TEMPLETON GLOBAL SMALLER COMPANIES FUND INC, N-30D, 1998-10-22

TEMPLETON GLOBAL SMALLER COMPANIES FUND INC
N-30D, 1998-10-22

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Annual Report

August 31, 1998

[PHOTO]

Templeton Global
Smaller Companies Fund, Inc.

[FRANKLIN TEMPLETON GRAPHIC]

PAGE
[FRANKLIN TEMPLETON 50 YEAR LOGO]

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

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

[PHOTO OF PETER A. NORI]

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

PAGE

SHAREHOLDER LETTER

- --------------------------------------------------------------------------------
Your Fund's Goal: Templeton Global Smaller Companies Fund seeks to achieve
long-term capital growth by investing primarily in the equity securities of
smaller companies of any nation.
- --------------------------------------------------------------------------------

Dear Shareholder:

This annual report of Templeton Global Smaller Companies Fund covers the fiscal
year ended August 31, 1998. The period proved to be challenging for many
investors in small cap stocks. Although U.S. and major European equity markets
reached new highs, the lion's share of gains came from liquid, large cap stocks,
which were viewed as a safe haven by investors concerned about the economic
slump in Japan and the rest of Asia. By the end of the reporting period,
however, even these stocks suffered from global market declines, as the Morgan
Stanley Capital International(R) (MSCI) World Index fell 18.01% from its peak
on July 20.(1) Within this environment, Templeton Global Smaller Companies
Fund -Class I delivered a 12-month cumulative total return of -21.64%, as
discussed in the Performance Summary on page 6.

CONTENTS

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

Performance Summaries
Class I ......................................... 6
Class II ........................................ 10
Advisor Class ................................... 14

Financial Highlights &
Statement of Investments ........................... 19

Financial Statements ............................... 30

Notes to the Financial
Statements ......................................... 33

Independent Auditor's Report ....................... 37

Tax Designation .................................... 38
</TABLE>

[FUND CATEGORY CHART]

(1). The MSCI World Index includes approximately 1,500 companies representing
the stock markets of 23 countries, including the U.S., Canada, the United
Kingdom, and Japan. The index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index.

You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 22 of
this report.

PAGE

[PIE CHART OF GEOGRAPHIC DISTRIBUTION]

<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
8/31/98

<S> <C>
European Stocks .................... 49.3%
North American Stocks .............. 22.7%
Asian Stocks ....................... 8.9%
Latin American Stocks .............. 4.8%
Australian/New Zealand Stocks ...... 4.0%
Middle-Eastern & African Stocks .... 2.4%
Short-Term Investments &
Other Net Assets ................. 7.9%
</TABLE>

EUROPE

Europe was our largest geographic exposure on August 31, 1998. Most equity
markets there appreciated during the year under review due to falling interest
rates, low inflation, government tax incentives, and increased management focus
on shareholder value. Our holdings of Swisslog Holding AG Plc. and Hazlewood
Foods Plc. rose substantially in value, and we realized profits by liquidating
our position in Adecco SA. Finding reasonable value in the United Kingdom, we
purchased shares of Hogg Robinson Plc., a major business-travel company, at what
we considered a significant discount to its fair value.

Like American corporations in the early 1990s, many European firms have
announced plans to cut costs, improve efficiency, reduce debt burdens, and
repurchase shares. Consequently, our general outlook for many European small cap
companies is bright, and we expect the region to remain the largest area of
concentration for the Fund in the near future.

UNITED STATES

The U.S. equity market advanced considerably during the first half of the fiscal
year. However, we were able to discover some small cap companies whose shares
were selling below our assessment of their fair value. For example, we
established a position in Scholastic Corp., a leading global publisher of
children's books. Although it has a strong brand franchise and a history of
solid growth, lower-than-expected earnings pushed down Scholastic's stock price.

By August, investor concerns about Asia's financial problems and Russia's
economic and political crisis sent U.S. shares spiraling downward. On August 26,
the unmanaged Dow Jones(R) Industrial

PAGE
Average (the Dow) fell 0.9%, the next day it tumbled 4.2%, and on August 31, it
plummeted an additional 6.4%.(2),(4) These declines nearly eliminated all
previous gains for the reporting period, and on August 31, the Dow was only 0.7%
higher than it had been 12 months earlier.(3),(4)

Despite these market drops, we saw better opportunities to purchase small cap
equities elsewhere. On August 31, 1998, shares of U.S. small cap companies sold
in excess of 20 times 1998 earnings estimates, compared with generally less than
10 times for stocks in Latin American and Asian (excluding Japanese) small cap
firms.(5) As a result, the Fund's U.S. exposure remained relatively low at the
end of the reporting period.

ASIA

Asia's economic instability, caused, in part, by 1997's widespread currency
devaluations, compounded during the 12 months under review, and recessionary
conditions prevailed throughout the region. The toll on financial markets was
severe, with equity markets in China, Hong Kong, Singapore, South Korea,
Malaysia, Taiwan, and Thailand each declining more than 40% during the reporting
period.(6)

Long-term economic prospects in Asia are far from homogenous. Although financial
markets in countries such as Indonesia and Thailand may take many years to
recover from the turmoil, a fundamentally stronger economy like Hong Kong, which
has large, liquid reserves to defend the Hong Kong dollar peg and help support

<TABLE>
<CAPTION>
TOP 10 EQUITY HOLDINGS
8/31/98

COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -------------------------------------------------------------------------------
<S> <C>
Gas y Electricidad SA
Utilities Electrical & Gas, Spain 2.0%

Allied Group Inc.
Insurance, U.S. 1.8%

US Foodservice
Food & Household Products, U.S. 1.4%

Hazlewood Foods Plc.
Food & Household Products,
United Kingdom 1.4%

Banco de Andalucia SA
Banking, Spain 1.4%

Sylea SA
Industrial Components, France 1.4%

News Corp. Ltd., pfd.
Broadcasting & Publishing,
Australia 1.3%

Internatio-Muller NV
Health & Personal Care,
Netherlands 1.3%

Vtech Holdings Ltd.
Electric Components &
Instruments, Hong Kong** 1.2%

Somerfield Plc.
Merchandising, United Kingdom 1.2%
</TABLE>

** Hong Kong reverted to the sovereignty of China on July 1, 1997.

2. Source: Bloomberg.

3. Source: Standard & Poor's(R) Micropal.

4. The Dow's market return, calculated by Wilshire Associates, Inc., includes
reinvested dividends. An index is an unmanaged group of securities that is used
to measure market performance. One cannot invest directly in an index.

5. Source: Salomon Smith Barney; Bloomberg.

6. Source: Bloomberg. Price depreciation is measured in U.S. dollars and
includes reinvested dividends.

PAGE

<TABLE>
<CAPTION>
TOP 10 COUNTRIES
REPRESENTED IN THE FUND*
8/31/98

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

<S> <C>
United States 19.0%

United Kingdom 11.8%

Netherlands 8.4%

Switzerland 6.3%

Spain 6.2%

Hong Kong** 5.4%

Canada 3.7%

Sweden 3.7%

Australia 2.7%

Norway 2.6%
</TABLE>

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

**Hong Kong reverted to the sovereignty of China on July 1, 1997.

ailing capital markets, offered an unusual opportunity to buy shares of
companies at a fraction of our estimate of their fair value. For example, we
bought stock in Varitronix International Ltd., the world's leader in high-end
liquid crystal displays. With a strong management team, healthy cash flow, and
solid earnings prospects, we believe that Varitronix represents one of the good
values hidden among beaten down Asian companies.

LATIN AMERICA

During the fiscal year, Latin American stock markets dropped sharply because of
falling commodity prices, ripple effects of the Asian financial crisis, and
possible devaluation of the Brazilian real. Taking advantage of these price
declines, we initiated a position in Fertilizantes Fosfatados SA, pfd. Brazil's
leading producer of fertilizers. At the time of our purchase, it had a strong
financial position, provided a 12% dividend yield, and traded at under 5 times
our estimates of 1998 earnings.

OUR LONG-TERM STRATEGY

We take very seriously the trust you have placed in us to invest your money, and
go to great lengths to assess what we believe to be each company's true value
before we buy its shares for the Fund's portfolio. Our analysts attempt to
determine a company's value by estimating what the company could earn well into
the future. By focusing on the long term, we are often able to buy when others
may be selling because of their shorter-term considerations. We believe that
this approach, while requiring patience, has the potential to reward our
investors.

Of course, 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

PAGE

volatility, illiquidity, currency fluctuation and limited product lines,
markets, or financial and management resources. In addition, emerging markets
are relatively small and less liquid. Investing in any emerging market means
accepting a certain amount of volatility and, in some cases, severe market
corrections. While 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 785% in the last 15 years, but has suffered six declines of more than
20% during that time.(7) These special risks and other considerations are
discussed in the Fund's prospectus.

This discussion reflects our views, opinions and portfolio holdings as of August
31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the Fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you better understand
our investment and management philosophy.

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.

TOP 10 INDUSTRIES
8/31/98

% OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------

Food & Household Products 7.2%

Building Materials & Components 6.5%

Merchandising 6.2%

Industrial Components 5.8%

Banking 5.4%

Insurance 4.2%

Forest Products & Paper 4.1%

Machinery & Engineering 4.1%

Transportation 4.1%

Metals & Mining 3.8%

7. Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended June 30, 1998. Market returns are measured in Hong Kong dollars.

PAGE

PERFORMANCE SUMMARY

CLASS I

Templeton Global Smaller Companies Fund - Class I produced a -21.64% cumulative
total return for the one-year period ended August 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include the initial sales charge. While we
expect market volatility in the short term, we have always maintained a
long-term perspective when managing the Fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 9, the Fund delivered a cumulative total return of 143.07% for the 10-year
period ended August 31, 1998.

The Fund's share price, as measured by net asset value, decreased $2.63, from
$9.53 on August 31, 1997, to $6.90 on August 31, 1998. During the reporting
period, shareholders received per-share distributions of 12.5 cents ($0.125) in
income dividends, 9 cents ($0.09) in short-term gains and 50.5 cents ($0.505) in
long-term capital gains. Distributions will vary depending on income earned by
the Fund and any profits realized from the sale of securities in the portfolio,
as well as the level of the Fund's operating expenses.

The graph on page 8 compares the performance of the Fund's Class I shares over
the past ten years and the unmanaged Morgan Stanley

Past performance is not predictive of future results.

PAGE

Capital International(R) (MSCI) World Index, which includes approximately
1,500 companies representing the stock markets of 23 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, 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 or operating 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 (9/1/88 - 8/31/98)

[LINE GRAPH OF CLASS I TOTAL RETURN INDEX COMPARISON]

The following line graph hypothetically compares the performance of the
Templeton Global Smaller Companies Fund Class I shares to that of the MSCI World
Index and CPI, based on a $10,000 investment from 9/1/88 to 8/31/98.

<TABLE>
<CAPTION>
Total Return Index Comparison

Templeton Global MSCI World CPI
Smaller Companies Fund Index
- Class I
----------------------------------------------------
<S> <C> <C> <C>
9/1/88 $9,425 $10,000 $10,000
9/30/88 $9,765 $10,426 $10,068
10/31/88 $9,983 $11,122 $10,101
11/30/88 $9,752 $11,511 $10,110
12/31/88 $9,872 $11,617 $10,127
1/31/89 $10,346 $12,039 $10,178
2/28/89 $10,292 $11,966 $10,218
3/31/89 $10,468 $11,891 $10,277
4/30/89 $10,833 $12,167 $10,345
5/31/89 $11,226 $11,871 $10,404
6/30/89 $11,185 $11,739 $10,429
7/31/89 $11,740 $13,068 $10,455
8/31/89 $12,106 $12,753 $10,472
9/30/89 $12,011 $13,115 $10,505
10/31/89 $11,471 $12,680 $10,556
11/30/89 $11,513 $13,188 $10,580
12/31/89 $11,634 $13,615 $10,597
1/31/90 $10,908 $12,981 $10,706
2/28/90 $11,242 $12,426 $10,756
3/31/90 $11,518 $11,678 $10,815
4/30/90 $11,242 $11,512 $10,833
5/31/90 $12,070 $12,726 $10,857
6/30/90 $12,055 $12,638 $10,916
7/31/90 $11,881 $12,755 $10,958
8/31/90 $10,472 $11,563 $11,058
9/30/90 $9,485 $10,346 $11,151
10/31/90 $9,273 $11,314 $11,218
11/30/90 $9,526 $11,131 $11,243
12/31/90 $9,811 $11,366 $11,243
1/31/91 $10,516 $11,784 $11,311
2/28/91 $11,613 $12,877 $11,327
3/31/91 $12,186 $12,499 $11,344
4/30/91 $12,334 $12,599 $11,360
5/31/91 $12,825 $12,886 $11,393
6/30/91 $12,448 $12,093 $11,428
7/31/91 $13,022 $12,666 $11,445
8/31/91 $13,267 $12,628 $11,478
9/30/91 $13,235 $12,961 $11,529
10/31/91 $13,230 $13,174 $11,546
11/30/91 $12,914 $12,602 $11,579
12/31/91 $13,688 $13,522 $11,588
1/31/92 $14,253 $13,274 $11,604
2/29/92 $14,617 $13,047 $11,647
3/31/92 $14,162 $12,435 $11,705
4/30/92 $14,362 $12,610 $11,722
5/31/92 $14,799 $13,113 $11,738
6/30/92 $14,471 $12,676 $11,781
7/31/92 $14,307 $12,711 $11,806
8/31/92 $14,016 $13,023 $11,839
9/30/92 $13,798 $12,905 $11,873
10/31/92 $13,741 $12,559 $11,915
11/30/92 $13,831 $12,786 $11,931
12/31/92 $14,194 $12,892 $11,924
1/31/93 $14,795 $12,937 $11,983
2/28/93 $15,095 $13,245 $12,024
3/31/93 $15,742 $14,017 $12,067
4/30/93 $15,950 $14,668 $12,100
5/31/93 $16,251 $15,009 $12,117
6/30/93 $16,043 $14,885 $12,134
7/31/93 $16,158 $15,194 $12,133
8/31/93 $17,199 $15,893 $12,167
9/30/93 $17,268 $15,602 $12,192
10/31/93 $17,871 $16,034 $12,243
11/30/93 $17,754 $15,130 $12,251
12/31/93 $18,714 $15,873 $12,251
1/31/94 $19,721 $16,923 $12,285
2/28/94 $19,370 $16,706 $12,328
3/31/94 $18,691 $15,989 $12,370
4/30/94 $18,855 $16,486 $12,386
5/31/94 $18,784 $16,531 $12,394
6/30/94 $18,011 $16,488 $12,436
7/31/94 $18,597 $16,805 $12,469
8/31/94 $19,300 $17,314 $12,521
9/30/94 $19,112 $16,862 $12,554
10/31/94 $18,916 $17,344 $12,563
11/30/94 $18,064 $16,596 $12,579
12/31/94 $17,855 $16,759 $12,579
1/31/95 $17,375 $16,511 $12,629
2/28/95 $17,735 $16,755 $12,679
3/31/95 $18,120 $17,566 $12,721
4/30/95 $18,913 $18,181 $12,763
5/31/95 $19,490 $18,340 $12,789
6/30/95 $20,018 $18,338 $12,814
7/31/95 $21,004 $19,259 $12,814
8/31/95 $21,076 $18,834 $12,848
9/30/95 $21,340 $19,386 $12,872
10/31/95 $20,608 $19,084 $12,915
11/30/95 $20,765 $19,751 $12,906
12/31/95 $21,007 $20,332 $12,897
1/31/96 $21,585 $20,702 $12,973
2/29/96 $22,218 $20,832 $13,015
3/31/96 $22,549 $21,184 $13,082
4/30/96 $23,099 $21,685 $13,132
5/31/96 $23,540 $21,707 $13,157
6/30/96 $23,705 $21,821 $13,166
7/31/96 $22,741 $21,055 $13,191
8/31/96 $23,540 $21,301 $13,216
9/30/96 $23,925 $22,139 $13,258
10/31/96 $24,269 $22,297 $13,300
11/30/96 $24,950 $23,550 $13,325
12/31/96 $25,647 $23,178 $13,325
1/31/97 $26,107 $23,460 $13,367
2/28/97 $26,414 $23,734 $13,407
3/31/97 $26,260 $23,269 $13,441
4/30/97 $26,230 $24,034 $13,457
5/31/97 $27,457 $25,522 $13,449
6/30/97 $28,561 $26,798 $13,465
7/31/97 $29,328 $28,037 $13,481
8/31/97 $29,236 $26,165 $13,506
9/30/97 $30,433 $27,590 $13,540
10/31/97 $28,149 $26,143 $13,574
11/30/97 $27,503 $26,609 $13,566
12/31/97 $27,459 $26,938 $13,550
1/31/98 $26,562 $27,693 $13,574
2/28/98 $28,787 $29,571 $13,601
3/31/98 $30,181 $30,824 $13,629
4/30/98 $30,414 $31,129 $13,653
5/31/98 $29,749 $30,744 $13,678
6/30/98 $28,455 $31,478 $13,694
7/31/98 $27,425 $31,432 $13,710
8/31/98 $22,910 $27,245 $13,727
</TABLE>

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

*Performance figures represent the change in value of an investment over the
periods shown and have been restated to include the current, maximum 5.75%
initial sales charge, assuming reinvestment of distributions at net asset value.
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.
Past performance is not predictive of future results.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index. Source: Morgan Stanley Capital International.

***Source: U.S. Bureau of Labor Statistics (8/31/98).

Past performance is not predictive of future results.

PAGE

<TABLE>
<CAPTION>
CLASS I
Periods ended 8/31/98
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (6/1/81)
- --------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Cumulative Total Return(1) -21.64% 33.21% 143.07% 672.85%
Average Annual Total Return(2) -26.13% 4.67% 8.64% 12.19%
Value of $10,000 Investment(3) $7,387 $12,561 $22,910 $72,828
</TABLE>

8/31/94 8/31/95 8/31/96 8/31/97 8/31/98
- --------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 12.22% 9.20% 11.69% 24.20% -21.64%
</TABLE>

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

2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to include the
current, maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares
were offered at a higher sales charge; thus actual total returns would have been
lower.

3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and have been restated to include the current,
maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares were
offered at a higher sales charge; thus actual total returns would have been
lower.

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

On January 1, 1993, the Fund's Class I shares implemented a Rule 12b-1 plan,
which affects subsequent performance. All calculations assume reinvestment of
distributions at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
currency volatility, and the economic, social and political climates of
countries where the Fund invests. Emerging markets involve heightened risks
related to the same factors, in addition to those associated with their
relatively small size and lesser liquidity. You may have a gain or loss when you
sell your shares.

Past performance is not predictive of future results.

PAGE

CLASS II

Templeton Global Smaller Companies Fund - Class II produced a cumulative total
return of -22.44% for the one-year period ended August 31, 1998. Cumulative
total return measures the change in value of an investment, assuming
reinvestment of all distributions, and does not include sales charges.

The Fund's share price, as measured by net asset value, decreased $2.64, from
$9.42 on August 31, 1997, to $6.78 on August 31, 1998. During the reporting
period, shareholders received per-share distributions of 7.78 cents ($0.0778) in
income dividends, 9 cents ($0.09) in short-term capital gains, and 50.5 cents
($0.505) in long-term capital gains. Distributions will vary depending on income
earned by the Fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the Fund's operating expenses.

Past performance is not predictive of future results.

PAGE
The graph on page 12 compares the performance of the Fund's Class II shares
since inception with the unmanaged Morgan Stanley Capital International(R)
(MSCI) World Index, which includes approximately 1,500 companies representing
the stock markets of 23 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, 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 or operating expenses. Of course, one cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.

Past performance is not predictive of future results.

PAGE
CLASS II
Total Return Index Comparison
$10,000 Investment (5/1/95 - 8/31/98)

[LINE GRAPH OF CLASS II TOTAL RETURN INDEX COMPARISON]

The following line graph hypothetically compares the performance of the
Templeton Global Smaller Companies Fund Class II shares to that of the MSCI
World Index and CPI, based on a $10,000 investment from 5/1/95 to 8/31/98.

<TABLE>
<CAPTION>
Total Return Index Comparison

Templeton Global MSCI World CPI
Smaller Companies Index
Fund - Class II
--------------------------------------------------
<S> <C> <C> <C>
5/1/95 $9,899 $10,000 $10,000
5/31/95 $10,202 $10,088 $10,020
6/30/95 $10,479 $10,086 $10,040
7/31/95 $10,982 $10,593 $10,040
8/31/95 $11,020 $10,359 $10,067
9/30/95 $11,146 $10,663 $10,086
10/31/95 $10,747 $10,497 $10,119
11/30/95 $10,829 $10,863 $10,112
12/31/95 $10,936 $11,183 $10,105
1/31/96 $11,238 $11,387 $10,164
2/29/96 $11,570 $11,458 $10,197
3/31/96 $11,728 $11,651 $10,250
4/30/96 $12,002 $11,927 $10,289
5/31/96 $12,232 $11,940 $10,309
6/30/96 $12,319 $12,002 $10,316
7/31/96 $11,800 $11,581 $10,335
8/31/96 $12,203 $11,716 $10,355
9/30/96 $12,405 $12,177 $10,388
10/31/96 $12,565 $12,264 $10,421
11/30/96 $12,920 $12,953 $10,441
12/31/96 $13,271 $12,748 $10,441
1/31/97 $13,510 $12,904 $10,473
2/28/97 $13,654 $13,054 $10,505
3/31/97 $13,558 $12,799 $10,531
4/30/97 $13,542 $13,219 $10,544
5/31/97 $14,166 $14,038 $10,537
6/30/97 $14,726 $14,739 $10,550
7/31/97 $15,109 $15,421 $10,563
8/31/97 $15,061 $14,392 $10,583
9/30/97 $15,669 $15,175 $10,609
10/31/97 $14,471 $14,379 $10,636
11/30/97 $14,135 $14,636 $10,629
12/31/97 $14,111 $14,816 $10,617
1/31/98 $13,629 $15,232 $10,636
2/28/98 $14,766 $16,265 $10,657
3/31/98 $15,455 $16,954 $10,678
4/30/98 $15,558 $17,122 $10,697
5/31/98 $15,197 $16,910 $10,717
6/30/98 $14,525 $17,314 $10,730
7/31/98 $13,990 $17,288 $10,742
8/31/98 $11,668 $14,985 $10,755
</TABLE>

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

*Performance figures represent the change in value of an investment over the
periods shown and include all sales charges, assuming reinvestment of
distributions at net asset value. Past performance is not predictive of future
results.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index. Source: Morgan Stanley Capital International.

***Source: U.S. Bureau of Labor Statistics (8/31/98).

Past performance is not predictive of future results.

PAGE
CLASS II
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)

<S> <C> <C> <C>
Cumulative Total Return(1) -22.44% 6.00% 17.86%
Average Annual Total Return(2) -24.02% 1.62% 4.73%
Value of $10,000 Investment(3) $7,598 $10,492 $11,668
</TABLE>

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

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

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

All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility and the economic, social
and political climates of countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares.

Past performance is not predictive of future results.

PAGE
ADVISOR CLASS

Templeton Global Smaller Companies Fund - Advisor Class produced a -21.51%
cumulative total return for the one-year period ended August 31, 1998.
Cumulative total return measures the change in value of an investment, assuming
reinvestment of all distributions.

The Fund's share price, as measured by net asset value, decreased $2.64, from
$9.55 on August 31, 1997, to $6.91 on August 31, 1998. During the reporting
period, shareholders received per-share distributions of 14.69 cents ($0.1469)
in income dividends, 9 cents ($0.09) in short-term capital gains, and 50.5 cents
($0.505) in long-term capital gains. Distributions will vary depending on income
earned by the Fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the Fund's operating expenses.

The graph on the following page compares the performance of the Fund's Advisor
Class shares over a ten-year period with the unmanaged Morgan Stanley Capital
International(R) (MSCI) World Index.

Past performance is not predictive of future results.

PAGE
The MSCI World Index includes approximately 1,500 companies representing the
stock markets of 23 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, 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 or operating 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 (9/1/88 - 8/31/98)

[LINE GRAPH]

The following line graph hypothetically compares the performance of the
Templeton Global Smaller Companies Fund Advisor shares to that of the MSCI World
Index and CPI, based on a $10,000 investment from 9/1/88 to 8/31/98.

<TABLE>
<CAPTION>
Total Return Index Comparison

Templeton Global MSCI World CPI
Smaller Companies Index
Fund - Advisor Class
-------------------------------------------------
<S> <C> <C> <C>
8/31/88 $10,000 $10,000 $10,000
9/30/88 $10,361 $10,426 $10,068
10/31/88 $10,592 $11,122 $10,101
11/30/88 $10,347 $11,511 $10,110
12/31/88 $10,474 $11,617 $10,127
1/31/89 $10,977 $12,039 $10,178
2/28/89 $10,919 $11,966 $10,218
3/31/89 $11,106 $11,891 $10,277
4/30/89 $11,494 $12,167 $10,345
5/31/89 $11,910 $11,871 $10,404
6/30/89 $11,867 $11,739 $10,429
7/31/89 $12,456 $13,068 $10,455
8/31/89 $12,844 $12,753 $10,472
9/30/89 $12,744 $13,115 $10,505
10/31/89 $12,171 $12,680 $10,556
11/30/89 $12,216 $13,188 $10,580
12/31/89 $12,344 $13,615 $10,597
1/31/90 $11,573 $12,981 $10,706
2/28/90 $11,928 $12,426 $10,756
3/31/90 $12,220 $11,678 $10,815
4/30/90 $11,928 $11,512 $10,833
5/31/90 $12,806 $12,726 $10,857
6/30/90 $12,791 $12,638 $10,916
7/31/90 $12,606 $12,755 $10,958
8/31/90 $11,111 $11,563 $11,058
9/30/90 $10,063 $10,346 $11,151
10/31/90 $9,839 $11,314 $11,218
11/30/90 $10,107 $11,131 $11,243
12/31/90 $10,410 $11,366 $11,243
1/31/91 $11,157 $11,784 $11,311
2/28/91 $12,321 $12,877 $11,327
3/31/91 $12,929 $12,499 $11,344
4/30/91 $13,086 $12,599 $11,360
5/31/91 $13,607 $12,886 $11,393
6/30/91 $13,208 $12,093 $11,428
7/31/91 $13,816 $12,666 $11,445
8/31/91 $14,076 $12,628 $11,478
9/30/91 $14,042 $12,961 $11,529
10/31/91 $14,037 $13,174 $11,546
11/30/91 $13,701 $12,602 $11,579
12/31/91 $14,523 $13,522 $11,588
1/31/92 $15,122 $13,274 $11,604
2/29/92 $15,508 $13,047 $11,647
3/31/92 $15,025 $12,435 $11,705
4/30/92 $15,238 $12,610 $11,722
5/31/92 $15,701 $13,113 $11,738
6/30/92 $15,354 $12,676 $11,781
7/31/92 $15,180 $12,711 $11,806
8/31/92 $14,871 $13,023 $11,839
9/30/92 $14,639 $12,905 $11,873
10/31/92 $14,579 $12,559 $11,915
11/30/92 $14,675 $12,786 $11,931
12/31/92 $15,059 $12,892 $11,924
1/31/93 $15,697 $12,937 $11,983
2/28/93 $16,016 $13,245 $12,024
3/31/93 $16,702 $14,017 $12,067
4/30/93 $16,923 $14,668 $12,100
5/31/93 $17,242 $15,009 $12,117
6/30/93 $17,021 $14,885 $12,134
7/31/93 $17,144 $15,194 $12,133
8/31/93 $18,247 $15,893 $12,167
9/30/93 $18,321 $15,602 $12,192
10/31/93 $18,961 $16,034 $12,243
11/30/93 $18,837 $15,130 $12,251
12/31/93 $19,855 $15,873 $12,251
1/31/94 $20,924 $16,923 $12,285
2/28/94 $20,551 $16,706 $12,328
3/31/94 $19,830 $15,989 $12,370
4/30/94 $20,004 $16,486 $12,386
5/31/94 $19,930 $16,531 $12,394
6/30/94 $19,110 $16,488 $12,436
7/31/94 $19,731 $16,805 $12,469
8/31/94 $20,476 $17,314 $12,521
9/30/94 $20,278 $16,862 $12,554
10/31/94 $20,069 $17,344 $12,563
11/30/94 $19,166 $16,596 $12,579
12/31/94 $18,944 $16,759 $12,579
1/31/95 $18,434 $16,511 $12,629
2/28/95 $18,817 $16,755 $12,679
3/31/95 $19,225 $17,566 $12,721
4/30/95 $20,066 $18,181 $12,763
5/31/95 $20,678 $18,340 $12,789
6/30/95 $21,239 $18,338 $12,814
7/31/95 $22,284 $19,259 $12,814
8/31/95 $22,361 $18,834 $12,848
9/30/95 $22,641 $19,386 $12,872
10/31/95 $21,865 $19,084 $12,915
11/30/95 $22,031 $19,751 $12,906
12/31/95 $22,288 $20,332 $12,897
1/31/96 $22,901 $20,702 $12,973
2/29/96 $23,573 $20,832 $13,015
3/31/96 $23,924 $21,184 $13,082
4/30/96 $24,508 $21,685 $13,132
5/31/96 $24,975 $21,707 $13,157
6/30/96 $25,151 $21,821 $13,166
7/31/96 $24,128 $21,055 $13,191
8/31/96 $24,975 $21,301 $13,216
9/30/96 $25,384 $22,139 $13,258
10/31/96 $25,749 $22,297 $13,300
11/30/96 $26,471 $23,550 $13,325
12/31/96 $27,211 $23,178 $13,325
1/31/97 $27,731 $23,460 $13,368
2/28/97 $28,024 $23,734 $13,408
3/31/97 $27,894 $23,269 $13,441
4/30/97 $27,862 $24,034 $13,457
5/31/97 $29,196 $25,522 $13,449
6/30/97 $30,335 $26,798 $13,465
7/31/97 $31,182 $28,037 $13,481
8/31/97 $31,084 $26,165 $13,507
9/30/97 $32,386 $27,591 $13,541
10/31/97 $29,977 $26,143 $13,575
11/30/97 $29,291 $26,609 $13,566
12/31/97 $29,235 $26,938 $13,550
1/31/98 $28,282 $27,693 $13,575
2/28/98 $30,683 $29,571 $13,602
3/31/98 $32,131 $30,824 $13,629
4/30/98 $32,413 $31,129 $13,654
5/31/98 $31,707 $30,744 $13,678
6/30/98 $30,330 $31,478 $13,694
7/31/98 $29,200 $31,432 $13,711
8/31/98 $24,398 $27,245 $13,727
</TABLE>

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

*Performance figures represent the change in value of an investment over the
periods shown, assuming reinvestment of distributions at net asset value. On
January 2, 1997, the Fund began selling Advisor Class shares to certain eligible
investors as described in the prospectus. This share class does not have sales
charges or a Rule 12b-1 plan. Performance quotations have been calculated as
follows: (a) For periods prior to January 2, 1997, figures reflect the Fund's
Class I performance, excluding the effect of the Class I sales charge, but
including the effect of Class I expenses, containing 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. Past performance is not predictive of future results.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index. Source: Morgan Stanley Capital International.

***Source: U.S. Bureau of Labor Statistics (8/31/98).

Past performance is not predictive of future results.

PAGE
ADVISOR CLASS
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR* 5-YEAR* 10-YEAR* (6/1/81)*

<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) -21.51% 33.71% 143.98% 675.75%
Average Annual Total Return(1) -21.51% 5.98% 9.33% 12.60%
Value of $10,000 Investment(2) $7,849 $13,371 $24,398 $77,575

8/31/94 8/31/95 8/31/96 8/31/97 8/31/98

One-Year Total Return(3),* 12.22% 9.20% 11.69% 24.46% -21.51%
</TABLE>

*On January 2, 1997, the Fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the Fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, containing Rule 12b-1
fees; and (b) for periods after January 1, 1997, figures reflect actual Advisor
Class performance, including the deduction of all fees and expenses applicable
only to that class. Since January 2, 1997 (commencement of sales), the
cumulative total return of Advisor Class shares was -10.01%.

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

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

3. One-year total return represents the change in value of an investment over
the 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 $72,000 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, 1998.*

[3-D GRAPH]
The following mountain chart illustrates the cumulative total return of a
$10,000 investment in the Fund on June 1, 1981 (inception).

<TABLE>
Principal + Principal + Total Value Principal Income Cap Gains
Dividends Cap Gains
<S> <C> <C> <C> <C> <C> <C>

6/1/81 $9,423 $9,423 $9,423 $9,423 $0 $0
12/81 $9,352 $9,156 $9,356 $9,152 $201 $4
12/82 $12,214 $12,013 $12,720 $11,507 $706 $506
12/83 $15,331 $16,407 $17,674 $14,065 $1,266 $2,342
12/84 $14,603 $16,157 $17,746 $13,015 $1,588 $3,143
12/85 $17,722 $20,781 $23,186 $15,317 $2,405 $5,464
12/86 $20,149 $24,221 $27,562 $16,808 $3,341 $7,413
12/87 $16,905 $20,912 $24,362 $13,456 $3,450 $7,457
12/88 $19,693 $26,701 $31,381 $15,012 $4,681 $11,688
12/89 $22,534 $30,946 $36,984 $16,495 $6,039 $14,451
12/90 $17,660 $25,865 $31,190 $12,335 $5,325 $13,529
12/91 $22,989 $36,012 $43,515 $15,486 $7,503 $20,526
12/92 $19,720 $38,044 $45,120 $12,644 $7,076 $25,400
12/93 $26,204 $49,740 $59,490 $16,454 $9,750 $33,286
12/94 $25,125 $46,937 $56,761 $15,301 $9,825 $31,636
12/95 $26,727 $55,765 $66,780 $15,713 $11,015 $40,052
12/96 $30,417 $68,328 $81,529 $17,216 $13,202 $51,112
12/97 $31,228 $73,091 $87,289 $17,030 $14,197 $56,061
8/31/98 $26,054 $60,983 $72,828 $14,209 $11,845 $46,774
</TABLE>

*Cumulative total return represents the change in value of an investment over
the indicated period. All figures have been restated to reflect the current,
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 Rule 12b-1 plan, which will affect subsequent
performance.

Except as noted, all figures assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.

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 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,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.................. $9.53 $8.55 $8.77 $8.24 $7.44
------------------------------------------------------------------
Income from investment operations:
Net investment income.............................. .16 .13 .16 .11 .09
Net realized and unrealized gains (losses)......... (2.07) 1.77 .72 .62 .81
------------------------------------------------------------------
Total from investment operations.................... (1.91) 1.90 .88 .73 .90
------------------------------------------------------------------
Less distributions from:
Net investment income.............................. (.13) (.13) (.12) (.11) (.07)
Net realized gains................................. (.59) (.79) (.98) (.09) (.03)
------------------------------------------------------------------
Total distributions................................. (.72) (.92) (1.10) (.20) (.10)
------------------------------------------------------------------
Net asset value, end of year........................ $6.90 $9.53 $8.55 $8.77 $8.24
------------------------------------------------------------------
------------------------------------------------------------------
Total Return*....................................... (21.64)% 24.20% 11.69% 9.20% 12.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $1,275,313 $1,881,547 $1,544,214 $1,447,155 $1,409,494
Ratios to average net assets:
Expenses........................................... 1.27% 1.30% 1.27% 1.36% 1.36%
Net investment income.............................. 1.69% 1.43% 1.93% 1.32% 1.17%
Portfolio turnover rate............................. 23.52% 25.60% 32.71% 18.79% 28.06%
</TABLE>

*Total return does not reflect sales commissions.
19

PAGE

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

<TABLE>
<CAPTION>
CLASS II
---------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------
1998 1997 1996 1995+
---------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $9.42 $8.47 $8.75 $7.87
---------------------------------------
Income from investment operations:
Net investment income...................................... .08 .07 .13 --
Net realized and unrealized gains (losses)................. (2.05) 1.75 .67 .88
---------------------------------------
Total from investment operations............................ (1.97) 1.82 .80 .88
---------------------------------------
Less distributions from:
Net investment income...................................... (.08) (.08) (.10) --
Net realized gains......................................... (.59) (.79) (.98) --
---------------------------------------
Total distributions......................................... (.67) (.87) (1.08) --
---------------------------------------
Net asset value, end of year................................ $6.78 $9.42 $8.47 $8.75
---------------------------------------
---------------------------------------
Total Return*............................................... (22.44)% 23.42% 10.74% 11.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $38,287 $43,071 $15,483 $2,569
Ratios to average net assets:
Expenses................................................... 2.03% 2.05% 2.07% 2.11%**
Net investment income...................................... .96% .75% 1.23% .16%**
Portfolio turnover rate..................................... 23.52% 25.60% 32.71% 18.79%
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period May 1, 1995 (effective date) to August 31, 1995.
20

PAGE

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

<TABLE>
<CAPTION>
ADVISOR CLASS
------------------
YEAR ENDED AUGUST
31,
------------------
1998 1997+
------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $9.55 $8.33
------------------
Income from investment operations:
Net investment income...................................... .16 .10
Net realized and unrealized gains (losses)................. (2.06) 1.12
------------------
Total from investment operations............................ (1.90) 1.22
------------------
Less distributions from:
Net investment income...................................... (.15) --
Net realized gains......................................... (.59) --
------------------
Total distributions......................................... (.74) --
------------------
Net asset value, end of year................................ $6.91 $9.55
------------------
------------------
Total Return*............................................... (21.51)% 14.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $7,185 $7,895
Ratios to average net assets:
Expenses................................................... 1.03% 1.05%**
Net investment income...................................... 1.97% 2.18%**
Portfolio turnover rate..................................... 23.52% 25.60%
</TABLE>

*Total return is not annualized
**Annualized
+For the period January 2, 1997 (effective date) to August 31, 1997.
See Notes to Financial Statements.
21

PAGE

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 86.4%
AEROSPACE & MILITARY TECHNOLOGY .9%
Celsius AB, B............................................... Sweden 450,000 $ 8,679,203
*Fairchild Corp., A......................................... United States 196,493 2,726,340
Hong Kong Aircraft Engineering Co. Ltd. .................... Hong Kong 848,600 887,015
--------------
12,292,558
--------------
APPLIANCES & HOUSEHOLD DURABLES 1.4%
Chofu Seisaku Co. Ltd. ..................................... Japan 73,400 670,628
Fisher & Paykel Ltd. ....................................... New Zealand 2,267,709 5,732,357
Guangdong Kelon Electrical Hldgs Ltd., H, 144A.............. China 11,152,000 5,612,554
+Rival Co. ................................................. United States 642,500 6,425,000
--------------
18,440,539
--------------
AUTOMOBILES .4%
Bilia AB.................................................... Sweden 320,000 2,769,432
Jardine International Motor Holdings Ltd. .................. Hong Kong 2,057,000 849,430
Weifu Fuel Injection Co. Ltd. .............................. China 4,745,850 1,249,359
--------------
4,868,221
--------------
BANKING 5.4%
Banco de Andalucia SA....................................... Spain 377,335 18,770,379
Banco de Valencia SA........................................ Spain 101,828 2,957,646
Banco Pastor SA............................................. Spain 51,000 2,720,863
Bank Handlowy W Warszawie SA, GDR, 144A..................... Poland 722,000 7,743,450
BPI Socieda de Gestora de Participacoes Socias SA........... Portugal 301,230 9,760,833
Commercial International Bank Ltd., GDR, 144A............... Egypt 450,700 3,267,575
Fokus Bank AS............................................... Norway 732,532 4,848,711
Fokus Bank AS, 144A......................................... Norway 211,505 1,399,975
National Bank of Canada..................................... Canada 893,200 11,592,213
Singapore Finance Ltd., fgn. ............................... Singapore 1,428,000 514,595
Union Bank of Norway, Primary Capital Cert. ................ Norway 314,000 7,587,173
--------------
71,163,413
--------------
BROADCASTING & PUBLISHING 2.3%
Cordiant Communications Group Plc. ......................... United Kingdom 548,240 977,705
*Golden Books Family Entertainment Inc. .................... United States 810,000 1,113,750
Hollinger International Inc., A............................. United States 694,280 9,719,920
*Scholastic Corp. .......................................... United States 335,000 12,981,250
South China Morning Post Ltd. .............................. Hong Kong 12,150,000 3,998,155
+*Wace Group Plc. .......................................... United Kingdom 4,431,400 2,114,819
--------------
30,905,599
--------------
BUILDING MATERIALS & COMPONENTS 6.5%
Anglian Group Plc. ......................................... United Kingdom 283,730 912,208
Cementos Diamante SA, ADR, 144A............................. Colombia 540,000 3,645,000
Comercial Ind. Fin. Inmobiliari Agropecuaria, ADR, 144A..... Argentina 431,000 754,250
</TABLE>

PAGE
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BUILDING MATERIALS & COMPONENTS (CONT.)
*Congoleum Corp., A......................................... United States 317,900 $ 2,364,381
Cristaleria Espanola SA..................................... Spain 82,550 6,052,142
Det Danske Traelastkompagni AS.............................. Denmark 107,000 10,195,483
Gujarat Ambuja Cements Ltd. ................................ India 709,800 3,019,822
Gujarat Ambuja Cements Ltd., GDR............................ India 489,600 1,799,280
Hepworth Plc. .............................................. United Kingdom 1,680,600 4,263,482
Mirgor SA Comercial Industrial Financiera Inmobi, C, ADR.... Argentina 359,000 628,250
Okumura Corp. .............................................. Japan 2,180,000 7,009,845
Pioneer International Ltd. ................................. Australia 3,000,000 5,493,594
Plettac AG.................................................. Germany 75,500 8,348,455
Sarna Kunststoff Holding AG................................. Switzerland 6,570 9,221,531
Schuttersveld NV............................................ Netherlands 220,694 5,267,689
*Siam City Cement Public Co. Ltd., fgn. .................... Thailand 1,184,600 1,526,692
Suez Cement Co., GDR, 144A.................................. Egypt 470,000 6,392,000
Uralita SA.................................................. Spain 814,000 8,804,994
--------------
85,699,098
--------------
BUSINESS & PUBLIC SERVICES 2.2%
*Healthcare Services Group Inc. ............................ United States 547,650 5,476,500
Kardex AG, br. ............................................. Switzerland 940 279,472
Lex Service Plc. ........................................... United Kingdom 1,681,000 11,920,888
*Magellan Health Services Inc. ............................. United States 250,000 2,609,375
*Novacare Inc. ............................................. United States 162,900 1,191,206
Scribona AB, A.............................................. Sweden 225,400 2,452,332
Scribona AB, B.............................................. Sweden 480,400 5,167,316
--------------
29,097,089
--------------
CHEMICALS 1.9%
Crompton & Knowles Corp. ................................... United States 163,383 2,389,476
Energia e Industrias Aragonesas Eia SA...................... Spain 1,641,000 11,231,095
Gurit Heberlein AG, br. .................................... Switzerland 4,000 10,786,144
--------------
24,406,715
--------------
CONSTRUCTION & HOUSING 2.3%
Dragados y Construcciones SA................................ Spain 208,000 5,131,773
Hollandsche Beton Groep NV.................................. Netherlands 850,920 13,811,068
+*Schuler Homes Inc. ....................................... United States 1,032,000 7,740,000
Sociedade Construcoes Soares da Costa SA.................... Portugal 115,000 841,665
Wai Kee Holdings Ltd. ...................................... Hong Kong 17,848,000 2,303,205
*Wai Kee Holdings Ltd., wts. ............................... Hong Kong 2,677,200 100,189
--------------
29,927,900
--------------
DATA PROCESSING & REPRODUCTION .4%
*Quantum Corp............................................... United States 410,000 4,689,375
--------------
</TABLE>

PAGE
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS .5%
Dongfang Electrical Machinery Co. Ltd., H................... China 4,648,000 $ 161,947
*G.P. Batteries International Ltd., wts..................... Singapore 336,500 142,103
+Techtronic Industries Co. Ltd. ............................ Hong Kong 29,104,621 5,708,850
Varitronix International Ltd. .............................. Hong Kong 474,000 874,697
--------------
6,887,597
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS 4.1%
Draka Holding NV Netherlands 333,485 10,473,512
*Solid Group Inc............................................ Philippines 63,000,000 719,178
Swisslog Holding AG......................................... Switzerland 132,500 13,306,800
Twentsche Kabel Holdings NV................................. Netherlands 388,525 13,861,599
VTech Holdings Ltd. ........................................ Hong Kong 4,533,000 15,911,010
--------------
54,272,099
--------------
ENERGY SOURCES 1.2%
*Northstar Energy Corp. .................................... Canada 1,420,000 8,079,788
*Ranger Oil Ltd. ........................................... Canada 1,266,900 6,730,406
Transportadora de Gas del Sur SA, B, ADR.................... Argentina 119,104 1,131,488
--------------
15,941,682
--------------
FINANCIAL SERVICES 1.3%
A.G. Edwards Inc. .......................................... United States 125,850 3,413,681
Industrial Credit & Inv. Corp. of India, GDR, 144A.......... India 667,000 6,003,000
Om Gruppen AB............................................... Sweden 417,000 7,166,277
--------------
16,582,958
--------------
FOOD & HOUSEHOLD PRODUCTS 7.2%
Albert Fisher Group Plc. ................................... United Kingdom 2,287,124 469,152
*Alicorp SA, 144A........................................... Peru 4,915,980 1,288,528
Cafe de Coral Holdings Ltd. ................................ Hong Kong 11,536,885 3,238,105
Hazlewood Foods Plc. ....................................... United Kingdom 6,452,423 18,908,120
Illovo Sugar Limited........................................ South Africa 5,150,000 3,606,864
Lindt & Spruengli Chocolate Works Ltd., partn. ctf.......... Switzerland 4,380 9,993,777
McBride Plc. ............................................... United Kingdom 3,800,000 10,721,881
National Foods Ltd. ........................................ Australia 7,225,425 10,527,060
Oshawa Group Ltd. (The)..................................... Canada 844,700 13,095,915
Panamerican Beverages Inc., A............................... Mexico 234,400 3,735,750
*US Foodservice............................................. United States 511,500 18,957,469
Vetropack AG................................................ Switzerland 5,310 899,502
--------------
95,442,123
--------------
FOREST PRODUCTS & PAPER 4.1%
Boise Cascade Corp. ........................................ United States 122,615 2,996,404
Cartiere Burgo SpA.......................................... Italy 780,035 4,682,403
+Crown-Van Gelder Papier SA................................. Netherlands 373,600 6,120,128
</TABLE>

PAGE
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER (CONT.)
*Empaques Ponderosa SA de CV, B............................. Mexico 4,018,800 $ 2,096,169
Fletcher Challenge Ltd. Forestry Division................... New Zealand 393,332 142,317
Hung Hing Printing Group Ltd. .............................. Hong Kong 17,271,508 5,293,428
Mayr-Melnhof Karton AG...................................... Austria 61,800 3,152,553
Metsa Serla OY, B........................................... Finland 1,185,460 9,056,479
Munksjo AB.................................................. Sweden 1,300,000 9,643,559
Norske Skogindustrier AS, A................................. Norway 11,000 303,965
Primex Forest Products Ltd. ................................ Canada 300,000 1,198,734
*Shorewood Packaging Corp. ................................. United
States........ 743,700 9,668,100
--------------
54,354,239
--------------
HEALTH & PERSONAL CARE 3.4%
Apothekers Cooperatie OPG VA, partn. ctf. .................. Netherlands 180,000 4,386,824
*Haemonetics Corp. ......................................... United States 254,900 3,998,744
Internatio-Muller NV........................................ Netherlands 628,092 17,169,521
Medeva Plc. ................................................ United Kingdom 1,737,911 3,070,206
*Playtex Products Inc. ..................................... United States 1,047,800 11,198,363
*Quorum Health Group Inc. .................................. United States 100,000 1,900,000
*Sunrise Medical Inc. ...................................... United States 313,600 2,744,000
--------------
44,467,658
--------------
INDUSTRIAL COMPONENTS 5.8%
Gencorp Inc. ............................................... United States 641,000 13,461,000
Hoganas AB, B............................................... Sweden 357,000 6,267,572
Lucas Varity Plc., ADR...................................... United Kingdom 248,200 8,718,025
Madeco Manufacturera de Cobre SA, ADR....................... Chile 405,000 1,949,063
Otra NV..................................................... Netherlands 573,000 6,939,172
Sylea SA.................................................... France 234,821 17,879,772
Walbro Corp. ............................................... United States 247,500 2,088,281
Weir Group Plc. ............................................ United Kingdom 4,523,412 13,823,451
Yamato Kogyo Co. Ltd. ...................................... Japan 894,000 5,888,661
--------------
77,014,997
--------------
INSURANCE 4.2%
Allied Group Inc. .......................................... United States 497,250 23,339,672
Capital RE Corp. ........................................... United States 240,000 6,360,000
CMAC Investment Corp. ...................................... United States 260,000 10,010,000
Enhance Financial Services Group Inc. ...................... United States 290,000 7,286,250
+Sovereign Ltd. ............................................ New Zealand 10,445,600 8,283,790
--------------
55,279,712
--------------
</TABLE>

PAGE
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
LEISURE & TOURISM .8%
Kuoni Reisen Holding AG, B.................................. Switzerland 2,598 $ 8,801,908
+*Tourism Holdings Ltd. .................................... New Zealand 3,008,571 1,237,696
--------------
10,039,604
--------------
MACHINERY & ENGINEERING 4.1%
Arcadis NV.................................................. Netherlands 275,655 2,354,783
Bucher Holding AG, br. ..................................... Switzerland 4,226 5,113,393
China International Marine Containers Inc., B............... China 2,417,637 995,233
Fives-Lille................................................. France 132,750 10,269,594
IHC Caland NV............................................... Netherlands 118,000 5,656,742
Laird Group Plc. ........................................... United Kingdom 2,900,000 11,144,694
SIG Swiss Industrial Company Holdings Ltd., registered...... Switzerland 19,800 13,690,106
Valmet (OY)................................................. Finland 381,600 5,119,523
--------------
54,344,068
--------------
MERCHANDISING 5.7%
Best Denki Co. Ltd. ........................................ Japan 138,000 762,377
David Jones Ltd. ........................................... Australia 1,624,529 1,413,046
Giordano International Ltd. ................................ Hong Kong 25,248,674 2,606,584
*Gymboree Inc. ............................................. United States 906,000 7,927,500
House of Fraser Plc. ....................................... United Kingdom 6,360,000 10,596,628
Hudsons Bay Co. ............................................ Canada 596,900 8,204,680
LI & Fung Ltd. ............................................. Hong Kong 10,017,000 11,763,111
Matsuzakaya Co. Ltd. ....................................... Japan 976,000 3,884,921
Moebel Walther AG........................................... Germany 148,410 5,554,329
Sa des Galeries Lafayette................................... France 5,540 5,183,790
Samas-Groep NV.............................................. Netherlands 37,800 1,994,422
Somerfield Plc. ............................................ United Kingdom 2,501,700 15,897,707
--------------
75,789,095
--------------
METALS & MINING 3.8%
AK Steel Holding Corp. ..................................... United States 540,000 7,492,500
Birmingham Steel Corp. ..................................... United States 932,500 6,410,938
Boehler Uddeholm AG......................................... Austria 41,950 2,001,861
Boehler Uddeholm AG, 144A................................... Austria 8,120 387,488
Boehler Uddeholm AG, 144A, seasoned......................... Austria 71,200 3,397,676
Century Aluminum Co. ....................................... United States 614,000 6,140,000
Elkem AS.................................................... Norway 630,000 7,206,478
Eramet SA................................................... France 29,011 829,587
Impala Platinum Holdings Ltd. .............................. South Africa 1,322,000 12,550,796
Quanex Corp. ............................................... United States 150,000 3,262,500
Vallourec................................................... France 16,185 807,059
--------------
50,486,883
--------------
</TABLE>

PAGE
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MISC MATERIALS & COMMODITIES .6%
IMC Global Inc. ............................................ United States 160,000 $ 2,940,000
Unitor ASA.................................................. Norway 470,000 5,617,891
--------------
8,557,891
--------------
MULTI-INDUSTRY 3.0%
*Amer Group Ltd., A......................................... Finland 397,000 5,991,895
DESC SA de CV DESC, B....................................... Mexico 694,700 2,473,730
Hogg Robinson Plc. ......................................... United Kingdom 2,900,000 11,241,820
La Cemento Nacional CA, GDR, 144A........................... Ecuador 27,575 3,998,375
Nagron Nationaal Grondbezit NV.............................. Netherlands 292,000 7,483,229
Pioneer Industries International Ltd. ...................... Hong Kong 7,019,400 652,192
Wagon Industrial Holdings Plc. ............................. United Kingdom 1,827,400 8,292,594
--------------
40,133,835
--------------
REAL ESTATE .3%
Asean Resources Holdings Ltd. .............................. Hong Kong 7,393,649 706,047
New Asia Realty and Trust Co. Ltd., A....................... Hong Kong 3,583,000 2,219,377
Tai Cheung Holdings Ltd. ................................... Hong Kong 3,630,000 833,815
--------------
3,759,239
--------------
TELECOMMUNICATIONS 1.4%
*Digital Telecommunications Philippines Inc. ............... Philippines 62,440,000 898,110
*Millicom International Cellular SA......................... Luxembourg 100,000 3,112,500
Tadiran Telecommunications Ltd. ............................ Israel 408,000 6,069,000
Telefonos de Mexico SA (Telmex), L.......................... Mexico 4,592,972 8,154,431
--------------
18,234,041
--------------
TEXTILES & APPAREL 2.0%
Fountain Set Holdings Ltd. ................................. Hong Kong 35,262,000 5,369,478
Gamma Holding NV............................................ Netherlands 180,000 8,683,199
Inner Mongolia Erdos Cashmere Products Co. Ltd., B.......... China 6,200,000 930,000
Kellwood Co. ............................................... United States 271,600 7,248,325
+Tungtex (Holdings) Co. Ltd. ............................... Hong Kong 35,573,000 3,947,863
--------------
26,178,865
--------------
TRANSPORTATION 4.1%
Anangel-American Shipholdings Ltd., ADR..................... Greece 446,800 2,010,600
Danzas Holding AG........................................... Switzerland 42,265 11,396,909
*Fritz Companies Inc. ...................................... United States 1,013,900 8,111,200
Great Eastern Shipping Co. Ltd., GDR........................ India 69,100 158,066
Great Eastern Shipping Co. Ltd., GDR, 144A.................. India 489,100 1,118,816
Helikopter Services Group ASA............................... Norway 591,700 4,562,946
IMC Holdings Ltd. .......................................... Hong Kong 6,654,000 772,802
*Marine Transport Corp. .................................... United States 75,100 166,628
*MS Carriers Inc. .......................................... United States 202,400 4,326,300
</TABLE>

PAGE
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TRANSPORTATION (CONT.)
*OMI Corp. ................................................. United States 751,000 $ 2,628,500
Sea Containers Ltd., A...................................... United Kingdom 461,000 13,858,813
Stolt Nielsen SA............................................ Norway 200,000 2,100,000
Stolt Nielsen SA, ADR....................................... Norway 100,000 1,000,000
Tranz Rail Holdings Ltd., ADR............................... New Zealand 499,480 1,997,920
--------------
54,209,500
--------------
UTILITIES ELECTRICAL & GAS 3.0%
Central Costanera SA, ADR, 144A............................. Argentina 21,500 440,838
Electricidad de Caracas SAICA SACA.......................... Venezuela 4,448,051 1,069,969
Gas y Electricidad SA....................................... Spain 331,283 26,101,822
Guangdong Electric Power Development Co Ltd., B, 144A....... China 14,689,967 4,113,615
Public Service Co. of New Mexico............................ United States 411,000 8,220,000
--------------
39,946,244
--------------
WHOLESALE & INTERNATIONAL TRADE 2.1%
Bergen Brunswig Corp., A.................................... United States 262,500 8,957,813
Dahl International AB....................................... Sweden 245,000 3,331,973
Dahl International AB, 144A................................. Sweden 255,000 3,467,972
+Eurodis Electron Plc....................................... United Kingdom 5,250,000 8,879,084
Sime Darby Hongkong Ltd. ................................... Hong Kong 11,057,000 2,711,028
--------------
27,347,870
--------------
TOTAL COMMON STOCKS AND WARRANTS (COST $1,087,858,454)...... 1,140,760,707
--------------
PREFERRED STOCKS 5.7%
Ballast Nedam NV, ctf., conv., pfd. ........................ Netherlands 188,040 7,275,737
Cia Brasileira de Petroleo Ipiranga, pfd. .................. Brazil 619,998,000 4,741,254
Companhia Riograndense de Telecom, A, pfd. ................. Brazil 8,249,900 3,504,928
Coteminas Cia Tecidos Norte de Minas (CTNM), pfd. .......... Brazil 23,829,100 2,459,850
Fertilizantes Fosfatados SA, pfd. .......................... Brazil 2,500,000,000 7,009,940
Hugo Boss AG, pfd. ......................................... Germany 6,000 12,894,811
Moebel Walther AG, pfd. .................................... Germany 150,000 5,698,894
News Corp. Ltd., pfd. ...................................... Australia 3,247,074 17,708,036
++Telecomunicacoes Brasileiras SA (Telebras), ADR, pfd. .... Brazil 46,000 3,251,625
Weg SA, pfd................................................. Brazil 17,249,300 10,992,417
--------------
TOTAL PREFERRED STOCKS (COST $80,911,346)................... 75,537,492
--------------
</TABLE>

PAGE
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 6.0%
Federal Farm Credit Banks, 5.50% to 5.53%, with maturities
to 9/01/98................................................ United States $ 40,075,000 $ 40,078,629
Fannie Mae, 5.71%, 11/02/98................................. United States 35,000,000 34,769,490
U.S. Treasury Bills, 5.09% to 5.11%, with maturities to
10/29/98.................................................. United States 4,491,000 4,456,436
--------------
TOTAL SHORT TERM INVESTMENTS (COST $79,290,787)............. 79,304,555
--------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST
$1,248,060,587)........................................... 1,295,602,754
--------------
(A)REPURCHASE AGREEMENT 1.1%
Swiss Bank Corp., 5.75%, 9/01/98 (Maturity Value
$14,860,373) (COST $14,858,000) Collateralized by U.S.
Treasury Notes and Bonds.................................. United States 14,858,000 14,858,000
--------------
TOTAL INVESTMENTS (COST $1,262,918,587) 99.2%............... 1,310,460,754
OTHER ASSETS, LESS LIABILITIES .8%.......................... 10,324,239
--------------
TOTAL NET ASSETS 100.0%..................................... $1,320,784,993
--------------
--------------
</TABLE>

*Non-Income producing.
**Securities traded in U.S. dollars.
(a)At August 31, 1998, all repurchase agreements held by the Fund had been
entered into on that date.
+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,
1998 were $50,457,230.
++Includes securities of twelve new holding companies deemed received in
conjunction with the "split-up" of Telecomunicacoes Brasileiras SA (Telebras).

See Notes to Financial Statements.
29

PAGE

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost
$1,248,060,587)........................................... $1,295,602,754
Repurchase agreement, at value and cost.................... 14,858,000
Cash....................................................... 6,231,922
Receivables:
Investment securities sold................................ 17,122,696
Capital shares sold....................................... 526,128
Dividends and interest.................................... 3,861,581
--------------
Total assets........................................... 1,338,203,081
--------------
Liabilities:
Payables:
Investment securities purchased........................... 8,728,005
Capital shares redeemed................................... 6,686,575
To affiliates............................................. 1,609,903
Accrued liabilities........................................ 393,605
--------------
Total liabilities...................................... 17,418,088
--------------
Net assets, at value........................................ $1,320,784,993
--------------
--------------
Net assets consist of:
Undistributed net investment income........................ $ 20,510,225
Net unrealized appreciation................................ 47,542,167
Accumulated net realized gain.............................. 31,883,873
Capital shares............................................. 1,220,848,728
--------------
Net assets, at value........................................ $1,320,784,993
--------------
--------------
CLASS I:
Net asset value per share ($1,275,313,245 / 184,892,028
shares outstanding)....................................... $6.90
--------------
--------------
Maximum offering price per share ($6.90 / 94.25%).......... $7.32
--------------
--------------
CLASS II:
Net asset value per share ($38,286,897 / 5,645,488 shares
outstanding)*............................................. $6.78
--------------
--------------
Maximum offering price per share ($6.78 / 99.00%).......... $6.85
--------------
--------------
ADVISOR CLASS:
Net asset value and maximum offering price per share
($7,184,851 / 1,039,536 shares outstanding)............... $6.91
--------------
--------------
</TABLE>

*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
30

PAGE

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

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $4,432,343)
Dividends.................................................. $43,078,177
Interest................................................... 9,969,817
-----------
Total investment income............................... $ 53,047,994
Expenses:
Management fees (Note 3)................................... 13,469,024
Administrative fees (Note 3)............................... 1,921,902
Distribution fees (Note 3)
Class I................................................... 4,083,287
Class II.................................................. 481,511
Transfer agent fees (Note 3)............................... 1,762,171
Custodian fees............................................. 472,144
Reports to shareholders.................................... 571,347
Registration and filing fees............................... 100,000
Professional fees.......................................... 92,832
Directors' fees and expenses............................... 65,000
Other...................................................... 53,173
-----------
Total expenses........................................ 23,072,391
-------------
Net investment income........................... 29,975,603
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 75,478,312
Foreign currency transactions............................. (942,778)
-----------
Net realized gain..................................... 74,535,534
Net unrealized depreciation on investments............ (477,160,612)
-------------
Net realized and unrealized loss............................ (402,625,078)
-------------
Net decrease in net assets resulting from operations........ $(372,649,475)
-------------
-------------
</TABLE>

See Notes to Financial Statements.
31

PAGE

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

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 29,975,603 $ 24,788,792
Net realized gain from investments and foreign currency
transactions............................................ 74,535,534 131,178,737
Net unrealized appreciation (depreciation) on
investments............................................. (477,160,612) 222,212,496
-----------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ (372,649,475) 378,180,025
Distributions to shareholders from:
Net investment income:
Class I.................................................. (24,864,205) (22,987,597)
Class II................................................. (393,741) (172,517)
Advisor Class............................................ (137,241) --
Net realized gains:
Class I.................................................. (118,716,606) (146,191,211)
Class II................................................. (3,094,067) (1,716,515)
Advisor Class............................................ (519,279) --
Capital share transactions (Note 2):
Class I.................................................. (103,255,384) 134,713,084
Class II................................................. 10,093,710 23,892,832
Advisor Class............................................ 1,808,776 7,097,043
-----------------------------------
Net increase (decrease) in net assets................... (611,727,512) 372,815,144
Net assets:
Beginning of year.......................................... 1,932,512,505 1,559,697,361
-----------------------------------
End of year................................................ $1,320,784,993 $1,932,512,505
-----------------------------------
-----------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 20,510,225 $ 18,349,708
-----------------------------------
-----------------------------------
</TABLE>

See Notes to Financial Statements.
32

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 long-term capital growth by investing
primarily in the equity securities of smaller companies of any nation. The
following summarizes the Fund's significant accounting policies.

a. SECURITIES VALUATION:

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

b. FOREIGN CURRENCY TRANSLATION:

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

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

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

c. INCOME TAXES:

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

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

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
information is available to the Fund. Interest income and estimated expenses are
accrued daily. Dividend income and distributions to shareholders are recorded on
the ex-dividend date.

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

e. ACCOUNTING ESTIMATES:

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

2. CAPITAL STOCK

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

At August 31, 1998, there were 1.5 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,
-----------------------------------------------------------------
1998 1997
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold............................................ 65,137,298 $ 565,906,634 25,217,003 $ 218,613,865
Shares issued on reinvestment of distributions......... 14,123,259 125,695,078 18,115,924 148,573,941
Shares redeemed........................................ (91,762,539) (794,857,096) (26,636,251) (232,474,722)
-----------------------------------------------------------------
Net increase (decrease)................................ (12,501,982) $(103,255,384) 16,696,676 $ 134,713,084
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>

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

2. CAPITAL STOCK (CONT.)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------
1998 1997
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold................................................. 2,789,801 $ 24,386,698 3,007,827 $26,358,916
Shares issued on reinvestment of distributions.............. 339,452 2,984,726 214,255 1,742,190
Shares redeemed............................................. (2,057,353) (17,277,714) (476,380) (4,208,274)
-----------------------------------------------------------
Net increase................................................ 1,071,900 $ 10,093,710 2,745,702 $23,892,832
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------
1998 1997*
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
ADVISOR CLASS SHARES:
Shares sold................................................. 1,534,040 $ 13,060,800 1,052,028 $ 9,160,119
Shares issued on reinvestment of distributions.............. 71,033 631,927 -- --
Shares redeemed............................................. (1,392,025) (11,883,951) (225,540) (2,063,076)
-----------------------------------------------------------
Net increase................................................ 213,048 $ 1,808,776 826,488 $ 7,097,043
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>

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

3. TRANSACTIONS WITH AFFILIATED 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
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>

The Fund reimburses Distributors up to 0.25% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Under the Class I
distribution plan, costs exceeding the maximum may be reimbursed in subsequent
periods. At August 31, 1998 there

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

3. TRANSACTIONS WITH AFFILIATED AND RELATED PARTIES (CONT.)
were no unreimbursed costs. Distributors received net commissions from sales of
Fund shares, and received contingent deferred sales charges for the year of
$754,107 and $41,558, respectively.

Legal fees of $47,534 were paid to a law firm in which a partner is an officer
of the Fund.

4. INCOME TAXES

At August 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $1,248,084,478 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 305,249,351
Unrealized depreciation..................................... (257,731,075)
-------------
Net unrealized appreciation................................. $ 47,518,276
-------------
-------------
</TABLE>

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1998 aggregated $378,122,187 and $479,835,388, respectively.

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, 1998, 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, 1998, 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, 1998, 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 29, 1998

PAGE

TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC.
Tax Designation

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates the following amounts as capital gain dividends for the fiscal year
ended August 31, 1998:

<TABLE>
<S> <C>
28% Rate Gain............................................... $ 3,916,905
20% Rate Gain............................................... 66,164,120
-----------
Total....................................................... $70,081,025
===========
</TABLE>

Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
8.18% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 1998.

PAGE

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PAGE

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PAGE

LITERATURE REQUEST

For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Templeton Fund Information at
1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending 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
Mutual Discovery 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
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund

GLOBAL INCOME

Franklin Global Government
Income Fund
Franklin Templeton Global
Currency Fund
Franklin Templeton Hard
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

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
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 Bond Fund
Franklin Floating Rate Trust
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

FRANKLIN FUNDS SEEKING
TAX-FREE INCOME

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

FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME

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

VARIABLE ANNUITIES++

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

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

**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).

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

+Portfolio of insured municipal securities.

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

09/98

PAGE
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404-1585
1-800/DIAL BEN(R)
www.franklin-templeton.com

SHAREHOLDER SERVICES
1-800/632-2301

FUND INFORMATION
1-800/342-5236

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

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

103 A98 10/98 [Recycling logo] Printed on recycled paper