FRANKLIN MUTUAL SERIES FUND INC, N-30D, 1997-09-02

FRANKLIN MUTUAL SERIES FUND INC
N-30D, 1997-09-02

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SEMI ANNUAL REPORT
JUNE 30, 1997

[GRAPHIC M]

MUTUAL EUROPEAN FUND

[FRANKLIN TEMPLETON LOGO]

<PAGE>

FRANKLIN MUTUAL ADVISERS
SENIOR PORTFOLIO MANAGEMENT TEAM

In its continuing efforts to strengthen the investment team, the fund's advisor
recently named as vice presidents the people pictured to the lower right. These
individuals have over 36 combined years of experience with Mutual Series. We
have also added several people to the research and trading side who have
excellent backgrounds and great enthusiasm. Our greatest resource in finding the
right people is our reputation as a dynamic and creative investment
organization.

[PHOTO OF BELOW LISTED INDIVIDUALS]

Left to right: Lawrence N. Sondike, Robert Friedman, Peter A. Langerman,
Raymond Garea, Jeff Altman, Michael Price (seated)

[PHOTO OF BELOW LISTED INDIVIDUALS]

Left to right top: Susan Potto, David Winters, Greg Gigliotti
Bottom: Leigh Walzer, Tom Price

<PAGE>

SHAREHOLDER LETTER

Your Fund's Objective: The Mutual European Fund seeks capital appreciation, with
income as a secondary objective, by investing primarily in common and preferred
stocks, bonds, and convertible securities. The fund will normally have at least
65% of its invested assets in the securities of issuers organized under the laws
of, or whose principal business operations or at least 50% of whose revenue is
earned from, European countries.

Dear Shareholder:

We are pleased to bring you this semi-annual report of the Mutual European Fund,
which covers the period ended June 30, 1997. During the six months under review,
the fund's Class Z shares provided a cumulative total return of 13.08%, as shown
in the Performance Summary on page 6. The Morgan Stanley Capital International
All Countries Europe Index returned 14.68%(1) for the same period. Since we've
now completed nearly one year of operation, we would like to take this
opportunity to highlight some of our views on European markets, currencies, and
politics, as well as our approach to investing in this unique and exciting part
of the world.

CONTENTS

SHAREHOLDER LETTER ................ 1

PERFORMANCE SUMMARY
Class Z .......................... 6
Class I .......................... 8
Class II ......................... 9

STATEMENT OF INVESTMENTS .......... 13

FINANCIAL STATEMENTS .............. 20

NOTES TO FINANCIAL STATEMENTS ..... 24

FUND CATEGORY

[PYRAMID GRAPH]

(1) Source: Micropal. Index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index.

<PAGE>

EUROPEAN MARKETS

Like the U.S. Standard & Poor's(R) 500 Stock Index, most European indices are
market-capitalization weighted and are heavily influenced by the performance of
the larger companies that comprise them. As the chart below illustrates, the
relative importance of the largest five and largest 10 companies in popular
Western European indices is even more pronounced than in the S&P 500. In our
opinion, many of these larger companies are expensive, trading at levels above
our target range for purchasing. We emphasize this point to underscore our value
approach. We seek a solid, absolute return over the years, and will not chase a
market, sector, or company in order to match an index.

PERCENT OF INDEX*

UNITED UNITED
STATES' KINGDOM'S
STANDARD FINANCIAL SWITZERLAND'S SWEDEN'S IRELAND'S NETHERLANDS'
AND POOR'S TIMES STOCK SWISS STOCKHOLM IRISH AMSTERDAM
500 EXCHANGE MARKET OPTIONS OVERALL EXCHANGES
INDEX 100 INDEX INDEX MARKET INDEX INDEX
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5 Largest
Companies 11.99% 24.38% 70.91% 55.02% 52.85% 50.08%
10 Largest
Companies 19.69% 38.77% 92.85% 72.50% 68.42% 78.16%

</TABLE>

* These percentages combine multiple classes of stocks, as of 6/30/97. Source:
Bloomberg.

CURRENCIES

Currency situations are obviously complex. Because over 75% of the fund is
invested outside the U.S., we hedge all currency exposure. By hedging, we seek
to eliminate the effects of currency fluctuations so that only the actual
performance of the portfolio's stocks affects the fund's total returns.

PORTFOLIO BREAKDOWN
Based on Total Net Assets
6/30/97

Equities - 78.4%

Bonds - 2.8%

Short-Term Obligations & Other
Net Assets - 18.8%

TOP 10 COUNTRIES
Period ended 6/30/97

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

United States
(includes cash) ..............20.2%

United Kingdom ...............19.3%

Sweden .......................19.1%

France .......................15.7%

Italy ........................ 3.6%

Norway ....................... 3.6%

Finland ...................... 3.1%

Netherlands .................. 3.1%

Denmark ...................... 2.4%

Belgium ...................... 2.0%

<PAGE>

EUROPEAN POLITICS

We continue to believe that Europe offers the best restructuring opportunities
in the world. European companies must compete or go out of business. It does not
matter whether the government is right wing, left wing, or centrist: thousands
of firms must allocate their capital properly or they will fade rapidly from the
business community. Most management teams are hungry to effectuate change
regardless of politics.

We also continue to believe that this process will not be pleasant or easy.
There is a streak of socialism that runs through the heart of Europe. Some
socialists have modernized their ideals to reflect the globalized economy: the
United Kingdom's Labour Party and Portugal's Socialists are healthy examples.
Others apparently do not see that their policies have helped erode Europe's
competitiveness and ability to create jobs. France is a notable example of this
(however, the French electorate swings back and forth, from left to right, with
remarkable frequency).

The political tides of Europe do not erase value, but can slow or speed the
process. We study the political scene, but we never let our opinions prevent us
from seeking inexpensive stocks.

We appreciate your participation in the Mutual European Fund and welcome your
comments and suggestions.

Sincerely,

Franklin Mutual Advisers Portfolio Management Team

TOP 10 HOLDINGS
Period ended 6/30/97

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

Suez Lyonnaise Des Eaux SA,
France,
Business & Public Services 3.1%

Societe Elf Aquitane SA,
France,
Energy Sources 1.9%

Finnveden Invest AB, B,
Sweden,
Industrial Components 1.4%

STE Generale de Belgique SA,
Belgium,
Multi-Industry 1.4%

Grupo Acciona SA,
Spain,
Construction & Housing 1.2%

Ostasiatiske Kompagnie,
Denmark,
Merchandising 1.2%

Skanska AB, B,
Sweden,
Construction & Housing 1.2%

Oresund Investment AB,
Sweden,
Multi-Industry 1.2%

Pearson PLC,
United Kingdom,
Broadcasting & Publishing 1.1%

Worms Et Compagnie,
France,
Food & Household Products 1.1%

For a complete list of portfolio holdings, see page 13 of this report.

<PAGE>

This discussion reflects the strategies the fund employed during the six months
under review, and includes opinions as of the close of the period. Since
economic and market conditions are constantly changing, strategies and
evaluations, conclusions, and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities the fund purchases and sells.

It is important to remember that the fund may invest in lower-rated "junk
bonds," which entail higher credit risks, as well as in foreign securities
involving risks, such as political uncertainty or fluctuations in foreign
exchange rates in areas where investments are made. Notably, the fund generally
expects to hedge against currency risk. The fund's value-oriented strategy may
include investments in companies involved in mergers, reorganizations,
restructurings, or liquidations. The risks associated with this and other
fund-specific investments are described in the prospectus.

<PAGE>

INVESTMENT APPROACH

We seek to invest in securities selling at a substantial discount to their
intrinsic value, taking into consideration, among other factors, price/book,
price/earnings, and cash flow. Rather than attempt to project growth rates and
earnings, we try to determine what a company is worth today -- and we want to
buy it at significantly less than that. Applying this value approach, we invest
primarily in three areas: (1) cheap stocks based on asset values, (2) mergers,
recapitalizations, spin-offs and other extraordinary corporate changes, and (3)
bankruptcy and other financially distressed situations. These investments,
particularly in the latter two categories, do not typically move with the same
volatility as the market indices and therefore have tended to reduce excessive
volatility in our overall performance. Generally, we have tended to underperform
against the S&P 500(R) slightly in bull markets, while outperforming the
benchmark in sideways and bear markets. Of course, past performance cannot
guarantee future results.

<PAGE>

PERFORMANCE SUMMARY
CLASS Z

Mutual European Fund - Class Z provided a cumulative total return of 13.08% for
the six-month period ended June 30, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any.

The price of the fund's Class Z shares increased $1.49 per share, from $11.39 on
December 31, 1996, to $12.88 on June 30, 1997. During the reporting period,
Class Z shares did not pay distributions. Of course, distributions will vary
depending on income earned by the fund, as well as any profits realized from the
sale of securities in the portfolio.

<PAGE>

CLASS Z
Periods ended 6/30/97

SINCE
INCEPTION
SIX MONTHS (7/3/96)
- ----------------------------------------------------------------

Aggregate Total Return(1) 13.08% 29.60%
Value of $10,000 Investment(2) $11,308 $12,960

1. Aggregate total return represents the change in value of an investment over
the indicated periods. Since these shares have existed for less than one year,
average annual total returns are not provided.

2. This figure represents the value of a hypothetical $10,000 investment in the
fund over the indicated period.

All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. The fund's manager has agreed in advance to
waive a portion of its management fees, which increases total return to
shareholders. If the manager had not taken this action, the fund's total return
would have been lower. Franklin Mutual Adviser has made a commitment to the
fund's Board not to seek an increase in the rate of investment advisory fees for
a three year period beginning November 1, 1996.

Investment return and principal value will fluctuate with market conditions,
currencies and the economic, social, and political climates of countries where
investments are made. Thus, your shares, when redeemed, may be worth more or
less than their original cost.

Past performance is not predictive of future results.

<PAGE>

CLASS I

Mutual European Fund - Class I provided a cumulative total return of 12.92% for
the six-month period ended June 30, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include the sales charge.

The fund's Class I shares, as measured by net asset value, increased $1.47 per
share, from $11.38 on December 31, 1996, to $12.85 on June 30, 1997. During the
reporting period, Class I shares did not pay distributions. Of course,
distributions will vary depending on income earned by the fund, as well as any
profits realized from the sale of securities in the portfolio.

CLASS I
Periods ended 6/30/97

SINCE
INCEPTION
SIX MONTHS (11/1/96)
- -------------------------------------------------------------------
Cumulative Total Return(1) 12.92% 19.28%
Aggregate Total Return(2) 7.80% 13.92%
Value of $10,000 Investment(3) $10,780 $11,392

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

2. Aggregate total return represents the change in value of an investment over
the indicated periods and includes the maximum 4.5% initial sales charge. Since
these shares have existed for less than one year, average annual total returns
are not provided.

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

All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. The fund's manager has agreed in advance to
waive a portion of its management fees, which increases total return to
shareholders. If the manager had not taken this action, the fund's total return
would have been lower. The fee waiver may be discontinued at any time, upon
notice to the fund's Board of Directors.

Past performance is not predictive of future results.

<PAGE>

CLASS II

Mutual European Fund - Class II provided a cumulative total return of 12.48% for
the six-month period ended June 30, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include the sales charges.

The fund's Class II shares, as measured by the net asset value, increased $1.42
per share, from $11.38 on December 31, 1996, to $12.80 on June 30, 1997. During
the reporting period, Class II shares did not pay distributions. Of course,
distributions will vary depending on income earned by the fund, as well as any
profits realized from the sale of securities in the portfolio.

CLASS II
Periods ended 6/30/97

SINCE
INCEPTION
SIX MONTHS (11/1/96)
- -----------------------------------------------------------

Cumulative Total Return(1) 12.48% 18.71%
Aggregate Total Return(2) 10.41% 16.53%
Value of $10,000 Investment(3) $11,041 $11,653

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

2. Aggregate total return represents the change in value of an investment over
the indicated periods and includes the 1.0% initial sales charge and 1.0%
contingent deferred sales charge, applicable to shares redeemed with 18 months
of investment. Since these shares have existed for less than one year, average
annual total returns are not provided.

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

All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. The fund's manager has agreed in advance to
waive a portion of its management fees, which increases total return to
shareholders. If the manager had not taken this action, the fund's total return
would have been lower. The fee waiver may be discontinued at any time, upon
notice to the fund's Board of Directors.

Past performance is not predictive of future results.

<PAGE>

MUTUAL EUROPEAN FUND
Financial Highlights

Per Share Operating Performance - Class Z (For a share outstanding throughout
the period)
<TABLE>
<CAPTION>

Six months For the period
ended July 3, 1996+
June 30, 1997 through
(unaudited) December 31, 1996
------------- -----------------
<S> <C> <C>
Net asset value, beginning of period........................................... $11.39 $10.00
-------- --------
Income from investment operations:
Net investment income...................................................... .23 .06
Net realized and unrealized gain........................................... 1.26 1.40
-------- --------
Total from investment operations............................................... 1.49 1.46
-------- --------
Distributions:
Dividends from net investment income....................................... -- (.05)
Distributions from net realized gains...................................... -- (.02)
-------- --------
Total distributions............................................................ -- (.07)
-------- --------
Change in net asset value...................................................... 1.49 1.39
-------- --------
Net asset value, end of period................................................. $12.88 $11.39
======== ========
Total Return*.................................................................. 13.08% 14.61%
Ratios /supplemental data
Net assets, end of period (000)................................................ $616,219 $450,495
Ratio of expenses to average net assets........................................ 1.05%** 1.15%**
Ratio of expenses, net of fee waiver, to average net assets.................... 1.03%** 1.09%**
Ratio of net investment income to average net assets........................... 4.03%** 1.87%**
Portfolio turnover rate........................................................ 44.40% 36.75%
Average commission rate paid (per share)....................................... $.0153 $.0233

</TABLE>

*Not annualized for periods of less than one year.
**Annualized.
+Commencement of operations.

<PAGE>

MUTUAL EUROPEAN FUND
Financial Highlights (continued)

Per share operating performance - Class I (For a share outstanding throughout
the period)

<TABLE>
<CAPTION>
Six months For the period
ended November 1, 1996+
June 30, 1997 through
(unaudited) December 31, 1996
------------- ------------------
<S> <C> <C>
Net asset value, beginning of period.......................................... $11.38 $10.84
------- ------
Income from investment operations:
Net investment income..................................................... .18 .03
Net realized and unrealized gain.......................................... 1.29 .58
------- ------
Total from investment operations.............................................. 1.47 .61
------- ------
Distributions:
Dividends from net investment income...................................... -- (.05)
Distributions from net realized gains..................................... -- (.02)
------- ------
Total distributions........................................................... -- (.07)
------- ------
Change in net asset value..................................................... 1.47 .54
------- ------
Net asset value, end of period................................................ $12.85 $11.38
======= ======
Total Return*................................................................. 12.92% 5.61%
Ratios/supplemental data
Net assets, end of period (000)............................................... $58,906 $9,200
Ratio of expenses to average net assets....................................... 1.40%** 1.42%**
Ratio of expenses, net of fee waiver, to average net assets................... 1.38%** 1.32%**
Ratio of net investment income to average net assets.......................... 4.09%** 1.44%**
Portfolio turnover rate....................................................... 44.40% 36.75%
Average commission rate paid (per share)...................................... $.0153 $.0233

</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge. Not annualized for periods of less than one year.
**Annualized.
+Commencement of sales.

<PAGE>

MUTUAL EUROPEAN FUND
Financial Highlights (continued)

Per share operating performance - Class II (For a share outstanding throughout
the period)
<TABLE>
<CAPTION>

Six months For the period
ended November 1, 1996+
June 30 1997 through
(unaudited) December 31, 1996
------------- ------------------
<S> <C> <C>
Net asset value, beginning of period.......................................... $11.38 $10.84
------- ------
Income from investment operations:
Net investment income..................................................... .14 .02
Net realized and unrealized gain.......................................... 1.28 .58
------- ------
Total from investment operations.............................................. 1.42 .60
------- ------
Distributions:
Dividends from net investment income...................................... -- (.04)
Distributions from net realized gains..................................... -- (.02)
------- ------
Total distributions....................................................... -- (.06)
------- ------
Change in net asset value..................................................... 1.42 .54
------- ------
Net asset value, end of period................................................ $12.80 $11.38
======= ======
Total Return*................................................................. 12.48% 5.52%
Ratios/supplemental data
Net assets, end of period (000)............................................... $26,954 $2,754
Ratio of expenses to average net assets....................................... 2.05%** 2.04%**
Ratio of expenses, net of fee waiver, to average net assets................... 2.04%** 1.94%**
Ratio of net investment income to average net assets.......................... 3.56%** .79%**
Portfolio turnover rate....................................................... 44.40 36.75%
Average commission rate paid (per share)...................................... $.0153 $.0233

</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge. Not annualized for periods of less than one year.
**Annualized.
+Commencement of sales.

See Notes to Financial Statements.

<PAGE>

MUTUAL EUROPEAN FUND
Investment Portfolio, June 30, 1997 (unaudited)
<TABLE>
<CAPTION>

INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks 77.9%
Appliances & Household Durables 0.6%
Electrolux AB, B................................. Swe. 55,000 $ 3,967,423
----------
Automobiles 1.7%
Bertrand Faure................................... Fr. 130,510 6,873,389
Fiat SpA......................................... Itl. 1,500,000 5,393,080
----------
12,266,469
----------
Beverages & Tobacco 2.2%
BAT Industries PLC............................... U.K. 500,000 4,475,512
Grand Metropolitan PLC........................... U.K. 100,000 968,376
Guinness PLC..................................... U.K. 450,000 4,406,401
Heineken Holding NV, A........................... Neth. 34,250 5,321,845
----------
15,172,134
----------
Broadcasting & Publishing 6.6%
A-Pressen AS, A.................................. Nor. 200,000 4,829,995
Aamulehti Yhtymae OY, II......................... Fin. 25,000 914,737
Midland Independent Newspapers PLC............... U.K. 2,330,200 6,965,493
Mirror Group PLC................................. U.K. 1,092,216 3,419,484
NV Holdingsmij de Telegraaf...................... Neth. 281,600 6,082,755
Pearson PLC...................................... U.K. 675,000 7,817,990
Scripps (EW) Co., A.............................. U.S. 45,000 1,873,125
Television 4 AB, A............................... Swe. 183,000 3,453,946
United News & Media PLC.......................... U.K. 335,580 3,892,346
Yorkshire Tyne Tees Television Holdings PLC...... U.K. 375,000 7,087,961
----------
46,337,832
----------
Building Materials & Components 1.5%
Geveko AB, B..................................... Swe. 552,134 7,066,287
Scancem AB, A.................................... Swe. 17,723 703,375
Scancem AB, B.................................... Swe. 80,145 3,035,678
----------
10,805,340
----------
Business & Public Services 5.4%
Esselte AB, A Shares............................. Swe. 162,000 3,706,806
Esselte AB, B Shares............................. Swe. 94,400 2,221,033
*IFIL Finanziaria Partecipazioni SpA............. Itl. 1,650,000 5,685,771
Suez Lyonnaise Des Eaux SA....................... Fr. 212,058 21,362,126
*Uniholding Corp................................. U.S. 5,000 46,250
*(R)Uniholding Corp.............................. U.S. 576,584 4,800,062
----------
37,822,048
----------
Chemicals 1.6%
Aga AB, B........................................ Swe. 311,400 4,146,364
Inspec Group PLC................................. U.K. 1,175,000 3,874,336
Laporte PLC...................................... U.K. 290,000 3,098,053
----------
11,118,753

----------

</TABLE>

<PAGE>

MUTUAL EUROPEAN FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)

INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
Construction & Housing 4.4%
Gines Navarro Construcciones SA.................. Sp. 22,238 $ 459,550
Grupo Acciona SA................................. Sp. 75,560 8,512,358
GTM-Entrepose.................................... Fr. 113,141 5,662,152
Hollandsche Beton Groep NV....................... Neth. 24,234 5,527,313
OCP Construcciones SA............................ Sp. 42,350 2,667,173
Skanska AB, B.................................... Swe. 186,400 8,241,070
----------
31,069,616
----------
Data Processing & Reproduction 0.4%
Tecnost Mael SPA................................. Itl. 1,720,000 3,117,336
----------
Electronic Components & Instruments 2.0%
Aspoyhtymae OY................................... Fin. 109,750 5,051,322
Bergman & Beving AB, B........................... Swe. 143,854 5,169,855
Spectra Physics AB, A............................ Swe. 214,400 3,852,576
----------
14,073,753
----------
Energy Equipment & Services 0.4%
Bouygues Offshore SA, ADR........................ Fr. 212,700 2,658,750
----------
Energy Sources 4.3%
* Cie Generale De Geophysique SA, ADR.............. Fr. 230,000 4,427,500
Eni SpA.......................................... Itl. 550,000 3,109,892
Saga Petroleum AS, B............................. Nor. 233,200 4,072,696
Societe Elf Aquitane SA.......................... Fr. 123,750 13,350,605
Yorkshire Water PLC.............................. U.K. 825,000 5,364,994
----------
30,325,687
----------
Financial Services 1.4%
Axa-UAP SA....................................... Fr. 67,000 4,167,050
Credit Communal Holding Dexia Belgium............ Bel. 40,000 4,295,638
*(R)Cityscape Financial Corp..................... U.S. 88,000 1,666,775
*Mercury European Privitization Trust PLC,
wts............................................. U.K. 540,000 346,217
----------
10,475,680
----------
Food & Household Products 2.9%
Cadbury Schweppes PLC............................ U.K. 765,359 6,825,255
Klene Holding NV................................. Neth. 71,489 1,551,496
Williams PLC..................................... U.K. 800,000 4,303,152
*Worms Et Compagnie.............................. Fr. 129,864 7,690,144
----------
20,370,047
----------
Forest Products & Paper 0.2%
Jefferson Smurfit Group PLC...................... U.K. 600,000 1,748,572
----------
Industrial Components 7.6%
Berisford PLC.................................... U.K. 1,341,000 3,171,110
Charter PLC...................................... U.K. 446,161 5,936,529
Finnveden Invest AB, B........................... Swe. 486,400 9,746,235
Gunnebo AB....................................... Swe. 738,500 6,921,498
Hexagon AB, B.................................... Swe. 204,457 5,550,510
James Crean Ltd.................................. Irl. 1,399,537 4,199,311

</TABLE>

<PAGE>

MUTUAL EUROPEAN FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)

INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
Industrial Components (continued)
Lucas Varity PLC................................. U.K. 1,718,536 $ 5,952,730
Michelin SA, Class B............................. Fr. 69,861 4,195,203
Tomkins PLC...................................... U.K. 1,709,985 7,403,888
----------
53,077,014
----------
Insurance 2.5%
Istituto Nazionale Delle Assicurazioni SpA....... Itl. 3,666,000 5,552,715
Koelnische Rueckversicherungs AG................. Ger. 2,906 2,499,570
Pohjola Insurance Co. Ltd., A.................... Fin. 207,000 6,138,944
SCOR, SA......................................... Fr. 82,181 3,308,664
----------
17,499,893
----------
Leisure & Tourism 0.5%
*Scandic Hotels AB............................... Swe. 220,860 3,483,281
----------
Machinery & Engineering 3.8%
*Firefly AB, Class B............................. Swe. 237,000 490,207
Kverneland Gruppen AS............................ Nor. 230,300 6,253,029
Rauma OY......................................... Fin. 274,300 6,286,014
Sandblom & Stohne AB, Class B.................... Swe. 237,000 1,593,174
Triplex Lloyd PLC................................ U.K. 2,475,000 6,367,925
TT Group PLC..................................... U.K. 880,000 5,422,239
----------
26,412,588
----------
Merchandising 3.0%
*Ostasiatiske Kompagnie.......................... Den. 349,320 8,259,648
Hemkopskedjan AB................................. Swe. 400,000 4,110,917
Robinson & Co. Ltd............................... Sing. 546,000 2,845,142
Vendome Luxury Group PLC......................... U.K. 765,950 5,657,027
----------
20,872,734
----------
Multi-Industry 16.9%
Aker RGI ASA, A.................................. Nor. 203,244 3,993,227
Aker RGI ASA, B.................................. Nor. 340,648 5,949,209
Atle AB.......................................... Swe. 375,000 5,041,691
Bulten AB, B..................................... Swe. 640,000 5,046,862
Cie Financiere Richemont AG, Class A............. Swtz. 4,840 6,992,400
*Cie Generale d'Industrie et de Participation
CGIP............................................ Fr. 22,870 6,499,039
*Corporacion Financiera Reunida SA............... Sp. 468,900 1,972,976
Custos AB, A..................................... Swe. 59,500 1,276,841
Custos AB, B..................................... Swe. 341,520 7,350,925
Financiere Et Industrielle Gaz Et Eaux SA........ Fr. 11,550 4,775,895
Hogg Robinson PLC................................ U.K. 1,600,000 5,715,332
Investor AB, B................................... Swe. 67,300 3,545,311
Invik & Co. AB, B................................ Swe. 132,512 5,867,153
Kinnevik AB, B................................... Swe. 268,200 7,471,670
La France SA..................................... Fr. 13,585 2,660,734
Lagardere SCA.................................... Fr. 184,423 5,356,919
Marine Wendel.................................... Fr. 44,187 4,511,409
Montaigne Participations et Gestion SA........... Fr. 8,307 4,092,223

</TABLE>

<PAGE>

MUTUAL EUROPEAN FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)

INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Multi-Industry (continued)
Oerlikon-Buehrle Holding AG...................... Swtz. 30,000 $ 3,512,496
Oresund Investment AB............................ Swe. 298,683 8,108,517
Rue Imperiale de Lyon SA......................... Fr. 366 348,767
Sophus Berendsen, AS, B.......................... Den. 30,000 4,337,415
STE Eurafrance................................... Fr. 10,350 4,244,474
STE Generale de Belgique SA...................... Bel. 103,509 9,663,524
----------
118,335,009
----------
Real Estate 4.6%
*Castellum AB.................................... Swe. 860,000 6,448,193
Fastighets AB Tornet, A.......................... Swe. 227,206 2,672,839
First Union Real Estate Equity & Mtg.
Investments, SBI................................ U.S. 352,500 5,001,094
Metropolis Realty Trust Inc...................... U.S. 152,000 5,624,000
Santa Anita Realty Enterprises Inc............... U.S. 155,000 4,814,688
Sefimeg.......................................... Fr. 13,380 853,795
Ste Des Immeubles De France...................... Fr. 54,948 3,179,049
Wallenstam Byggnads AB, Class B.................. Swe. 480,000 3,567,966
----------
32,161,624
----------
Recreation & Other Consumer Goods 0.8%
EMI Group PLC.................................... U.K. 301,765 5,414,774
----------
Telecommunications 0.7%
*Cellular Communications International Inc....... U.S. 69,500 2,328,250
GN Great Nordic Ltd., br......................... Den. 5,000 530,881
*Telewest Communications PLC..................... U.K. 1,224,000 1,956,802
----------
4,815,933
----------
Transportation 1.2%
De Sammensluttede Vognmaend AF, B................ Den. 5,926 3,703,806
Florida East Coast Industries Inc................ U.S. 14,000 1,554,000
Railtrack Group PLC.............................. U.K. 310,000 3,229,113
----------
8,486,919
----------
Utilities Electrical & Gas 0.7%
Thames Water Group PLC........................... U.K. 445,000 5,139,261
----------
Total Common Stocks (Cost $514,907,366).......... 547,028,470
----------
Preferred Stocks 0.5%
First Union Real Estate Equity & Mtg.
Investments,
cvt., pfd., A................................... U.S. 5,000 240,000
Suedzucker AG Mannheim, pfd...................... Ger. 6,450 3,458,197
----------
Total Preferred Stocks (Cost $3,244,826)......... 3,698,197
----------

</TABLE>
16

<PAGE>

MUTUAL EUROPEAN FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>

PRINCIPAL
IN LOCAL
ISSUE COUNTRY CURRENCY** VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes 0.8%
Aamulehti Yhtymae OY, 6.00%, conv., 11/19/98..... Fin. 3,750,000 $ 3,430,263
Olivetti International NV, 3.75%, conv.,
12/31/99........................................ Itl. 4,000,000,000 2,330,234
----------
Total Corporate Bonds and Notes (Cost
$5,375,826)..................................... 5,760,497
----------
Bonds and Notes in Reorganization 2.0%
*Anchor Glass Container Corp., 9.91%, 7/15/99.... U.S. 121,259 123,684
*Anchor Glass Container Corp., zero coupon,
7/15/98......................................... U.S. 149,611 147,367
*Eurotunnel Finance Ltd., bank claim
tranche B........................................ U.K. (A) 25,000,000 1,967,516
tranche B........................................ U.K. 4,000,000 3,147,430
*Fokker NV,
6.50%, 8/26/96................................... Ger. 4,000,000 415,735
7.50%, 6/29/96................................... Ger. 4,500,000 467,702
10.00%,11/22/97.................................. Neth. 6,600,000 609,430
6.25%, 11/04/98.................................. Ger. 14,750,000 1,533,022
*Northampton Business Parks, bank claim.......... U.K. 9,124,783 5,470,403
----------
Total Bonds and Notes in Reorganization
(Cost $12,705,913)......................... 13,882,289
----------
Principal
Short Term Obligations 16.4% Amount
Federal Home Loan Bank, 5.15% to 5.67% with
maturities to 6/12/98........................... U.S. 70,145,000 68,225,160
Federal National Mortgage Association., 5.29% to
5.64% with maturities to 4/21/98.............. U.S. 47,800,000 46,659,060
----------
Total Short Term Obligations (Cost
$114,831,806)................................... 114,884,220
----------
Total Investments (Cost $651,065,737) 97.6%..... 685,253,673
Unrealized Gain in Forward Exchange
Contracts 1.9%........................... 13,094,897
Other Assets, less liabilities 0.5%............. 3,730,281
----------
Total Net Assets 100.0%......................... $702,078,851
==========
</TABLE>

*Non-income producing securities.
**Currency of countries indicated.
(A)Traded in French francs
(R)Restricted securities.

See Notes to Financial Statements.

<PAGE>

MUTUAL EUROPEAN FUND
Financial Statements

Statement of Assets and Liabilities
June 30, 1997 (unaudited)

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost $651,065,737).................. $685,253,673
Cash................................................................................ 11,481,463
Receivables:
Investment securities sold......................................................... 9,701,320
Capital shares sold................................................................ 3,528,978
Dividends and interest............................................................. 1,899,484
Unrealized gains on forward exchange contracts (Note 8)............................. 17,716,354
-----------
Total assets.................................................................... 729,581,272
-----------
Liabilities:
Payables:
Investment securities purchased.................................................... 21,887,874
Capital shares redeemed............................................................ 352,650
Unrealized loss on forward exchange contracts (Note 8).............................. 4,621,457
Accrued expenses.................................................................... 640,440
-----------
Total liabilities............................................................... 27,502,421
-----------
Net assets, at value................................................................. $702,078,851
===========
Net assets consist of:
Undistributed net investment income................................................. $ 12,540,982
Net unrealized appreciation......................................................... 47,282,833
Accumulated net realized gain....................................................... 43,034,337
Net capital paid in on shares of capital stock...................................... 599,220,699
-----------
Net assets, at value................................................................. $702,078,851
===========

Class Z
Net asset value per share ($616,219,075 / 47,843,970 shares outstanding).................. $12.88
======
Class I
Net asset value per share ($58,906,345 / 4,585,489 shares outstanding).................... $12.85
======
Maximum offering price ($12.85 / 95.50%).................................................. $13.46
======
Class II
Net asset value per share ($26,953,431 / 2,105,900 shares outstanding).................... $12.80
======
Maximum offering price ($12.80 / 99.00%).................................................. $12.93
======
</TABLE>

See Notes to Financial Statements.

<PAGE>

MUTUAL EUROPEAN FUND
Financial Statements (continued)

Statement of Operations
for the six months ended June 30, 1997 (unaudited)

<TABLE>
<S> <C> <C>
Investment income:
(net of $1,328,755 foreign taxes withheld)
Dividends............................................................. $11,974,765
Interest.............................................................. 3,189,952
-----------
Total income...................................................... $15,164,717
Expenses:
Management fees (Note 4).............................................. 2,371,151
Administrative fees (Note 4).......................................... 230,663
Distribution fees (Note 4)
Class I......................................................... 62,453
Class II........................................................ 69,422
Transfer agent fees (Note 4).......................................... 203,326
Custodian fees........................................................ 151,840
Reports to shareholders............................................... 30,913
Audit fees............................................................ 9,924
Legal fees............................................................ 11,022
Registration and filing fees.......................................... 103,352
Directors' fees and expenses.......................................... 2,556
Other................................................................. 7,833
-----------
Total expenses.................................................... 3,254,455
Less expenses waived (Note 4)......................................... (50,034)
-----------
Total expenses less fees waived................................... 3,204,421
-----------
Net investment income............................................. 11,960,296
Realized and unrealized gain:
Net realized gain on:
Investments.......................................................... 26,856,193
Foreign currency transactions........................................ 12,813,653
-----------
39,669,846
-----------
Net unrealized appreciation on:
Investments.......................................................... 5,761,657
Foreign currency translation of other assets and liabilities......... 13,085,124
-----------
18,846,781
-----------
Net realized and unrealized gain....................................... 58,516,627
-----------
Net increase in net assets resulting from operations................... $70,476,923
===========
</TABLE>

See Notes to Financial Statements.

<PAGE>

MUTUAL EUROPEAN FUND
Financial Statements (continued)

Statements of Changes in Net Assets

Six months For period July 3, 1996
ended (commencement of
June 30, 1997 operations) to
(unaudited) December 31, 1996
------------- ------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income........................................ $ 11,960,296 $ 2,205,789
Net realized gain on investments and foreign currency
transactions............................................... 39,669,846 4,514,505
Net unrealized appreciation.................................. 18,846,781 28,436,052
------------- -------------
Net increase in net assets resulting from operations....... 70,476,923 35,156,346
Distributions to shareholders:
From net investment income
Class Z...................................................... -- (1,947,610)
Class I...................................................... -- (25,784)
Class II..................................................... -- (7,669)
From net realized gain
Class Z...................................................... -- (779,044)
Class I...................................................... -- (10,995)
Class II..................................................... -- (4,015)

Capital share transactions (Note 3)
Class Z...................................................... 100,471,265 418,343,037
Class I...................................................... 45,939,268 9,032,503
Class II..................................................... 22,742,439 2,692,187
------------- -------------
Net increase in net assets................................. 239,629,895 462,448,956
Net assets:
Beginning of period........................................... 462,448,956 --
------------- -------------
End of period................................................. $ 702,078,851 $462,448,956
============ ==================

</TABLE>

See Notes to Financial Statements.

<PAGE>

MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual European Fund (the Fund) is a separate diversified series of Franklin
Mutual Series Fund Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation and income through a flexible policy of investing
in stocks and corporate debt securities. The following summarizes the Fund's
significant accounting policies.

a. Security Valuation:

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and 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.

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, 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 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
distribute substantially all of its taxable income.

d. Securities Transactions, Investment Income, Expenses and Distributions:

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

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

<PAGE>

MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Securities Transactions, Investment Income, Expenses and Distributions:
(continued)

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

e. Accounting Estimates:

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

f. Options:

Options purchased are recorded as investments; options written (sold) are
accounted for as liabilities. When an option expires, the premium (original
option value) is realized as a gain if the option was written or as a loss if
the option was purchased. When the exercise of an option results in a cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.

g. Securities Sold Short:

The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed by purchasing the same security at the current
market value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates.

The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must also maintain a deposit with the
Broker consisting of cash and securities having a value equal to a specified
percentage of the value of the securities sold short.

2. MERGER OF HEINE SECURITIES AND FRANKLIN RESOURCES

On October 31, 1996, pursuant to an agreement between Franklin Resources, Inc.
(FRI) and Heine Securities Corporation (Heine), the investment adviser, the
assets of Heine were acquired by Franklin Mutual Advisers, Inc. (FMA), a
subsidiary of FRI. FMA became the investment adviser to the Series Fund and the
Series Fund name changed from Mutual Series Fund Inc. to Franklin Mutual Series
Fund Inc.

<PAGE>

MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)

3. CAPITAL STOCK

Effective November 1, 1996, the Fund offered three classes of shares: Class Z,
Class I, and Class II. Outstanding shares before that date were designated as
Class Z shares. The shares have the same rights except for their initial sales
load, distribution fees, voting rights on matters affecting a single class and
the exchange privilege of each class.

At June 30, 1997, there were 400 million Fund shares authorized ($0.001 par
value) of which 200 million, 100 million, and 100 million were designated as
Class Z, Class I, and Class II shares, respectively. Transactions in the Fund's
shares were as follows:

For the period
July 3, 1996
(commencement of
operations)
Six months ended to December 31, 1996
June 30, 1997
-------------------------- --------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class Z
Shares sold.............................................. 14,677,957 $178,094,215 42,171,939 $446,968,711
Shares issued on reinvestment of distributions........... -- -- 229,503 2,586,502
Shares redeemed.......................................... (6,380,920) (77,622,950) (2,854,509) (31,212,176)
---------- ------------ ---------- ------------
Net increase............................................. 8,297,037 $100,471,265 39,546,933 $418,343,037
========== ============ ========== ============

</TABLE>

<TABLE>
<CAPTION>
For the period
November 1, 1996
Six months ended to December 31, 1996
June 30, 1997
-------------------------- --------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class I
Shares sold.............................................. 5,610,052 $ 68,824,265 813,014 $ 9,085,283
Shares issued on reinvestment of distributions........... -- -- 2,838 31,814
Shares redeemed.......................................... (1,832,836) (22,884,997) (7,579) (84,594)
---------- ----------- ------- ----------
Net increase............................................. 3,777,216 $ 45,939,268 808,273 $ 9,032,503
========== =========== ======= ==========
</TABLE>

<TABLE>
<CAPTION>
For the period
November 1, 1996
Six months ended to December 31, 1996
June 30, 1997
-------------------------- --------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class II
Shares sold.............................................. 1,952,353 $ 23,808,741 242,959 $ 2,703,061
Shares issued on reinvestment of distributions........... -- -- 860 9,680
Shares redeemed.......................................... (88,458) (1,066,302) (1,814) (20,554)
--------- ----------- ------- ----------
Net increase............................................. 1,863,895 $ 22,742,439 242,005 $ 2,692,187
========= =========== ======= ==========
</TABLE>

<PAGE>

MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)

4. TRANSACTIONS WITH AFFILIATED AND RELATED PARTIES

Certain officers of the Fund are also officers or directors of FMA, Franklin
Templeton Services, Inc. (FTSI), Franklin Templeton Distributors, Inc. (FTD) and
Franklin Templeton Investor Services, Inc. (FTIS), the Fund's investment
manager, administrative manager, principal underwriter for Class I and II
shares, and transfer agent, respectively.

The Fund pays an investment management fee to FMA of .80% per year of the
average daily net assets of the Fund. In connection with the merger, FRI and FMA
agreed, through October 31, 1999, to limit the expense ratio of the Fund to be
no higher than expected for the Fund's 1996 fiscal year, except that increases
in expenses will be permitted if the Fund's Board of Directors determines that
such expenses would have been higher had the merger not taken place. This
expense limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions, and expenses of an extraordinary
nature. The expense reduction is set forth in the Statement of Operations.

The Fund pays its allocated share of an administrative fee to FTSI based on the
Series Fund's aggregate average daily net assets as follows: .15% per annum of
the first $200 million of the Fund's average daily net assets, .135% of the next
$500 million, .10% of the next $500 million, and .075% in excess of $1.2
billion.

The Fund reimburses FTD up to .35% and 1.00% per year of the average daily net
assets of Class I and Class II, respectively, for costs incurred in marketing
the Fund's shares. FTD received net commissions from sales of Fund shares and
received contingent deferred sales charges for the period of $52,386 and $8,198,
respectively.

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1997 aggregated $485,094,048 and $208,088,520,
respectively.

6. INCOME TAXES

At June 30, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $651,065,737 was as follows:

Unrealized appreciation..................... $53,103,441
Unrealized depreciation..................... (18,915,505)
---------
Net unrealized appreciation................. $34,187,936
=========

<PAGE>

MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)

7. RESTRICTED SECURITIES

The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at June 30, 1997 are as follows:

Number of
Shares or Acquisition
Principal Amount Issuer Date Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
88,000 Cityscape Financial Corp. ................................................. 11/25/96 $1,666,775
576,584 Uniholding Corp. .......................................................... 01/06/97 4,800,062
----------
Total Restricted Securities (cost $95,411,422) (.92% of Net Assets)........ $6,466,837
==========
</TABLE>

8. FINANCIAL INSTRUMENTS

The Fund has been a party to financial instruments with off-balance sheet risk
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the functional currency
and the foreign currencies and interest rates. These instruments involve market
risk in excess of the amount recognized on the Statement of Assets and
Liabilities. Some of these risks have been minimized by offsetting contracts.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts, future movement in currency values and interest rates and
contract positions that are not exact offsets. The contract amount indicates the
extent of the Fund's involvement in such contracts.

The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.

As of June 30, 1997, the Fund had the following forward foreign currency
contracts outstanding:

In Settlement Unrealized
Contracts to Buy: Exchange for Date Gain/(Loss)
- ------------------------------------------------------------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
4,650,000 Australian Dollar...................................... U.S. $ 3,480,705 11/06/97 U.S. $ 36,784
463,599 British Pound.......................................... 771,429 07/18/97 182
2,920,023 British Pound.......................................... 4,704,740 08/18/97 150,679
4,282,430 British Pound.......................................... 6,969,043 09/18/97 145,100
3,818,572 British Pound.......................................... 6,224,554 12/15/97 101,907
2,000,000 Finnish Markka......................................... 387,019 09/03/97 74
1,796,400 Irish Punt............................................. 2,705,108 11/14/97 12,768
972,853 Swiss Franc............................................ 669,832 09/10/97 2,108
------------ -----------
U.S. $25,912,430 U.S. $ 449,602
============ -----------
</TABLE>

<PAGE>

MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)

8. FINANCIAL INSTRUMENTS (cont.)

In Settlement Unrealized
Contracts to Sell: Exchange for Date Gain/(Loss)
- ------------------------------------------------------------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
4,650,000 Australian Dollar................................. U.S. $ 3,608,400 11/06/97 U.S. $ 90,911
494,495,320 Belgium Franc..................................... 13,992,176 11/07/97 239,904
139,841,497 Danish Krone...................................... 21,672,632 10/24/97 464,743
23,077,447 Dutch Guilder..................................... 12,294,840 09/17/97 471,408
12,607,845 Dutch Guilder..................................... 6,553,501 12/10/97 54,065
114,030,322 Finnish Markka.................................... 22,741,235 09/03/97 671,064
333,877,932 French Franc...................................... 61,391,134 07/17/97 4,508,451
206,391,403 French Franc...................................... 36,604,266 08/29/97 1,341,767
10,158,784 French Franc...................................... 1,784,462 11/14/97 39,668
102,455,671 French Franc...................................... 17,988,458 11/28/97 374,340
23,130,033 Deutschemark...................................... 13,758,444 09/18/97 416,375
1,518,000 Irish Punt........................................ 2,301,288 11/14/97 4,618
42,703,993,230 Italian Lira...................................... 26,327,514 01/02/98 1,301,734
48,375,010 Norwegian Krone................................... 7,003,905 09/10/97 374,058
126,193,579 Norwegian Krone................................... 17,798,812 12/09/97 415,675
2,615,431 Singapore Dollar.................................. 1,849,668 08/29/97 15,501
2,581,329,415 Spanish Peseta.................................... 17,923,060 08/18/97 396,400
55,552,421 Swedish Krona..................................... 8,416,396 07/21/97 1,228,694
230,448,545 Swedish Krona..................................... 33,084,500 08/15/97 3,237,789
30,047,046 Swedish Krona..................................... 4,155,545 10/21/97 253,255
375,247,238 Swedish Krona..................................... 49,840,259 11/18/97 1,048,037
251,627,998 Swedish Krona..................................... 33,131,498 02/17/98 295,893
7,170,954 Swiss Franc....................................... 4,975,306 09/10/97 22,402
------------ -----------
U.S. $419,197,300 17,266,752
============
-----------
Unrealized gain on forward exchange contracts............... 17,716,354
</TABLE>

<TABLE>
<CAPTION>
-----------

Contracts to Buy:
<S> <C> <C> <C> <C>
27,871,217 Danish Krone...................................... U.S. $ 4,278,290 10/24/97 (51,435 )
6,625,224 Finnish Markka.................................... 1,310,719 09/03/97 (28,430 )
22,937,340 French Franc...................................... 3,983,094 07/17/97 (75,266 )
32,349,119 French Franc...................................... 5,783,747 08/29/97 (256,817 )
9,519,862 Deutschemark...................................... 5,554,475 09/18/97 (63,145 )
608,953,193 Spanish Peseta.................................... 4,195,723 08/18/97 (61,064 )
2,809,271 Swedish Krona..................................... 367,971 11/18/97 (2,690 )
8,949,348 Swiss Franc....................................... 6,276,599 09/10/97 (95,376 )
------------ -----------
U.S. $31,750,616 U.S. $ (634,223 )
============
-----------
</TABLE>

<PAGE>

MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)

8. FINANCIAL INSTRUMENTS (cont.)

</TABLE>
27

<PAGE>

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<PAGE>

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

FRANKLIN TEMPLETON GROUP

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GLOBAL GROWTH Franklin Templeton High Income Fund Allocator Series FRANKLIN STATE-SPECIFIC
Franklin Global Health Care Fund Currency Fund Franklin Templeton Conservative FUNDS SEEKING
Franklin Templeton Japan Fund Templeton Americas Government Target Fund TAX-FREE INCOME
Templeton Developing Securities Fund Franklin Templeton Moderate Alabama
Markets Trust Target Fund Arizona*
Templeton Foreign Fund GROWTH Franklin Templeton Growth Arkansas**
Templeton Foreign Smaller Franklin Blue Chip Fund Target Fund California*
Companies Fund Franklin California Growth Fund Colorado
Templeton Global Franklin DynaTech Fund INCOME Connecticut
Infrastructure Fund Franklin Equity Fund Franklin Adjustable Rate Florida*
Templeton Global Franklin Gold Fund Securities Fund Georgia
Opportunities Trust Franklin Growth Fund Franklin Adjustable U.S. Hawaii**
Templeton Global Franklin MidCap Growth Fund Government Securities Fund Indiana
Real Estate Fund Franklin Small Cap Franklin's AGE High Income Fund Kentucky
Templeton Global Growth Fund Franklin Investment Grade Louisiana
Smaller Companies Fund Mutual Discovery Fund Income Fund Maryland
Templeton Greater European Fund Franklin Short-Intermediate Massachusetts***
Templeton Growth Fund GROWTH AND INCOME U.S. Government Securities Fund Michigan*
Templeton Latin America Fund Franklin Asset Allocation Fund Franklin U.S. Government Minnesota***
Templeton Pacific Growth Fund Franklin Balance Sheet Securities Fund Missouri
Templeton World Fund Investment Fund Franklin Money Fund New Jersey
Franklin Convertible Franklin Federal Money Fund New York*
GLOBAL GROWTH AND INCOME Securities Fund North Carolina
Franklin Global Utilities Fund Franklin Equity Income Fund For Corporations Ohio***
Franklin Templeton German Franklin Income Fund Franklin Corporate Qualified Oregon
Government Bond Fund Franklin MicroCap Value Fund Dividend Fund Pennsylvania
Franklin Templeton Global Franklin Natural Resources Fund Tennessee**
Currency Fund Franklin Real Estate FRANKLIN FUNDS SEEKING Texas
Mutual European Fund Securities Fund TAX-FREE INCOME Virginia
Templeton Global Bond Fund Franklin Rising Dividends Fund Federal Intermediate-Term Washington**
Templeton Growth and Franklin Strategic Income Fund Tax-Free Income Fund
Income Fund Franklin Utilities Fund Federal Tax-Free Income Fund VARIABLE ANNUITIES+
Franklin Value Fund High Yield Tax-Free Income Fund Franklin Valuemark(R)
GLOBAL INCOME Mutual Beacon Fund Insured Tax-Free Income Fund Franklin Templeton
Franklin Global Government Mutual Qualified Fund Puerto Rico Tax-Free Valuemark Income Plus
Income Fund Mutual Shares Fund Income Fund (an immediate annuity)
Franklin Templeton Hard Templeton American Trust, Inc. Tax-Exempt Money Fund
Currency Fund

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*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.

02/97.1

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BOARD OF DIRECTORS

Michael F. Price (Chairman)
Edward I. Altman, Ph.D.
Ann Torre Grant
Andrew H. Hines, Jr.
Peter A. Langerman
William Lippman
Bruce A. MacPherson INVESTMENT MANAGER
Fred R. Millsaps Franklin Mutual Advisers, Inc.
Leonard Rubin 51 John F. Kennedy Parkway
Barry F. Schwartz Short Hills, NJ 07078
Vaugn R. Sturtevant, M.D.
Robert E. Wade SHAREHOLDER SERVICES
1-800-632-2301 - (Class I & II)
OFFICERS 1-800-448-FUND - (Class Z)
Michael F. Price, President
Peter A. Langerman, Exec. Vice President FUND INFORMATION
Jeffrey A. Altman, Senior Vice President 1-800-342-5236
Robert L. Friedman, Senior Vice President
Raymond Garea, Senior Vice President This report must be preceded or accompanied by the current prospectus of the
Lawrence N. Sondike, Senior Vice President Mutual European Fund, which contains more complete information including risk
Greg Gigliotti, Vice President factors, charges and expenses. Like any investment in securities, the Fund's
Susan Potto, Vice President portfolio will be subject to the risk of loss from market, currency, economic,
Tom Price, Vice President political and other factors, as well as investment decisions by the Investment
Leigh Walzer, Vice President Manager, which will not always be profitable or wise. The Fund and its investors
David Winters, Vice President are not protected from such losses by the Investment Manager. Therefore,
James Baio, Treasurer investors who cannot accept the risk of such losses should not invest in shares
Stuart C. Pistol, Assistant Treasurer of the Fund.
Liz Cohernour, Gen. Counsel & Secretary To ensure the highest quality of service, telephone calls to or
Lily Simo, Assistant Secretary from our service departments may be monitored, recorded and accessed. These
calls can be determined by the presence of a regular beeping tone.

[RECYCLING LOGO] Printed on recycled paper
478 S97 06/97

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