore 1,346,000 3,651,075
*GP Batteries International Ltd., wts....................... Singapore 336,500 320,582
+Techtronic Industries Co. Ltd.............................. Hong Kong 29,104,621 10,046,437
--------------
16,207,293
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.0%
Draka Holding NV............................................ Netherlands 333,485 14,061,336
Swisslog Holding AG......................................... Switzerland 132,500 9,793,381
Twentsche Kabel Holdings NV................................. Netherlands 102,525 5,538,620
VTech Holdings Ltd.......................................... Hong Kong 4,533,000 8,540,138
--------------
37,933,475
--------------
ENERGY SOURCES 0.1%
Transportadora de Gas del Sur SA, ADR B..................... Argentina 119,104 1,399,472
--------------
FINANCIAL SERVICES 1.9%
A.G. Edwards Inc............................................ United States 83,900 3,335,025
Alex Brown Inc.............................................. United States 142,950 12,106,078
Dah Sing Financial Holdings Ltd............................. Hong Kong 1,766,000 7,383,496
London Pacific Group Ltd.................................... United Kingdom 292,952 989,815
Manhattan Card Co. Ltd...................................... Hong Kong 20,130,639 7,403,358
Om Gruppen AB............................................... Sweden 139,000 3,881,992
Peregrine Investments Holdings Ltd.......................... Hong Kong 1,071,500 1,991,045
--------------
37,090,809
--------------
FOOD & HOUSEHOLD PRODUCTS 5.9%
Albert Fisher Group Plc..................................... United Kingdom 2,508,924 1,565,308
*Alicorp SA, 144A........................................... Peru 2,212,000 2,875,975
Bombril SA.................................................. Brazil 1,534,876,400 13,499,600
CP Pokphand Co. Ltd......................................... Hong Kong 23,241,100 7,572,589
Cafe de Coral Holdings Ltd.................................. Hong Kong 11,536,885 3,051,889
Chareon Pokphand Feedmill Public Co. Ltd., fgn.............. Thailand 31,300 71,407
Hazlewood Foods Plc......................................... United Kingdom 6,452,423 14,115,884
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, RIGHTS AND WARRANTS (CONT.)
FOOD & HOUSEHOLD PRODUCTS (CONT.)
Herdez SA de CV, new........................................ Mexico 5,795,400 $ 4,170,424
*JP Foodservice Inc......................................... United States 511,500 15,568,781
Lindt & Spruengli Chocolate Works Ltd., partn. ctf.......... Switzerland 4,380 7,269,343
McBride Plc................................................. United Kingdom 3,800,000 9,113,744
National Foods Ltd.......................................... Australia 8,172,661 11,537,196
Oshawa Group Ltd. (The)..................................... Canada 844,700 13,020,189
Panamerican Beverages Inc., A............................... Mexico 234,400 7,046,650
Perkins Foods Plc........................................... United Kingdom 473,500 713,599
PT Japfa Comfeed Indonesia TBK.............................. Indonesia 2,685,000 1,041,400
Vetropack AG................................................ Switzerland 7,130 1,269,578
--------------
113,503,556
--------------
FOREST PRODUCTS & PAPER 4.1%
Boise Cascade Corp.......................................... United States 122,615 4,850,956
Cartiere Burgo SpA.......................................... Italy 1,045,835 5,993,210
+Crown-Van Gelder Papier SA................................. Netherlands 74,720 6,249,643
*Empaques Ponderosa SA de CV, B............................. Mexico 4,018,800 3,046,893
Fletcher Challenge Ltd. Forestry Division................... New Zealand 4,211,532 4,950,597
Hung Hing Printing Group Ltd................................ Hong Kong 18,295,508 13,693,006
Mayr-Melnhof Karton AG...................................... Austria 61,800 3,557,010
Metsa Serla OY, B........................................... Finland 1,185,460 9,802,951
Munksjo AB.................................................. Sweden 1,300,000 14,027,471
Norske Skogindustrier AS, A................................. Norway 11,000 407,478
Primex Forest Products Ltd.................................. Canada 300,000 1,739,475
*Shorewood Packaging Corp................................... United States 495,800 10,721,675
--------------
79,040,365
--------------
HEALTH & PERSONAL CARE 4.5%
Apothekers Cooperatie OPG VA, partn. ctf.................... Netherlands 180,000 5,756,458
Esaote Biomedica SpA, ADR, 144A............................. Italy 34,975 862,761
Gedeon Richter Ltd., GDR, 144A.............................. Hungary 57,480 5,483,592
*Haemonetics Corp........................................... United States 254,900 4,651,925
Internatio-Mueller NV....................................... Netherlands 628,092 20,117,485
Medeva Plc.................................................. United Kingdom 3,237,911 11,543,542
Pacific Chemical Co. Ltd.................................... South Korea 110,000 2,718,006
*Paragon Trade Brands Inc................................... United States 400,000 6,375,000
*Physician Corp. of America................................. United States 664,000 4,523,500
*Playtex Products Inc....................................... United States 1,047,800 10,281,538
Pliva DD, GDR, 144A......................................... Croatia 233,185 3,888,360
*Quorum Health Group Inc.................................... United States 117,000 3,985,313
*Sunrise Medical Inc........................................ United States 384,100 5,689,481
Swank International Manufacturing Co. Ltd................... Hong Kong 14,994,000 1,625,261
--------------
87,502,222
--------------
INDUSTRIAL COMPONENTS 3.3%
Charter Plc................................................. United Kingdom 189,913 2,366,642
Gencorp Inc................................................. United States 641,000 17,146,750
Hoeganaes AB, B free........................................ Sweden 238,000 7,976,236
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, RIGHTS AND WARRANTS (CONT.)
INDUSTRIAL COMPONENTS (CONT.)
Otra NV..................................................... Netherlands 227,000 $ 3,227,700
Sylea SA.................................................... France 76,400 6,792,006
Walbro Corp................................................. United States 305,000 6,557,500
Weir Group Plc.............................................. United Kingdom 4,523,412 19,461,762
--------------
63,528,596
--------------
INSURANCE 5.1%
Allied Group Inc............................................ United States 331,500 14,668,875
American Bankers Insurance Group Inc........................ United States 153,615 10,138,590
Capital RE Corp............................................. United States 120,000 6,097,500
CMAC Investment Corp........................................ United States 260,000 11,992,500
Conseco Inc................................................. United States 473,460 20,358,780
Enhance Financial Services Group Inc........................ United States 145,000 6,706,250
*Fairfax Financial Holdings Ltd............................. Canada 70,000 19,613,210
London Insurance Group Inc.................................. Canada 400,000 9,680,556
--------------
99,256,261
--------------
LEISURE & TOURISM 0.7%
Kuoni Reisen Holding AG, B.................................. Switzerland 2,598 10,692,256
+Tourism Holdings Ltd....................................... New Zealand 2,340,000 2,989,823
--------------
13,682,079
--------------
MACHINERY & ENGINEERING 3.0%
Bucher Holding AG........................................... Switzerland 4,226 4,287,761
China International Marine Containers, B.................... China 2,197,853 2,722,677
Fives-Lille................................................. France 132,750 9,069,713
Heidemij NV................................................. Netherlands 275,655 2,902,345
IHC Caland NV............................................... Netherlands 118,000 6,763,592
Lucas Variety Plc., ADR..................................... United Kingdom 248,200 7,864,838
Saurer AG................................................... Switzerland 6,000 4,402,486
SIG Schweizerische Industrie-Gesell, br..................... Switzerland 4,950 14,302,033
Valmet (OY)................................................. Finland 381,600 5,511,735
--------------
57,827,180
--------------
MERCHANDISING 4.7%
David Jones Ltd............................................. Australia 2,502,120 3,642,578
De Boer Unigro.............................................. Netherlands 387,500 12,869,004
Det Danske Traelastkompagni AS.............................. Denmark 107,000 9,321,127
Giordano International Ltd.................................. Hong Kong 10,448,674 7,415,666
*Gymboree Inc............................................... United States 395,000 9,677,500
*Hechinger Co., A........................................... United States 1,362,400 2,809,950
Hudsons Bay Co.............................................. Canada 596,900 15,047,719
J.C. Penney Co. Inc......................................... United States 103,476 6,208,560
Li & Fung Ltd............................................... Hong Kong 10,017,000 10,211,536
Moebel Walther AG........................................... Germany 148,410 7,808,890
Sa des Galeries Lafayette................................... France 5,540 2,015,640
Somerfield Plc.............................................. United Kingdom 1,069,600 3,371,262
--------------
90,399,432
--------------
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, RIGHTS AND WARRANTS (CONT.)
METALS & MINING 5.0%
AK Steel Holding Corp....................................... United States 270,000 $ 12,217,500
*+Angang New Steel Company Ltd., H, 144A.................... China 46,154,000 15,484,922
Antofagasta Holdings Plc.................................... Chile 1,188,400 7,606,962
Birmingham Steel Corp....................................... United States 570,000 10,687,500
Boehler Uddeholm AG......................................... Austria 41,950 3,283,201
Boehler Uddeholm AG, 144A................................... Austria 8,120 635,509
Boehler Uddeholm AG, 144A, seasoned......................... Austria 71,200 5,572,442
Century Aluminum Co......................................... United States 214,000 3,531,000
Eramet SA................................................... France 29,011 1,399,398
Impala Platinum Holdings Ltd................................ South Africa 1,322,000 14,652,883
PT Tambang Timah (Persero), fgn............................. Indonesia 5,282,000 6,947,656
Quanex Corp................................................. United States 150,000 5,446,875
Vallourec................................................... France 154,855 9,228,789
--------------
96,694,637
--------------
MISCELLANEOUS MATERIALS & COMMODITIES 0.8%
IMC Global Inc.............................................. United States 160,000 5,630,000
Korea Chemical Co Ltd....................................... South Korea 89,580 6,884,508
Thai Glass Industries Public Co. Ltd., fgn.................. Thailand 1,089,700 2,422,264
--------------
14,936,772
--------------
MULTI-INDUSTRY 2.4%
*Amer Group Ltd., A......................................... Finland 397,000 7,660,149
DESC SA, B.................................................. Mexico 694,701 5,802,563
La Cemento Nacional CA, GDR, 144A........................... Ecuador 27,575 6,066,500
Marine Wendel............................................... France 89,189 9,132,982
Nagron Nationaal Grondbezit NV.............................. Netherlands 292,000 8,217,663
Pioneer Industries International Holdings Ltd............... Hong Kong 7,099,400 2,794,138
Saha Union Public Co. Ltd., fgn............................. Thailand 31,000 18,134
Wagon Industrial Holdings Plc............................... United Kingdom 1,827,400 7,151,584
--------------
46,843,713
--------------
REAL ESTATE 1.5%
Asean Resources Holdings Ltd................................ Hong Kong 7,393,649 2,504,462
*Catellus Development Corp.................................. United States 550,000 10,587,500
New Asia Realty and Trust Co. Ltd., A....................... Hong Kong 3,583,000 13,130,808
Tai Cheung Holdings Ltd..................................... Hong Kong 3,630,000 2,693,400
--------------
28,916,170
--------------
RECREATION & OTHER CONSUMER GOODS 0.2%
Fila Holding SpA, ADR....................................... Italy 116,700 3,566,644
--------------
TELECOMMUNICATIONS 0.8%
*Digital Telecommunications Philippines Inc................. Philippines 5,618,000 422,880
*Millicom International Cellular SA......................... Luxembourg 100,000 5,100,000
Telmex-Telefonos de Mexico SA, L............................ Mexico 4,592,972 10,541,054
--------------
16,063,934
--------------
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, RIGHTS AND WARRANTS (CONT.)
TEXTILES & APPAREL 3.0%
Daehan Synthetic Fiber Co. Ltd.............................. South Korea 4,580 $ 390,759
Fountain Set Holdings Ltd................................... Hong Kong 35,262,000 8,053,905
*Fruit of the Loom Inc., A.................................. United States 102,000 2,728,500
Gamma Holdings NV........................................... Netherlands 180,000 9,033,210
Inner Mongolia Erdos Cashmere Products, B................... China 6,200,000 4,761,600
Kellwood Co................................................. United States 271,600 9,811,550
+Tungtex (Holdings) Co. Ltd................................. Hong Kong 35,573,000 5,324,818
Yizheng Chemical Fibre Co. Ltd., H.......................... China 23,734,600 17,304,405
--------------
57,408,747
--------------
TRANSPORTATION 5.4%
Airborne Freight Corp....................................... United States 309,900 15,262,575
Anangel-American Shipholdings Ltd., ADR..................... Greece 446,800 5,249,900
*Fritz Companies............................................ United States 1,013,900 13,180,700
Helikopter Services Group ASA............................... Norway 591,700 7,517,218
IMC Holdings Ltd............................................ Hong Kong 6,654,000 3,176,953
Malaysian International Shipping Corp. Bhd., fgn............ Malaysia 1,233,333 2,530,995
*MS Carriers Inc............................................ United States 202,400 4,756,400
*OMI Corp................................................... United States 1,065,000 11,315,625
Orient Overseas International Ltd........................... Hong Kong 3,560,000 2,411,768
PT Steady Safe, fgn......................................... Indonesia 8,800,820 5,268,619
Sea Containers Ltd., A...................................... United Kingdom 461,000 10,948,750
Singapore Bus Service (1978) Ltd., fgn...................... Singapore 300,100 1,360,030
*Stena Line AB, B free...................................... Sweden 1,620,000 6,807,068
Stolt Nielsen SA............................................ Norway 200,000 4,700,000
Stolt Nielsen SA, ADR....................................... Norway 100,000 2,412,500
Tranz Rail Holdings Ltd., ADR............................... New Zealand 77,390 1,301,119
Unitor AS................................................... Norway 470,000 6,599,623
--------------
104,799,843
--------------
UTILITIES ELECTRICAL & GAS 2.3%
Central Costanera SA, ADR, 144A............................. Argentina 21,500 740,406
Electricas Reunidas de Zaragoza............................. Spain 327,869 12,476,317
Electricidad de Caracas..................................... Venezuela 3,021,410 5,112,688
Gesa-Gas y Electricidad SA.................................. Spain 331,283 20,517,724
Guangdong Electric Power Development Co Ltd, B, 144A........ China 300,000 218,337
Public Service Co. of New Mexico............................ United States 206,000 3,759,500
Shandong Huaneng Power...................................... China 160,300 1,913,581
--------------
44,738,553
--------------
WHOLESALE & INTERNATIONAL TRADE 2.1%
Bergen Brunswig Corp., A.................................... United States 262,500 11,025,000
Dahl International AB....................................... Sweden 245,000 4,618,592
Dahl International AB, 144A................................. Sweden 255,000 4,807,106
Davids Ltd.................................................. Australia 8,500,000 4,437,239
Eurodis Electron Plc........................................ United Kingdom 1,500,000 3,366,608
Sime Darby Hongkong Ltd..................................... Hong Kong 11,067,000 11,995,974
--------------
40,250,519
--------------
TOTAL COMMON STOCKS, RIGHTS AND WARRANTS (COST
$1,155,736,713)........................................... 1,659,219,530
--------------
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS 3.1%
Ballast Nedam NV, ctf., conv., pfd.......................... Netherlands 90,040 $ 4,474,312
Cia Brasileira de Petroleo Ipiranga, pfd.................... Brazil 117,495,000 1,883,795
*Empresa Nacional de Comercio Redito Participacoe, pfd...... Brazil 23,829,100 8,514,291
Electrolux Do Brasil SA, pfd................................ Brazil 1,725,760,000 2,213,526
Hollinger International Inc., conv., pfd., Pride............ United States 559,000 6,673,062
Hugo Boss AG, pfd........................................... Germany 6,000 7,975,630
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR......... United States 46,000 5,428,000
Unibanco-Uniao de Bancos Brasileiros SA, pfd................ Brazil 274,381,688 9,301,073
Weg SA, pfd................................................. Brazil 17,249,300 14,030,168
--------------
TOTAL PREFERRED STOCKS (COST $39,311,795)................... 60,493,857
--------------
PRINCIPAL
AMOUNT**
SHORT TERM OBLIGATIONS 10.8% U.S. GOVERNMENT AND GOVERNMENT
AGENCIES
Federal Farm Credit Banks, 9/29/97...................... United States $ 7,711,000 7,679,539
Federal Home Loan Mortgage Corp., 9/15/97............... United States 16,060,000 16,028,458
Federal National Mortgage Association, 11/17/97......... United States 133,100,000 132,153,597
(a)REPURCHASE AGREEMENTS
UBS Securities Inc., 5.45%, 9/2/97 (Maturity Value
$53,796,557)
Collateral: U.S. T Note, 6.00%, 9/30/98................. United States 53,764,000 53,764,000
--------------
TOTAL SHORT TERM OBLIGATIONS (COST $209,587,694)............ 209,625,594
--------------
TOTAL INVESTMENTS 99.8% (COST $1,404,636,202)............... 1,929,338,981
OTHER ASSETS, LESS LIABILITIES 0.2%......................... 3,173,524
--------------
TOTAL NET ASSETS 100.0%..................................... $1,932,512,505
==============
</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 $65,355,687.
(a)At August 31, 1997, all repurchase agreements held by the Fund had been
entered into on that date.

See notes to financial statements.

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $1,404,636,202).......................... $1,929,338,981
Cash............................................................................... 173,811
Receivables:
Investment securities sold........................................................ 3,466,165
Capital shares sold............................................................... 4,823,194
Dividends and interest............................................................ 2,967,619
--------------
Total assets................................................................... 1,940,769,770
--------------
Liabilities:
Payables:
Investment securities purchased................................................... 2,111,460
Capital shares redeemed........................................................... 3,288,663
Accrued expenses and other liabilities............................................. 2,857,142
--------------
Total liabilities.............................................................. 8,257,265
--------------
Net assets, at value.......................................................... $1,932,512,505
==============
Net assets consist of:
Undistributed net investment income................................................ $ 18,349,708
Net unrealized appreciation........................................................ 524,702,779
Accumulated net realized gain...................................................... 77,258,392
Capital shares..................................................................... 1,312,201,626
--------------
Net assets, at value.......................................................... $1,932,512,505
==============
CLASS I:
Net asset value per share ($1,881,546,506 4 197,394,010 shares outstanding)........ $ 9.53
==============
Maximum offering price per share ($9.53 4 94.25%).................................. $10.11
==============
CLASS II:
Net asset value per share ($43,071,147 4 4,573,588 shares outstanding)............. $ 9.42
==============
Maximum offering price per share ($9.42 4 99.00%).................................. $ 9.52
==============
ADVISOR CLASS:
Net asset value and offering price per share ($7,894,852 / 826,488 shares
outstanding)..................................................................... $ 9.55
==============
</TABLE>

See notes to financial statements.

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1997

<TABLE>
<S> <C> <C>
Investment income:
(net of $3,297,146 foreign taxes withheld)
Dividends.............................................................. $35,615,805
Interest............................................................... 12,010,301
-----------
Total investment income............................................ $ 47,626,106
Expenses:
Management fees (Note 3)............................................... 13,090,483
Administrative fees (Note 3)........................................... 1,884,048
Distribution Fees (Note 3)
Class I............................................................... 4,189,942
Class II.............................................................. 268,433
Transfer agent fees (Note 3)........................................... 1,782,400
Custodian fees......................................................... 849,000
Reports to shareholders................................................ 463,250
Professional fees (Note 3)............................................. 68,500
Registration and filing fees........................................... 129,575
Directors' fees and expenses........................................... 77,000
Other.................................................................. 34,683
-----------
Total expenses..................................................... 22,837,314
------------
Net investment income............................................. 24,788,792
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments........................................................... 131,957,614
Foreign currency transactions......................................... (778,877)
-----------
Net realized gain...................................................... 131,178,737
Net unrealized appreciation on investments............................. 222,212,496
------------
Net realized and unrealized gain........................................ 353,391,233
------------
Net increase in net assets resulting from operations.................... $378,180,025
============
</TABLE>

See notes to financial statements.

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
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............................................. $ 24,788,792 $ 28,543,879
Net realized gain from investments and foreign currency
transactions.................................................... 131,178,737 158,727,706
Net unrealized appreciation (depreciation) on investments......... 222,212,496 (23,274,642)
-----------------------------------
Net increase in net assets resulting from operations.......... 378,180,025 163,996,943
Distributions to shareholders from:
Net investment income
Class I.......................................................... (22,987,597) (20,150,116)
Class II......................................................... (172,517) (50,894)
Net realized gains
Class I.......................................................... (146,191,211) (164,590,927)
Class II......................................................... (1,716,515) (494,045)
Capital share transactions (Note 2)
Class I.......................................................... 134,713,084 118,750,930
Class II......................................................... 23,892,832 12,511,697
Advisor Class.................................................... 7,097,043 --
-----------------------------------
Net increase in net assets.................................... 372,815,144 109,973,588
Net assets:
Beginning of year.................................................. 1,559,697,361 1,449,723,773
-----------------------------------
End of year........................................................ $1,932,512,505 $1,559,697,361
===================================
Undistributed net investment income included in net assets:
Beginning of year.................................................. $ 18,851,474 $ 10,508,605
===================================
End of year........................................................ $ 18,349,708 $ 18,851,474
===================================
</TABLE>

See notes to financial statements.

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton Global Smaller Companies Fund, Inc. (the Fund), is registered under
the Investment Company Act of 1940 as a diversified, open-end, investment
company. The Fund seeks to achieve its objectives by investing primarily in
securities of smaller companies globally. 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
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 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.

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Notes to Financial Statements (cont.)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.

At August 31, 1997, there were 1.50 billion shares authorized ($0.20 par value)
of which 750 million, 550 million, and 200 million were designated as Class I
shares, Class II shares, and Advisor Class shares, respectively. Transactions in
the Fund's shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------
1997 1996
-----------------------------------------------------------------
CLASS I: SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold............................................ 25,217,003 $ 218,613,865 20,182,579 $ 165,480,309
Shares issued on reinvestment of distributions......... 18,115,924 148,573,941 20,586,393 160,467,664
Shares redeemed........................................ (26,636,251) (232,474,722) (25,112,503) (207,197,043)
-----------------------------------------------------------------
Net increase........................................... 16,696,676 $ 134,713,084 15,656,469 $ 118,750,930
=================================================================
</TABLE>

<TABLE>
<CAPTION>
CLASS II: SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold............................................ 3,007,827 $ 26,358,916 1,602,914 $ 13,112,922
Shares issued on reinvestment of distributions......... 214,255 1,742,190 64,332 497,295
Shares redeemed........................................ (476,380) (4,208,274) (133,035) (1,098,520)
-----------------------------------------------------------------
Net increase........................................... 2,745,702 $ 23,892,832 1,534,211 $ 12,511,697
=================================================================
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDED AUGUST 31,
1997*
--------------------------
ADVISOR CLASS: SHARES AMOUNT
- ------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold.............................................. 1,052,028 $ 9,160,119
Shares redeemed.......................................... (225,540) (2,063,076)
--------------------------
Net increase............................................. 826,488 $ 7,097,043
==========================
</TABLE>

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

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Notes to Financial Statements (cont.)

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Fund are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), 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 monthly an investment management fee to TICI of 0.75% per year of
the average daily net assets of the Fund. The Fund pays an administrative fee to
FT Services based on the Fund's average daily net assets as follows:

<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS
---------------------------------------------------------------------------
<C> <S>
0.15% $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, 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
there were no unreimbursed costs.

Distributors received net commissions from sales of Fund shares, and received
contingent deferred sales charges for the period of $375,271 and $12,143,
respectively.

During the year ended August 31, 1997 legal fees of $18,430 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 $423,324,152 and $389,073,255, respectively.

5. INCOME TAXES

At August 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $1,406,743,171 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation........... $597,965,284
Unrealized depreciation........... (75,369,474)
--------------
Net unrealized appreciation....... $522,595,810
==============
</TABLE>

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Independent Auditor's Report

THE BOARD OF DIRECTORS AND SHAREHOLDERS
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.

We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton Global Smaller Companies Fund, 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 Global Smaller Companies Fund, 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

New York, New York
September 26, 1997

<PAGE>

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Tax Designation

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $117,200,000 as a capital gain dividend for the fiscal year ended
August 31, 1997.

Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
14.86% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 1997.

<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
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>
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 a current prospectus of the
Templeton Global Smaller Companies Fund, Inc., which contains more complete
information including charges and expenses.

Investors should be aware that the value of investments made for the Fund may go
up as well as down and that the Investment Manager may make errors in selecting
securities for the Fund's portfolio. Like any investment in securities, the
Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factor. 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.

103 A97 10/97
TL103 A97 [RECYCLE LOGO] PRINTED ON RECYCLED PAPER