FRANKLIN MUTUAL SERIES FUND INC, N-30D, 1998-09-02

FRANKLIN MUTUAL SERIES FUND INC
N-30D, 1998-09-02

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SEMI ANNUAL

JUNE 30, 1998

MUTUAL SHARES FUND

REPORT

[LOGO]

FRANKLIN(R) TEMPLETON(R)

PAGE

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.

PAGE

CONTENTS

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

Performance Summaries
Class Z ............................... 4
Class I ............................... 6
Class II .............................. 7

Management Update ........................ 8

Statement of Investments ................. 12

Financial Statements ..................... 25

Notes to Financial
Statements ............................... 28
</TABLE>

FUND CATEGORY

[PYRAMID GRAPH]

SHAREHOLDER LETTER

Your Fund's Objective: Mutual Shares Fund seeks capital appreciation, with
income as a secondary objective, by investing primarily in common and preferred
stocks, bonds, and convertible securities. The fund may also invest in foreign
securities.

Dear Shareholder:

We are pleased to bring you this semiannual report of Mutual Shares Fund, which
covers the six months ended June 30, 1998. During this period, relatively low
interest rates, benign inflation, and moderate economic growth contributed to
strong stock market performance in the U.S. The Standard & Poor's(R) 500 Stock
Index rose 17.71% and the Dow Jones(R) Industrial Average advanced 14.11%, as
many investors appeared to focus on large growth companies, regardless of
valuation.* In such an environment, contrarian "value" investors such as
ourselves have difficulty performing in line with broad market indices, and the
fund's Class Z shares produced a six-month 6.67% cumulative total return, as
discussed in the Performance Summary on page 4.

*Source: Standard & Poor's Micropal. Dow Jones Industrial Average's total return
is calculated by Wilshire Associates, Inc. Indices are unmanaged. Price
appreciation 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 12 of
this report.

PAGE

PORTFOLIO BREAKDOWN
Based on Total Net Assets
6/30/98

This chart shows in pie format the portfolio breakdown of the fund's securities
on June 30, 1998, based on total net assets.

[PIE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
<S> <C>
Equities 79.0%
Bonds 3.4%
Short-Term Investments & Other
Net Assets 17.6%
</TABLE>

TOP 10 INDUSTRIES
6/30/98

This table shows the Top 10 Industries of the fund on June 30, 1998, based on
total net assets.

<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
<S> <C>
Banking 8.1%
Broadcasting & Publishing 7.6%
Financial Services 6.1%
Multi-Industry 5.7%
Insurance 5.0%
Energy Sources 5.0%
Transportation 4.7%
Health & Personal Care 4.2%
Telecommunications 4.0%
Food & Household Products 2.8%
</TABLE>

A number of our European holdings contributed positively to the fund's
performance. The stock price of Suez Lyonnaise des Eaux SA rose considerably as
it metamorphosed into one of the world's largest water and waste services
companies, and we believe still more value could be unlocked. The share value of
Investor AB, a large Swedish company whose holdings include Astra AB
(pharmaceuticals), Ericsson LM (telecommunications equipment) and Scania AB
(truck manufacturing), also increased substantially. Investor's new chairman is
driving more restructuring at all divisions, yet during the period, its shares
traded at an approximate 20% discount to its book value. In our opinion, the
firm has excellent long-term potential.

Some of the fund's largest U.S. positions, including MCI Communications Corp.
and Morgan Stanley Dean Witter & Co., also performed well. MCI's merger with
Worldcom, which is scheduled for this summer, benefited the fund significantly.
And the merger of Dean Witter, Discover and The Morgan Stanley Group appears to
have been a considerable success. Combined, these two powerful franchises offer
compelling synergies, and, in our opinion, its management, which owns a
substantial amount of the stock, is very shareholder oriented.

However, the first half of 1998 held a major disappointment for us - Sunbeam
Corp. Although we recovered our investment in Sunbeam several times over by
selling some of its shares in 1992 and 1994, the decreasing value of its stock
during this reporting period diminished the fund's return appreciably. In March,
Sunbeam made a series of announcements that disclosed weakness in its underlying
businesses and also lowered future earnings expectations. As a result, its share
price fell substantially. On June 15, Sunbeam's Board of Directors, including
Peter Langerman of Franklin Mutual Advisers, Inc., terminated Albert Dunlap as
the company's chief executive officer. While

PAGE

TOP 10 HOLDINGS
6/30/98

This table shows the Top 10 Holdings of the fund on June 30, 1998, based on
total net assets.

<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
<S> <C>
Chase Manhattan Corp.
Banking, U.S. 5.0%

Investor AB, A & B
Multi-Industry, Sweden 3.4%
Mediaone Group, Inc.
Broadcasting & Publishing, U.S. 2.7%

Morgan Stanley
Dean Witter & Co.
Financial Services, U.S. 2.0%

Railtrack Group PLC
Transportation,
United Kingdom 1.6%

General Motors Corp.
Automobiles, U.S. 1.4%

MCI Communications Corp.
Telecommunications, U.S. 1.3%

Suez Lyonnaise des Eaux SA
Business & Public Services,
France 1.3%

Sunbeam Corp.
Food & Household Products, U.S. 1.0%

Fund American Enterprises
Holdings Inc.
Insurance, U.S. 0.9%
</TABLE>

making no predictions at this point about Sunbeam's share price, we note that as
of June 30, 1998, our position in Sunbeam represented approximately 1% of the
fund's total net assets. On December 31, 1997, it was 4.4% of the fund's total
net assets.

Looking forward, we believe equity markets should present us with many
opportunities, and expect to find value in small-cap and medium-cap stocks. The
remainder of 1998 should be an exciting period for Europe as the continent
prepares for limited introduction of the euro (the region's future single
currency) on January 1, 1999. And the Asian financial crises of 1997 could also
provide investment opportunities for us. Of course, we are always mindful of the
fund's low risk, low volatility philosophy, and our investments will be
consistent with this.

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

Sincerely,

Franklin Mutual Advisers Senior Portfolio Management Team

- -------------------------------------------------------------------------------
The discussion contained in this report reflects our views, opinions and
portfolio holdings as of June 30, 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
historic performance is no guarantee of future results, these insights may help
you understand our investment and management philosophy.

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. The fund generally expects
to hedge against currency risk where feasible and to the extent possible. 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.
- -------------------------------------------------------------------------------
3

PAGE

Performance Summary

CLASS Z

Mutual Shares Fund - Class Z produced a 6.67% cumulative total return for the
six-month period ended June 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions.

The fund's Class Z share price increased $1.42, from $21.30 on December 31,
1997, to $22.72 on June 30, 1998. During the reporting period, Class Z shares
paid no distributions. Distributions will vary depending on income earned by the
fund and any profits realized from the sale of securities in the portfolio, as
well as the level of the fund's operating expenses.

Past performance is not predictive of future results.

PAGE

CLASS Z
Periods ended 6/30/98

<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
<S> <C> <C> <C>
Cumulative Total Return(1) 18.58% 143.41% 330.27%

Average Annual Total Return(2) 18.58% 19.47% 15.71%

Value of $10,000 Investment(3) $11,858 $24,341 $43,027
</TABLE>

<TABLE>
<CAPTION>
6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 9.93% 21.64% 20.93% 26.93% 18.58%
</TABLE>

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

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

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

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

All calculations assume reinvestment of dividends and capital gains 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 returns would have been lower.
Franklin Mutual Advisers 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.

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 investments are made. You may
have a gain or loss when you sell your shares.

Past performance is not predictive of future results.

PAGE

CLASS I

Mutual Shares Fund - Class I produced a 6.44% cumulative total return for the
six-month period ended June 30, 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.

The fund's Class I share price, as measured by net asset value, increased $1.37,
from $21.26 on December 31, 1997, to 22.63 on June 30, 1998. During the
reporting period, Class I shares paid no distributions. 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.

CLASS I
Periods ended 6/30/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (11/1/96)
<S> <C> <C>
Cumulative Total Return(1) 18.17% 43.42%

Average Annual Total Return(2) 12.87% 20.86%

Value of $10,000 Investment(3) $11,287 $13,696
</TABLE>

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

2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the maximum 4.5% initial
sales charge.

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

Past performance is not predictive of future results.

PAGE

CLASS II

Mutual Shares Fund - Class II produced a 6.09% cumulative total return for the
six-month period ended June 30, 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 Class II share price, as measured by net asset value, increased
$1.29, from $21.18 on December 31, 1997, to $22.47 on June 30, 1998. During the
reporting period, Class II shares paid no distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio.

CLASS II
Periods ended 6/30/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (11/1/96)
<S> <C> <C>
Cumulative Total Return(1) 17.37% 41.85%

Average Annual Total Return(2) 15.21% 22.17%

Value of $10,000 Investment(3) $11,521 $13,944
</TABLE>

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

2. Average annual total return represents the average annual change in value of
an investment over the 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.

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

Past performance is not predictive of future results.

PAGE

MANAGEMENT UPDATE

Franklin Mutual Advisers, Inc. is pleased to announce promotions within its
senior portfolio management team, which will become effective November 1, 1998.

Peter Langerman, currently Chief Operating Officer, will become CEO of Franklin
Mutual Advisers. Robert Friedman, currently Senior Vice President, will become
Chief Investment Officer and will have overall responsibility for the funds'
portfolio management. Their work continues to be supported by the senior
portfolio team of Jeff Altman, Ray Garea, David Marcus, Larry Sondike and David
Winters. While Michael Price will no longer be actively managing the funds'
portfolios, he will continue as Chairman of the Boards of Directors that oversee
the Mutual Series funds and Franklin Mutual Advisers, Inc.

Mr. Langerman joined Heine Securities Corporation (predecessor of Franklin
Mutual Advisers) in 1986 as an analyst, and was named Chief Operating Officer in
May 1997. He has spent a considerable part of his time at Mutual Series focusing
on investments in companies in financial distress and bankruptcy.

Mr. Friedman has been responsible for numerous large domestic positions as well
as having oversight of non-U.S. investments. He was based in London for two
years, and has considerable experience implementing the Mutual Series value
philosophy both domestically and abroad. He has also been instrumental to the
success of Mutual Discovery Fund.

PAGE

MUTUAL SHARES FUND
Financial Highlights

<TABLE>
<CAPTION>
CLASS Z
-----------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ------------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+
(For a share outstanding throughout
the period)
Net asset value, beginning of
period................................ $21.30 $18.57 $17.29 $15.74 $16.19 $14.67
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income................ .29 .42 .55 .40 .27 .28
Net realized and unrealized gains.... 1.13 4.43 2.96 4.10 .46 2.78
-----------------------------------------------------------------------------------
Total from investment operations...... 1.42 4.85 3.51 4.50 .73 3.06
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income................ -- (.54) (.50) (.39) (.27) (.28)
Net realized gains................... -- (1.58) (1.73) (2.56) (.91) (1.26)
-----------------------------------------------------------------------------------
Total distributions................... -- (2.12) (2.23) (2.95) (1.18) (1.54)
-----------------------------------------------------------------------------------
Net asset value, end of period........ $22.72 $21.30 $18.57 $17.29 $15.74 $16.19
-----------------------------------------------------------------------------------
Total Return*......................... 6.67% 26.44% 20.76% 29.11% 4.53% 21.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)..... $7,984,186 $7,918,986 $6,543,063 $5,229,574 $3,745,726 $3,527,076
Ratios to average net assets:
Expenses............................. .73%** .72% .70% .69% .72% .74%
Expenses, excluding waiver and
payments by affiliate............... .76%** .75% .72% .69% .72% .74%
Net investment income................ 2.48%** 1.92% 3.02% 2.47% 1.80% 1.90%
Portfolio turnover rate............... 29.22% 49.61% 58.35% 79.32% 66.55% 48.78%
</TABLE>

*Total return is not annualized.
**Annualized.
+Per share amounts for all periods prior to December 31, 1996 have been restated
to reflect a 5-for-1 stock split effective February 3, 1997.
9

PAGE

MUTUAL SHARES FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS I
--------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ------------------------
(UNAUDITED) 1997+++ 1996+
--------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $21.26 $18.56 $18.90
--------------------------------------------
Income from investment operations:
Net investment income...................................... .24 .34 .21
Net realized and unrealized gains.......................... 1.13 4.43 1.08
--------------------------------------------
Total from investment operations............................ 1.37 4.77 1.29
--------------------------------------------
Less distributions from:
Net investment income...................................... -- (.49) (.47)
Net realized gains......................................... -- (1.58) (1.16)
--------------------------------------------
Total distributions......................................... -- (2.07) (1.63)
--------------------------------------------
Net asset value, end of period.............................. $22.63 $21.26 $18.56
--------------------------------------------
Total Return*............................................... 6.44% 26.03% 6.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $1,702,262 $1,043,262 $35,634
Ratios to average net assets:
Expenses................................................... 1.08%** 1.07% 1.09%**
Expenses, excluding waiver and payments by affiliate....... 1.11%** 1.10% 1.18%**
Net investment income...................................... 2.18%** 1.58% 2.44%**
Portfolio turnover rate..................................... 29.22% 49.61% 58.35%
</TABLE>

*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 5-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.

PAGE

MUTUAL SHARES FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
CLASS II
---------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ------------------------
(UNAUDITED)+++ 1997+++ 1996+
---------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $21.18 $18.56 $18.90
---------------------------------------------
Income from investment operations:
Net investment income...................................... .17 .20 .20
Net realized and unrealized gains.......................... 1.12 4.42 1.08
---------------------------------------------
Total from investment operations............................ 1.29 4.62 1.28
---------------------------------------------
Less distributions from:
Net investment income...................................... -- (.42) (.46)
Net realized gains......................................... -- (1.58) (1.16)
---------------------------------------------
Total distributions......................................... -- (2.00) (1.62)
---------------------------------------------
Net asset value, end of period.............................. $22.47 $21.18 $18.56
---------------------------------------------
Total Return*............................................... 6.09% 25.17% 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $1,093,269 $636,838 $16,873
Ratios to average net assets:
Expenses................................................... 1.73%** 1.72% 1.71%**
Expenses, excluding waiver and payments by affiliate....... 1.76%** 1.75% 1.80%**
Net investment income...................................... 1.53%** .92% 1.69%**
Portfolio turnover rate..................................... 29.22% 49.61% 58.35%
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 5-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.

See Notes to Financial Statements.
11

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 78.7%
AEROSPACE & MILITARY TECHNOLOGY 1.6%
*Coltec Industries Inc. .................................... United States 386,000 $ 7,671,750
*General Motors Corp., H ................................... United States 463,000 21,818,875
*Hexcel Corp. .............................................. United States 1,740,895 39,387,749
+*Kreisler Manufacturing Corp. ............................. United States 154,480 1,525,490
*Litton Industries Inc. .................................... United States 329,200 19,422,800
Lockheed Martin Corp. ...................................... United States 286,618 30,345,681
Northrop Grumman Corp. ..................................... United States 458,000 47,231,250
Primex Technologies Inc. ................................... United States 63,990 3,279,488
---------------
170,683,083
---------------
APPLIANCES & HOUSEHOLD DURABLES .6%
Black & Decker Corp. ....................................... United States 594,775 36,281,275
Premark International Inc. ................................. United States 715,300 23,068,425
---------------
59,349,700
---------------
AUTOMOBILES 2.4%
*Borg-Warner Automotive Inc. ............................... United States 556,300 26,737,169
Chrysler Corp. ............................................. United States 789,600 44,513,700
General Motors Corp. ....................................... United States 2,279,000 152,265,688
Volvo AB, B................................................. Sweden 1,080,300 32,172,347
---------------
255,688,904
---------------
BANKING 7.4%
Chase Manhattan Corp. ...................................... United States 7,133,976 538,615,188
Cullen/Frost Bankers Inc. .................................. United States 362,300 19,654,775
First Chicago NBD Corp. .................................... United States 1,021,270 90,510,054
First Union Corp. .......................................... United States 658,540 83,953,978
Fleet Financial Group Inc. ................................. United States 314,700 26,277,450
Mercantile Bancorporation Inc. ............................. United States 35,300 1,778,238
PNC Bank Corp. ............................................. United States 364,700 19,625,419
Royal Bank of Canada........................................ Canada 220,300 13,257,999
---------------
793,673,101
---------------
BEVERAGES & TOBACCO 2.0%
B.A.T. Industries Plc. ..................................... United Kingdom 770,000 7,721,327
Brown-Forman Corp., B....................................... United States 354,700 22,789,475
+Genesee Corp., A........................................... United States 15,911 525,063
+Genesee Corp., B........................................... United States 103,550 3,417,150
Heineken Holding NV, A...................................... Netherlands 690,581 22,745,515
Philip Morris Companies Inc. ............................... United States 1,195,700 47,080,688
RJR Nabisco Holdings Corp. ................................. United States 3,829,599 90,952,976
UST Inc. ................................................... United States 713,000 19,251,000
---------------
214,483,194
---------------

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BROADCASTING & PUBLISHING 7.6%
BHC Communications Inc., A.................................. United States 37,917 $ 5,320,229
Central Newspapers Inc., A.................................. United States 425,300 29,664,675
*Chris Craft Industries Inc. ............................... United States 216,865 11,859,805
Comcast Corp., A............................................ United States 105,500 4,193,625
Comcast Corp., Special A.................................... United States 558,819 22,684,559
Daily Mail & General Trust Plc. ............................ United Kingdom 65,000 3,047,519
Daily Mail & General Trust Plc., A.......................... United Kingdom 1,284,500 58,144,768
Dow Jones & Co. Inc. ....................................... United States 1,295,800 72,240,850
Dun & Bradstreet Corp. ..................................... United States 341,300 12,898,800
+Houghton Mifflin Co. ...................................... United States 1,544,300 49,031,525
*Mediaone Group Inc. ....................................... United States 6,547,673 287,688,382
*R H Donnelly Corp. ........................................ United States 134,500 403,500
Readers Digest Association Inc., A.......................... United States 1,304,600 35,387,275
Readers Digest Association Inc., B.......................... United States 25,000 678,125
Scripps Co., A.............................................. United States 1,477,500 80,985,469
+Southam Inc. .............................................. Canada 3,996,700 72,565,972
United News & Media Plc. ................................... United Kingdom 1,270,000 17,788,985
*Valassis Communications Inc. .............................. United States 950,000 36,634,375
*Washington Post Co., B..................................... United States 29,200 16,819,200
---------------
818,037,638
---------------
BUILDING MATERIALS & COMPONENTS .7%
*American Standard Cos. Inc. ............................... United States 1,083,000 48,396,563
Johns-Manville Corp. ....................................... United States 1,392,935 20,981,083
Lone Star Industries Inc. .................................. United States 63,095 4,862,258
Noland Co. ................................................. United States 134,475 3,462,731
---------------
77,702,635
---------------
BUSINESS & PUBLIC SERVICES 1.6%
Browning Ferris Industries Inc. ............................ United States 175,000 6,081,250
*Humana Inc. ............................................... United States 310,000 9,668,125
Moore Corp. Ltd. ........................................... Canada 228,900 3,032,925
Moore Corp. Ltd., fgn. ..................................... Canada 943,000 12,504,505
Suez Lyonnaise des Eaux SA.................................. France 849,380 139,783,841
---------------
171,070,646
---------------
CHEMICALS 2.1%
Dow Chemical Co. ........................................... United States 398,000 38,481,625
General Chemical Group Inc. ................................ United States 499,000 13,847,250
Morton International Inc. .................................. United States 1,974,900 49,372,500
*Nova Chemicals Ltd., w/i .................................. Canada 1,199,560 24,471,660
Olin Corp. ................................................. United States 1,899,100 79,168,731
Rohm & Haas Co. ............................................ United States 116,500 12,108,719
*W R Grace & Co. ........................................... United States 827,200 14,114,100
---------------
231,564,585
---------------

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

DATA PROCESSING & REPRODUCTION .2%
*Bay Networks Inc. ......................................... United States 125,500 4,047,375
*NCR Corp. ................................................. United States 665,200 21,840,000
---------------
25,887,375
---------------

ELECTRICAL & ELECTRONICS .9%
*DSC Communications Corp. .................................. United States 381,100 11,433,000
Philips Electronics NV, ADR................................. Netherlands 563,300 47,880,500
*Wang Laboratories Inc., A.................................. United States 1,401,000 35,637,938
---------------
94,951,438
---------------

ENERGY EQUIPMENT & SERVICES 2.3%
*Camco International Inc. .................................. United States 33,700 2,624,388
*Cooper Cameron Corp. ...................................... United States 515,000 26,265,000
*EVI Weatherford Inc. ...................................... United States 1,019,985 37,866,943
*Noble Drilling Corp. ...................................... United States 633,400 15,241,188
*R & B Falcon Corp. ........................................ United States 1,227,000 27,760,875
*Rowan Companies Inc. ...................................... United States 1,756,900 34,149,744
*Seacor Smit Inc. .......................................... United States 552,500 33,875,156
Transocean Offshore Inc. ................................... United States 1,357,000 60,386,500
*Veritas DGC Inc. .......................................... United States 208,600 10,416,963
---------------
248,586,757
---------------

ENERGY SOURCES 5.0%
Amerada Hess Corp. ......................................... United States 337,800 18,346,763
(R)+*Environmental Credits LLC.............................. United States 324,995 60,124,075
Imperial Oil Ltd. .......................................... Canada 2,431,200 42,394,050
Kerr McGee Corp. ........................................... United States 579,300 33,526,988
Noble Affiliates Inc. ...................................... United States 368,300 13,995,400
*Nuevo Energy Co. .......................................... United States 325,000 10,440,625
*Ocean Energy Inc. ......................................... United States 2,017,510 39,467,539
Pennzoil Co. ............................................... United States 1,193,100 60,400,688
Royal Dutch Petroleum Co. .................................. Netherlands 884,000 48,454,250
Saga Petroleum AS, A........................................ Norway 948,500 14,585,652
*Santa Fe Energy Resources Inc. ............................ United States 1,818,000 19,543,500
Santa Fe International Corp. ............................... United States 415,500 12,568,875
Shell Transport & Trading Co. Plc. ......................... United Kingdom 3,300,000 23,263,089
Societe Elf Aquitane SA..................................... France 569,500 80,065,332
Societe Elf Aquitaine SA, ADR............................... France 158,000 11,218,000
Tidewater Inc. ............................................. United States 1,362,000 44,946,000
---------------
533,340,826
---------------
FINANCIAL SERVICES 5.0%
Advanta Corp., A............................................ United States 145,568 3,193,398
Advanta Corp., B............................................ United States 558,618 11,102,533
Bear Stearns Co. Inc. ...................................... United States 208,859 11,878,856

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

FOREST PRODUCTS & PAPER 2.2%
Avenor Inc. ................................................ Canada 1,319,500 30,866,547
Bowater Inc. ............................................... United States 488,800 23,095,800
Champion International Corp. ............................... United States 597,300 29,379,694
Fletcher Challenge Canada Ltd., A........................... Canada 168,000 2,336,269
Greif Brothers Corp., A..................................... United States 205,400 7,676,825
Longview Fibre Co. ......................................... United States 316,700 4,512,975
Rayonier Inc. .............................................. United States 1,127,300 51,855,800
St. Joe Co. ................................................ United States 1,024,325 28,040,897
*Stone Container Corp. ..................................... United States 2,612,500 40,820,313
Temple Inland Inc. ......................................... United States 308,147 16,601,420
---------------
235,186,540
---------------

HEALTH & PERSONAL CARE 4.2%
*Apria Healthcare Group Inc. ............................... United States 1,139,000 7,617,063
*Beverly Enterprises Inc. .................................. United States 3,317,000 45,816,063
*Foundation Health Systems, A............................... United States 3,431,190 90,497,636
*Kindercare Learning Centers Inc. .......................... United States 95,891 2,061,657
*Maxicare Health Plans Inc. ................................ United States 318,900 2,152,575
*Mid-Atlantic Medical Services Inc. ........................ United States 1,857,800 21,364,700
*Oxford Health Plans Inc. .................................. United States 669,500 10,251,719
*Pacificare Health Systems Inc., A.......................... United States 579,924 49,003,578
*Pacificare Health Systems Inc., B.......................... United States 507,020 44,807,893
*Paragon Health Networks Inc. .............................. United States 513,975 8,287,847
*Perrigo Co. ............................................... United States 821,100 8,262,319
*Pharmerica Inc. ........................................... United States 1,509,566 18,209,140

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
HEALTH & PERSONAL CARE (CONT.)
*PSS World Medical Inc. .................................... United States 535,500 $ 7,831,688
*Tenet Healthcare Corp. .................................... United States 2,133,900 66,684,375
United States Surgical Corp. ............................... United States 452,500 20,645,313
*Vencor Inc. ............................................... United States 2,497,000 18,103,250
*Ventas Inc. ............................................... United States 2,417,000 33,384,813
---------------
454,981,629
---------------
INDUSTRIAL COMPONENTS 1.9%
Echlin Inc. ................................................ United States 817,100 40,088,969
ITT Industries Inc. ........................................ United States 1,398,000 52,250,250
(R)+*Lancer Industries Inc., B.............................. United States 3 4,357,546
*Lear Corp. ................................................ United States 597,800 30,674,613
Lucas Varity Plc. .......................................... United Kingdom 10,355,052 41,249,853
Lucas Varity Plc., ADR...................................... United Kingdom 272,000 10,829,000
Mark IV Industries Inc. .................................... United States 220,500 4,768,313
*Owens-Illinois Inc. ....................................... United States 431,400 19,305,150
*PXL Holdings Corp. ........................................ United States 21 46,305
---------------
203,569,999
---------------
INSURANCE 5.1%
*Alleghany Corp. ........................................... United States 202,022 47,121,632
Allied Group Inc. .......................................... United States 181,800 8,510,513
Allmerica Financial Corp. .................................. United States 248,250 16,136,250
AON Corp. .................................................. United States 1,044,600 73,383,150
Argonaut Group Inc. ........................................ United States 312,250 9,874,906
Financial Security Assurance Holding Ltd. .................. United States 401,700 23,599,875
+Fund American Enterprises Holdings Inc. ................... United States 674,084 99,764,432
Guardian Royal Exchange Plc. ............................... United Kingdom 620,000 3,651,684
Hartford Financial Services Group Inc. ..................... United States 517,700 59,211,938
Kansas City Life Insurance Co. ............................. United States 78,300 7,125,300
Royal & Sun Alliance Insurance Group Plc. .................. United Kingdom 1,153,500 11,932,626
SAFECO Corp. ............................................... United States 267,000 12,115,125
Sampo Insurance Co. Ltd., A................................. Finland 2,000,000 94,778,955
Selective Insurance Group Inc. ............................. United States 393,508 8,817,039
St. Paul Co. Inc. .......................................... United States 1,158,990 48,750,017
Torchmark Corp. ............................................ United States 146,900 6,720,675
Unitrin Inc. ............................................... United States 182,988 12,717,666
---------------
544,211,783
---------------

LEISURE & TOURISM 1.6%
Callaway Golf Co. .......................................... United States 2,368,800 46,635,750
Hilton Hotels Corp. ........................................ United States 1,492,500 42,536,250
La Quinta Inns Inc. ........................................ United States 1,081,500 17,591,949
*MGM Grand Inc. ............................................ United States 1,925,000 60,757,813
---------------
167,521,762
---------------

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

MERCHANDISING 1.6%
American Stores Co. ........................................ United States 1,046,000 25,300,125
*CompUSA Inc. .............................................. United States 960,000 17,340,000
Dillards Inc., A............................................ United States 454,700 18,841,631
Hudson's Bay Co. ........................................... Canada 1,671,300 38,300,507
Quaker State Corp. ......................................... United States 706,400 11,567,300
*Sports Authority Inc. ..................................... United States 70,000 1,045,625
*Toys R Us Inc. ............................................ United States 1,335,000 31,455,938
*Venator Group Inc. ........................................ United States 1,514,600 28,966,725
*Viking Office Products Inc. ............................... United States 15,000 470,625
---------------
173,288,476
---------------

METALS & MINING 1.0%
Allegheny Teledyne Inc. .................................... United States 494,500 11,311,688
Alumax Inc. ................................................ United States 121,419 5,630,806
Aluminum Co. of America..................................... United States 800,000 52,750,000
Commercial Metals Co. ...................................... United States 374,812 11,525,469
LTV Corp. .................................................. United States 1,075,500 10,284,469
(R)+Metallurg Inc. ......................................... United States 601,869 13,361,492
Reynolds Metals Co. ........................................ United States 144,500 8,082,969
---------------
112,946,893
---------------

MULTI-INDUSTRY 5.6%
*Berkshire-Hathaway Inc., A................................. United States 1,025 80,262,625
Canadian Pacific Ltd. ...................................... Canada 660,800 18,750,200
Canadian Pacific Ltd., new.................................. Canada 405,000 11,401,856
Edperbrascan Corp., A....................................... Canada 928,700 15,598,851
Harcourt General Inc. ...................................... United States 300,300 17,867,850
Investor AB, A.............................................. Sweden 1,770,400 102,562,390
Investor AB, B.............................................. Sweden 4,543,500 265,206,993
Lagardere S.C.A. ........................................... France 999,593 41,613,887
MacMillan Bloedel Ltd. ..................................... Canada 835,200 8,916,827
Power Corp. of Canada....................................... Canada 300,000 14,076,366
*Saab AB, B................................................. Sweden 1,578,475 16,626,152
Viad Corp. ................................................. United States 561,100 15,570,525
---------------
608,454,522
---------------

REAL ESTATE 2.4%
Alexander & Baldwin Inc. ................................... United States 273,000 7,951,125
+*Alexander's Inc. ......................................... United States 383,200 34,104,800
*Al-Zar Ltd. LP............................................. United States 284 97,412
*Cadillac Fairview Corp. ................................... Canada 125,500 2,884,567
*Cadillac Fairview Corp., ADR .............................. Canada 2,650,997 60,972,931
*Cadillac Fairview Corp., wts. ............................. Canada 291,749 3,124,713
Capital Automotive.......................................... United States 430,800 6,111,975
*Castle & Cooke Inc. ....................................... United States 216,933 4,121,727

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

RECREATION & OTHER CONSUMER GOODS
*Bulova Corp. .............................................. United States 37,900 743,788
Todd A O Corp., A........................................... United States 332,723 3,410,411
---------------
4,154,199
---------------

TELECOMMUNICATIONS 5.8%
*360 Degrees Communications Company......................... United States 2,649,666 84,789,312
BCE Inc. ................................................... Canada 331,900 14,072,262
*CS Wireless Inc. .......................................... United States 1,512 15
*Firstworld Communications Inc. ............................ United States 6,585 2,831,550
*Ionica Group Plc., wts. ................................... United Kingdom 3,265 65,300
MCI Communications Corp. ................................... United States 2,454,000 142,638,750
Media General Inc., A....................................... United States 520,200 25,619,850
Sprint Corp. ............................................... United States 160,000 11,280,000
Telecom Italia SpA.......................................... Italy 3,060,000 22,356,738
Telecom Italia SpA, di Risp................................. Italy 2,090,000 10,169,284
*Telecommunications Inc. - TCI Ventures Group, A............ United States 3,072,100 61,634,006
*Tele-Communications Inc., A................................ United States 697,500 26,810,156
Telecomunicacoes Brasileiras SA (Telebras).................. Brazil 498,500,000 39,652,430
Telephone & Data Systems Inc. .............................. United States 2,224,600 87,593,625
*Teleport Communications Group Inc. ........................ United States 981,500 53,246,375
*US Cellular Corp. ......................................... United States 1,441,400 44,323,050
---------------
627,082,703
---------------

TEXTILES & APPAREL .1%
+Fab Industries Inc. ....................................... United States 331,100 9,229,413
---------------

TRANSPORTATION 3.9%
Burlington Northern Santa Fe Corp. ......................... United States 448,800 44,066,550
Canadian National Railway Co. .............................. Canada 755,101 40,114,764
Deutsche Lufthansa AG....................................... Germany 2,000,000 50,193,906
*Eurotunnel SA, New Units................................... France 40,939 45,028
+Florida East Coast Industries Inc. ........................ United States 2,066,800 60,453,900
(R)*Golden Ocean Group Ltd., wts. .......................... United States 4,030 20,150
Helikopter Services Group ASA............................... Norway 947,800 9,634,248

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

U.S. REGIONAL BANKS .6%
First Virginia Banks Inc. .................................. United States 638,400 32,638,200
National City Corp. ........................................ United States 475,500 33,760,500
---------------
66,398,700
---------------

UTILITIES ELECTRICAL & GAS .2%
*Calenergy Co. Inc. ........................................ United States 582,400 17,508,400
---------------
8,481,325,598
TOTAL COMMON STOCKS (COST $5,861,521,511)................... ---------------

PREFERRED STOCKS .3%
(R)*Interlake Corp., Series A3, 9.00%, cvt., pfd. .......... United States 2,450 2,609,649
Telecomunicacoes Brasileiras SA (Telebras), pfd., ADR....... Brazil 264,100 28,836,419
(R)*Viasystems Inc., pfd., B................................ United States 156,252 3,359,418
*Wundies Industries Inc., 11.25%, pfd. ..................... United States 30,892 84,953
---------------
34,890,439
TOTAL PREFERRED STOCKS (COST $35,790,848)................... ---------------

PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>

CORPORATE BONDS AND NOTES 2.2%
American Telecasting Inc., 14.50%, 6/15/04.................. United States $ 4,850,000 1,236,750
Australis Holdings Pty. Ltd:
0/11.00%, 11/01/02........................................ Australia 6,918,000 1,176,060
B, 0/11.00%, 11/02/02..................................... Australia 650,000 110,500
Boston Chicken Inc., cvt., zero coupon, 6/01/15............. United States 7,775,000 427,625
Cadillac Fairview Corp., 12.00%, 7/31/05.................... Canada 302,084CAD 205,422
Cityscape Financial Corp., 12.75%, 6/01/04.................. United States 5,763,000 2,305,200
Club Regina Resorts Inc., 13.00%, 12/01/00.................. United States 5,250,000 5,591,250
CML Group Inc., 5.50%, 1/15/03.............................. United States 2,000,000 1,600,000
Consorcio G Grupo Dina SA de CV:
cvt., 8.00%, 8/08/04...................................... Mexico 3,470,000 2,810,700
0/12.00%, 11/15/02........................................ Mexico 4,390,000 4,170,500
CS Wireless Inc., B, zero coupon to 3/01/01, 11.375%,
3/01/06................................................... United States 7,250,000 1,703,750
Eurotunnel Plc.:
Jr. Note Tranche JD3 Tier 1............................... United Kingdom 4,237,573GBP 6,310,331
Jr. Note Tranche JD3 Tier 2............................... United Kingdom 5,401,573GBP 7,660,655
Jr. Note Tranche JD3 Tier 3............................... United Kingdom 399,303GBP 519,666
Jr. Note Tranche JD3 Tier 2 Interest Accrual.............. United Kingdom 228,545GBP 228,797
Jr. Note Tranche JD3 Tier 3 Interest Accrual.............. United Kingdom 457,090GBP 190,664
Resettable Facility Tranche R5............................ United Kingdom 3,420,789GBP 2,910,873
Stapled Equity Note....................................... United Kingdom 13,961,897GBP 7,920,454
Stapled Participating Loan Note........................... United Kingdom 1,291,611GBP 959,000

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES (CONT.)
Eurotunnel SA:
Jr. Note Tranche JD1 Tier 1............................... France 5,805,530FRF $ 844,999
Jr. Note Tranche JD1 Tier 2............................... France 5,805,530FRF 796,988
Jr. Note Tranche JD1 Tier 3............................... France 11,611,058FRF 1,478,749
Jr. Note Tranche JD2 Tier 1............................... France 88,846,709FRF 12,894,970
Jr. Note Tranche JD2 Tier 2............................... France 43,846,709FRF 6,001,183
Jr. Note Tranche JD2 Tier 3............................... France 78,596,249FRF 10,009,777
Jr. Note Tranche's JD1 & JD 2 Tier 3 Interest Accrual..... France 3,871,405FRF 384,195
Jr. Note Tranche's JD1 & JD 2 Tier 2 Interest Accrual..... France 7,742,375FRF 320,145
Resettable Facility Note - Tranche R4..................... France 85,753,553FRF 7,091,759
(R)Fairchild Semiconductor Corp., 11.74%, 3/14/08........... United States 3,300,000 3,300,000
Global Ocean Carriers Ltd., 10.25%, 7/15/07................. United States 3,325,000 3,075,625
(R)Golden Ocean Group Ltd., 144A, 10.00%, 8/31/01........... United States 7,515,000 5,598,675
Hechinger Co., 6.95%, 10/15/03.............................. United States 11,828,000 8,338,740
HIH Capital Ltd., cvt., 7.50%, 9/25/06...................... United Kingdom 7,930,000 5,392,400
Hurricane Hydrocarbons Ltd., 11.75%, 11/01/04............... Canada 1,744,000 1,674,240
Ionica Plc., 0/15.00%, 5/01/07.............................. United Kingdom 19,010,000 4,277,250
Ivax Corp., cvt., 6.50%, 11/15/01........................... United States 3,000,000 2,643,750
Korea Electric Power Corp.:
6.375%, 12/01/03.......................................... South Korea 11,630,000 9,129,550
6.75%, 8/01/27............................................ South Korea 5,325,000 4,206,750
Local Financial, 11.00%, 9/05/04............................ United States 1,850,000 2,025,750
Localiza Rent-A-Car SA, 10.25%, 10/01/05.................... Brazil 1,350,000 1,080,000
Nebco Evans Holding Company, 144A,
zero coupon to 7/15/02, 12.375%, 7/15/07.................. United States 1,050,000 714,000
Oxford Health Plans Inc., 144A, 11.00%, 5/15/05............. United States 2,135,000 2,199,050
Peregrine Investments Holdings Ltd.:
zero coupon, 6/30/00...................................... Hong Kong 250,000,000JPY 202,652
zero coupon, 6/30/00...................................... United States 500,000 56,250
Philipp Brothers Chemicals Inc., 144A, 9.875%, 6/01/08...... United States 12,410,000 12,534,100
Physicians Resource Group Inc.
6.00%, 12/01/01........................................... United States 1,945,000 1,543,844
cvt., 144A, 6.00%, 12/01/01............................... United States 275,000 218,281
Production Resource Group LLC, 144A, 11.50%, 1/15/08........ United States 875,000 857,500
Republic National Bank of New York, 9.00%, 3/01/01.......... Cayman Islands 3,500,000 3,421,250
Resource America Inc., 144A, 12.00%, 8/01/04................ United States 2,300,000 2,472,500
(R)Roil Limited, 144A, 12.779%, 12/05/02.................... Cayman Islands 9,000,000 7,515,000
Samsung Electronics Co. Ltd., 144A, 8.50%, 11/01/02......... South Korea 1,320,000 1,158,300
Security Capital US Realty, cvt., 144A, 2.00%, 5/22/03...... Luxembourg 60,812,000 51,272,118
Southwest Royalties Inc., 10.50%, 10/15/04.................. United States 7,485,000 6,137,700
Specialty Foods Corp., B, 11.25%, 8/15/03................... United States 4,395,000 3,911,550
TFM SA de CV:
144A, 10.25%, 6/15/07..................................... Mexico 400,000 389,000
144A, zero coupon to 6/15/02, 11.75%, 6/15/09............. Mexico 2,250,000 1,411,875

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES (CONT.)
Tri-State Outdoor Media, 144A, 11.00%, 5/15/98.............. United States $ 3,000,000 $ 3,052,500
US Cellular Corp., cvt., 6/15/15............................ United States 5,000,000 1,881,250
---------------
239,552,412
TOTAL CORPORATE BONDS AND NOTES (COST $525,573,136)......... ---------------

BONDS & NOTES IN REORGANIZATION 1.2%
*Adams County Co. Industrial Dev. Auth., 9.00%, 11/01/96.... United States 16,729,000 8,365
*AEC, bank claim............................................ United States 333,281 237,463
*Alliance Entertainment Corp. bank claim:
8.82%, 2/20/99............................................ United States 1,462,500 1,042,031
8.80%, 2/20/99............................................ United States 641,250 456,896
8.80%, 2/20/99............................................ United States 391,875 279,217
*Alpargatus SA Industrial Y Comercial:
11.75%, 8/18/98........................................... Argentina 1,455,000 1,047,600
bank claim................................................ Argentina 2,190,000 1,576,800
*APS Inc., bank claim, 9/09/09, tranche..................... United States 13,300,000 11,704,000
*Barney's Inc.
7.18%, 6/15/00............................................ United States 10,000,000 3,800,000
8.32%, 6/15/00............................................ United States 1,500,000 570,000
bank claim................................................ United States 11,795,769 4,482,392
*Brunos Inc., bank claim.................................... United States 700,000 581,000
*Dictaphone Corporation, bank claim......................... United States 1,590,301 1,558,495
*Dow Corning Corp.:
bank debt................................................. Japan 600,000,000JPY 4,755,557
bank claim #1............................................. United States 7,500,000 10,050,000
bank claim #2............................................. United States 2,738,952 3,670,196
bank claim #3............................................. United States 1,391,595 1,864,737
9.375%, 2/01/08........................................... United States 2,170,000 2,907,800
8.15%, 10/15/29........................................... United States 5,280,000 7,075,200
9.50%, 8/10/49............................................ United States 1,250,000 1,675,000
MTN, 8.55%, 3/01/01....................................... United States 500,000 670,000
Swap...................................................... United States 1,000,000 1,080,000
*El Paso TX Housing Finance Corp., 8.88%, 10/15/96.......... United States 9,355,000 4,678
*Harrah's Jazz Finance Corp., 14.25%, 11/15/01.............. United States 5,680,000 1,846,000
*Korea National Housing Corporation Loan, bank claim........ United States 14,325,000 13,035,750
*Louisiana Agriculture Finance Authority:
8.25%, 10/01/96........................................... United States 3,450,000 1,725
8.80%, 10/01/96........................................... United States 775,000 388
*Louisiana Housing Finance, 8.61%, 8/01/96.................. United States 11,530,000 5,765
*Memphis TN Health Facilities, 8.68%, 9/15/96............... United States 7,110,000 3,555

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
Mercury Finance Co., Bank Claim, MTN:
5.79%, 2/02/97............................................ United States $ 580,870 $ 563,444
5.66%, 3/10/97............................................ United States 4,100,261 3,977,253
8.15%, 5/14/97............................................ United States 753,834 731,219
6.29%, 12/16/97........................................... United States 4,468,419 4,334,367
6.16%, 12/15/98........................................... United States 343,725 333,413
9.76%, 2/20/99............................................ United States 4,000,000 3,700,000
10.86%, 2/20/99........................................... United States 4,000,000 3,700,000
7.33%, 6/29/99............................................ United States 1,340,528 1,300,312
7.42%, 6/29/00............................................ United States 5,445,238 5,281,881
7.50%, 6/29/01............................................ United States 4,324,962 4,195,213

Mercury Finance Co., Commercial Paper:
2/03/97................................................... United States 1,130,928 1,097,000
2/04/97................................................... United States 102,727 99,645
2/06/97................................................... United States 777,474 754,149
2/07/97................................................... United States 307,821 298,587
2/11/97................................................... United States 698,819 677,855
2/13/97................................................... United States 258,831 251,066
2/18/97................................................... United States 1,013,366 982,965
2/19/97................................................... United States 1,351,431 1,310,888
2/20/97................................................... United States 189,866 184,170
2/21/97................................................... United States 1,142,580 1,108,303
2/24/97................................................... United States 505,635 490,465
2/27/97................................................... United States 73,407 71,205
3/07/97................................................... United States 1,205,738 1,169,566
3/10/97................................................... United States 303,657 294,547
3/11/97................................................... United States 48,360 46,909
3/14/97................................................... United States 86,057 83,475
3/17/97................................................... United States 720,015 698,414
3/19/97................................................... United States 1,957,885 1,899,148
4/11/97................................................... United States 51,416 49,873
4/18/97................................................... United States 176,539 171,243
4/22/97................................................... United States 100,873 97,847
4/24/97................................................... United States 151,305 146,766
2/20/99................................................... United States 61,268 59,430
2/20/99................................................... United States 571,422 554,279
2/20/99................................................... United States 316,695 307,194

*Mobilemedia Communications Corp., 8.47%, 1/01/99........... United States 1,000,000 950,000
*PIV Investment Finance (Cayman) Ltd., 4.50%,
cvt.,12/01/00............................................. Hong Kong 12,290,000 1,536,250
*Southeast Banking Corp.:
4.75%, 10/15/97........................................... United States 3,317,000 2,852,620
10.50%, 4/11/01........................................... United States 5,300,000 3,259,500
zero coupon, 12/16/96..................................... United States 2,230,000 1,360,300
zero coupon, 11/10/97..................................... United States 1,250,000 762,500
*Southeast Texas Housing Finance Corp., 8.60%, 9/01/96...... United States 200,000 100
---------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $105,577,155)... 127,733,971
---------------
</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPANIES IN LIQUIDATION
+*City Investing Co., Liquidating Trust..................... United States 4,314,037 $ 3,909,596
(R)*Kendall International Inc., Residual Ownership
Certificates.............................................. United States 379 4,548
*Mcorp Financial Trust, claim units......................... United States 64,189 78,471
*Mcorp Trust Units.......................................... United States 64,172 642
*Ranger Industries Inc. .................................... United States 76,839 50,426
*Roeser & Pendelton......................................... United States 2,800 4,000
---------------
TOTAL COMPANIES IN LIQUIDATION (COST $610,409).............. 4,047,683
---------------

<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 15.6%
Federal Home Loan Bank, 5.11% to 5.47%, with maturities to
10/20/98.................................................. United States $ 719,547,000 710,799,834
Federal Home Loan Mortgage Corp., 5.40% to 5.415% with
maturities to 11/25/98.................................... United States 43,365,000 42,485,698
Federal National Mortgage Assn., 5.12% to 5.47% with
maturities to 11/03/99.................................... United States 930,218,000 905,399,079
U.S. Treasury Bill, 5.28%, 12/10/98......................... United States 20,200,000 19,741,836
---------------
TOTAL SHORT TERM INVESTMENTS (COST $1,679,367,797).......... 1,678,426,447
---------------
TOTAL INVESTMENTS (COST $8,208,440,856) 98.0%............... 10,565,976,550
OPTIONS WRITTEN............................................. (280,000
SECURITIES SOLD SHORT (3.0%)................................ (325,790,086)
NET EQUITY IN FORWARD CONTRACTS............................. 5,540,132)
OTHER ASSETS, LESS LIABILITIES 5.0%......................... 534,270,443
---------------
TOTAL NET ASSETS 100.0%..................................... $10,779,717,039
---------------

SHARES VALUE
------ -----
OPTIONS WRITTEN
Montgomery Ward Trade Claims, November/100/Put (Premium
Received $280,000)........................................ United States 40,000 $ 280,000

</TABLE>

PAGE

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
SECURITIES SOLD SHORT

ISSUER COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alcatel Alsthom Cie Generale D'Electricite SA............... France 51,500 $ 10,485,693
Alcatel Alsthom Cie Generale D' Electricite SA, ADR......... France 56,000 2,278,500
Alltel Corp. ............................................... United States 149,900 6,970,350
AT&T Corp. ................................................. United States 1,466,100 83,750,963
Daimler Benz AG............................................. Germany 74,400 7,295,734
Daimler Benz AG, ADR........................................ Germany 79,300 7,716,881
Dana Corp. ................................................. United States 402,700 21,544,450
Dun & Bradstreet Corp. ..................................... United States 17,000 578,000
Meditrust Companies Inc. ................................... United States 159,200 4,447,650
Northern Telecom, Ltd. ..................................... Canada 128,800 7,304,696
*Office Depot Inc. ......................................... United States 15,000 473,438
Schlumberger Ltd. .......................................... United States 39,800 2,718,838
Sterling Chemicals Holdings Inc., 13.50%, 8/15/08........... United States 4,000,000 2,340,000
Telecom Italia Mobile SpA................................... Italy 1,770,000 10,799,932
Tyco International Ltd., new................................ United States 344,171 21,682,773
United Healthcare Corp. .................................... United States 155,000 9,842,500
*Worldcom Inc. ............................................. United States 2,592,200 125,559,688
------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $296,534,782)......... $325,790,086
------------
</TABLE>

CURRENCY ABBREVIATIONS:

CAD -- Canadian Dollar
FRF -- French Franc
GBP -- British Pound
JPY -- Japanese Yen

*Non-income producing.
**Securities traded in U.S. dollars, unless otherwise indicated.
(R)Restricted securities (See note 6).
+Affiliated issuers (See note 7).

See Notes to Financial Statements.
24

PAGE

MUTUAL SHARES FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)

<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $7,844,849,945)................ $9,888,216,299
Controlled affiliates (cost $88,687,993).................. 128,434,967
Non controlled affiliates (cost $274,902,918)............. 549,325,284 $10,565,976,550
--------------
Cash....................................................... 80,716,260
Receivables:
Investment securities sold................................ 267,401,438
Capital shares sold....................................... 16,898,186
Dividends and interest.................................... 26,627,156
From affiliates........................................... 323,156
Unrealized gain on forward exchange contracts (Note 8)..... 17,999,939
Deposits with broker for securities sold short............. 263,033,298
---------------
Total assets.......................................... 11,238,975,983
---------------
Liabilities:
Payables:
Investment securities purchased........................... 99,703,107
Capital shares redeemed................................... 9,743,959
To affiliates............................................. 9,055,953
Options written, at value (premiums received $280,000)..... 280,000
Securities sold short, at value (proceeds $296,534,782).... 325,790,086
Unrealized loss on forward exchange contracts (Note 8)..... 12,459,807
Accrued liabilities........................................ 2,226,032
---------------
Total liabilities..................................... 459,258,944
---------------
Net assets, at value........................................ $10,779,717,039
---------------
Net assets consist of:
Undistributed net investment income........................ $ 141,554,225
Net unrealized appreciation................................ 2,333,820,522
Accumulated net realized gain.............................. 606,300,586
Capital shares............................................. 7,698,041,706
---------------
Net assets, at value........................................ $10,779,717,039
---------------
</TABLE>

<TABLE>
<S> <C> <C>
CLASS Z:
Net asset value and maximum offering price per share
($7,984,186,442 / 351,440,081 shares outstanding)......... $22.72
---------------
CLASS I:
Net asset value per share ($1,702,261,966 / 75,212,112
shares outstanding)....................................... $22.63
---------------
Maximum offering price per share ($22.63 / 95.50%)......... $23.70
---------------
CLASS II:
Net asset value per share ($1,093,268,631 / 48,644,008
shares outstanding)*...................................... $22.47
---------------
Maximum offering price per share ($22.47 / 99.00%)......... $22.70
---------------
</TABLE>

*Redemption price per share is equal to net asset value less any applicable
sales charge.

See Notes to Financial Statements.
25

PAGE

MUTUAL SHARES FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $4,181,812)
Dividends.................................................. $ 96,552,380
Interest................................................... 70,933,600
------------
Total investment income............................... $167,485,980
------------
Expenses:
Management fees (Note 3)................................... 31,206,908
Administrative fees (Note 3)............................... 4,066,749
Distribution fees (Note 3)
Class I.................................................. 2,494,169
Class II................................................. 4,446,392
Transfer agent fees (Note 3)............................... 2,869,642
Custodian fees............................................. 383,659
Reports to shareholders.................................... 345,462
Registration and filing fees............................... 570,525
Professional fees.......................................... 105,850
Directors' fees and expenses............................... 95,666
Other...................................................... 4,708
------------
Total expenses........................................ 46,589,730
Expenses waived/paid by affiliate (Note 3)............ (1,813,136)
------------
Net expenses...................................... 44,776,594
------------
Net investment income........................... 122,709,386
------------
Realized and unrealized gains (losses):
Net realized gain from:
Investments............................................... 473,092,042
Foreign currency transactions............................. 14,125,378
------------
Net realized gain...................................... 487,217,420
Net unrealized appreciation (depreciation) on:
Investments............................................... 50,612,993
Translation of assets and liabilities denominated in
foreign currencies...................................... (11,593,740)
------------
Net unrealized appreciation............................ 39,019,253
------------
Net realized and unrealized gain............................ 526,236,673
------------
Net increase in net assets resulting from operations........ $648,946,059
------------
</TABLE>

See Notes to Financial Statements.
26

PAGE

MUTUAL SHARES FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
---------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 122,709,386 $ 151,211,050
Net realized gain from investments and foreign currency
transactions............................................. 487,217,420 763,745,787
Net unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign
currencies............................................... 39,019,253 932,565,733
-----------------------------------
Net increase in net assets resulting from operations.... 648,946,059 1,847,522,570
Distributions to shareholders from:
Net investment income:
Class Z.................................................. -- (186,061,271)
Class I.................................................. -- (20,965,055)
Class II................................................. -- (10,947,344)
Net realized gains:
Class Z.................................................. -- (544,604,116)
Class I.................................................. -- (64,397,717)
Class II................................................. -- (38,739,615)
Capital share transactions (Note 2):
Class Z.................................................. (462,473,614) 410,817,174
Class I.................................................. 581,948,166 994,313,815
Class II................................................. 412,210,053 617,578,010
-----------------------------------
Net increase in net assets.............................. 1,180,630,664 3,004,516,451
Net assets:
Beginning of period........................................ 9,599,086,375 6,594,569,924
-----------------------------------
End of period.............................................. $10,779,717,039 $9,599,086,375
---------------------------------------
Undistributed net investment income included in net assets:
End of period.............................................. $ 141,554,225 $ 18,844,839
-----------------------------------
</TABLE>

See Notes to Financial Statements.
27

PAGE

MUTUAL SHARES FUND
Notes to Financial Statements (unaudited)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mutual Shares 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 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 each 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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)

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

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

Common expenses incurred by the Series Fund are allocated among the funds
comprising the Series Fund 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. FORWARD EXCHANGE 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.

f. CURRENCY OPTION CONTRACTS:

Options purchased are recorded as investments; options written (sold) are
recorded 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. The Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.

PAGE

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. SECURITIES ISSUED ON A WHEN-ISSUED OR DELAYED BASIS:

The Fund may trade securities on a when-issued or delayed basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date purchase price. Although the Fund will
generally purchase these securities with the intention of acquiring such
securities, it may sell such securities before the settlement date.

i. 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 Z, Class I and Class II 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.

Effective February 3, 1997, the shares of the Fund were split on a 5-for-1
basis. All previously reported per share data for the Fund have been restated to
give effect to the split. At June 30, 1998, there were 1.5 billion Fund shares
authorized ($0.001 par value) of which 1 billion, 250 million, and 250 million
were designated as Class Z, Class I, and Class II shares, respectively.
Transactions in the Fund's shares were as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold............................................ 10,562,497 $ 234,831,047 6,313,080 $ 551,052,039
Shares issued on reinvestment of distributions......... -- -- 32,082,168 672,754,666
Shares issued on 5-for-1 stock split................... -- -- 297,727,890 --
Shares redeemed........................................ (30,912,944) (697,304,661) (34,805,380) (812,989,531)
-----------------------------------------------------------------
Net increase (decrease)................................ (20,350,447) $(462,473,614) 301,317,758 $ 410,817,174
-----------------------------------------------------------------
</TABLE>

PAGE

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

2. CAPITAL STOCK (CONT.)

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold............................................ 32,921,733 $ 733,924,977 45,117,270 $ 988,714,584
Shares issued on reinvestment of distributions......... -- -- 3,784,679 79,046,346
Shares issued on 5-for-1 stock split................... -- -- 3,159,210 --
Shares redeemed........................................ (6,781,422) (151,976,811) (3,362,536) (73,447,115)
-----------------------------------------------------------------
Net increase........................................... 26,140,311 $ 581,948,166 48,698,623 $ 994,313,815
-----------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold............................................ 20,850,431 $ 463,180,261 26,987,282 $593,740,934
Shares issued on reinvestment of distributions......... -- -- 2,226,926 46,322,849
Shares issued on 5-for-1 stock split................... -- -- 1,696,268 --
Shares redeemed........................................ (2,278,062) (50,970,208) (1,020,690) (22,485,773)
----------------------------------------------------------------
Net increase........................................... 18,572,369 $ 412,210,053 29,889,786 $617,578,010
----------------------------------------------------------------
</TABLE>

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton
Services, Inc. (FT Services), the Fund's investment manager and administrative
manager, respectively. Franklin/Templeton Investor Services, Inc. (Investor
Services) and Franklin/Templeton Distributors, Inc. (Distributors), are the
Fund's transfer agent and principal underwriter, respectively.

The Fund pays an investment management fee to Franklin Mutual of 0.60% per year
of the average daily net assets of the Fund. Franklin Mutual 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 Series 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.

PAGE

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

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregate average daily net assets as follows:

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

The Fund reimburses Distributors up to 0.35% 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. Distributors
received net commissions from sales of those shares and received contingent
deferred sales charges for the period of $759,623 and $288,407, respectively.

4. INCOME TAXES

At June 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $7,913,173,381 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $2,733,415,133
Unrealized depreciation..................................... (406,682,050)
--------------
Net unrealized appreciation................................. $2,326,733,083
==============
</TABLE>

Net investment income and net realized gains differ for financial statement and
tax purposes primarily due to differing treatments of passive foreign investment
companies and foreign currency transactions.

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1998, aggregated $3,313,824,264 and $2,434,140,520,
respectively.

Transactions in options written during the period ended June 30, 1998 were as
follows:

<TABLE>
<CAPTION>
NUMBER
OF CONTRACTS PREMIUM
------------------------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- --
Options written............................................. 40,700 $365,750
Options expired............................................. (700) (85,750)
Options terminated in closing transactions.................. -- --
Options exercised........................................... -- --
----------------------------
Options outstanding at June 30, 1998........................ 40,000 $280,000
----------------------------
</TABLE>

PAGE

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

6. RESTRICTED SECURITIES

The Fund may purchase securities through private offerings 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, 1998 are as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
967,806 Cityscape Financial Corp. .................................. 11/25/96 $ 45,487
324,995 Environmental Credits LLC................................... 1/26/98 60,124,075
3,300,000 Fairchild Semiconductor Corp., 11.74%, 3/14/08.............. 4/02/97 3,300,000
750,000 FBR Asset Investment Corp. ................................. 12/12/97 15,000,000
7,515,000 Golden Ocean Group Ltd., 144A, 10.00%, 8/31/01.............. 8/26/97 5,598,675
4,030 Golden Ocean Group Ltd., wts. .............................. 8/26/97 20,150
2,450 Interlake Corp., Series A3, 9.00%, cvt., pfd. .............. 6/17/92 2,609,649
Kendall International Inc., Residual Ownership
379 Certificates................................................ 7/06/92 4,548
3 Lancer Industries Inc., B................................... 8/11/89 4,357,546
601,869 Metallurg Inc. ............................................. 4/14/97 13,361,492
40,500,000 MSCW Investors I, LLC....................................... 12/27/95 68,310,892
9,000,000 Roil Limited, 144A, 12.779%, 12/05/02....................... 5/08/98 7,515,000
302,625 Security Capital Global Realty.............................. 4/08/98 6,052,500
11,260,174 Sunbeam Corp. .............................................. 3/13/90 105,141,875
156,252 Viasystems Inc., pfd., B.................................... 12/12/97 3,359,418
------------
TOTAL RESTRICTED SECURITIES (COST $186,774,750) (2.73% OF NET ASSETS)............. $294,801,307
------------
</TABLE>

7. INVESTMENT IN AFFILIATES

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 June 30, 1998 were
$681,177,401. For the period ended June 30, 1998, dividend income from
"affiliated companies" was $3,181,193 and net realized gains from disposition of
"affiliated companies" were $4,450,510.

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DIVIDEND INCOME REALIZED
SHARES HELD GROSS GROSS SHARES HELD VALUE 1/1/98- CAPITAL
NAME OF ISSUER DEC. 31, 1997 ADDITIONS REDUCTIONS JUNE 30, 1998 JUNE 30, 1998 6/30/98 GAIN
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
Environmental Credits
LLC...................... -- 359,995 35,000 324,995 $ 60,124,075 -- $1,869,101
MSCW Investors I, LLC..... 40,500,000 -- -- 40,500,000 68,310,892 -- --
--------------------------------------------
TOTAL CONTROLLED
AFFILIATES............... $128,434,967 -- $1,869,101
============================================
</TABLE>

PAGE

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

<TABLE>
<CAPTION>
7. INVESTMENT IN AFFILIATES (CONT.)
NUMBER OF NUMBER OF DIVIDEND INCOME REALIZED
SHARES HELD GROSS GROSS SHARES HELD VALUE 1/1/98- CAPITAL
NAME OF ISSUER DEC. 31, 1997 ADDITIONS REDUCTIONS JUNE 30, 1998 JUNE 30, 1998 6/30/98 GAIN
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NON CONTROLLED AFFILIATES
Alexander's Inc. ......... 386,000 -- 2,800 383,200 $ 34,104,800 -- $ 111,712
BHC Communications Inc.,
A........................ 283,317 -- 245,400 37,917 ** $ 283,317 1,915,629
City Investing Co.,
Liquidating Trust........ 4,314,037 -- -- 4,314,037 3,909,596 -- --
Fab Industries Inc. ...... 331,100 -- -- 331,100 9,229,413 115,885 --
Florida East Coast
Industries Inc. ......... 513,000 1,553,800 -- 2,066,800 60,453,900 103,340 --
Fund American Enterprises
Holdings Inc. ........... 674,084 -- -- 674,084 99,764,432 539,267 --
Genesee Corp., A.......... 15,911 -- -- 15,911 525,063 17,502 --
Genesee Corp., B.......... 103,550 -- -- 103,550 3,417,150 113,905 --
Houghton Mifflin Co. ..... 1,475,300 69,000 -- 1,544,300 49,031,525 386,075 --
Kreisler Manufacturing
Corp. ................... 184,480 -- 30,000 154,480 1,525,490 -- 315,979
Lancer Industries Inc.,
B........................ 3 -- -- 3 4,357,546 -- --
MBO Properties Inc. ...... 574,712 -- -- 574,712 5,459,764 -- --
Metallurg Inc. ........... 589,939 11,930 -- 601,869 13,361,492 -- 238,089
Seaboard Corp. ........... 76,450 -- -- 76,450 22,246,950 38,225 --
Southam Inc. ............. 3,996,700 -- -- 3,996,700 72,565,972 278,382 --
Sunbeam Corp. ............ 11,260,174 -- -- 11,260,174 105,141,875 225,203 --
Van Melle NV.............. 925,076 14,231 -- 939,307 67,647,466 1,080,092 --
--------------------------------------------
TOTAL NON CONTROLLED
AFFILIATES............... $552,742,434 $3,181,193 $2,581,409
============================================
</TABLE>

*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of June 30, 1998, no longer an affiliate.

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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 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.

A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.

PAGE

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

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
As of June 30, 1998, the Fund had the following forward exchange contracts
outstanding:

IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ----------------- ----------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
4,633,724 British Pounds..................................... U.S. $ 7,586,310 8/17/98 U.S. $ 130,834
17,000,000 British Pounds..................................... 28,158,800 10/15/98 32,782
10,261,133 Canadian Dollars................................... 6,970,547 7/13/98 9,365
------------ ------------
U.S. $42,715,657 172,981
------------ ------------
CONTRACTS TO SELL:
- ------------------
560,719 British Pounds..................................... U.S. $ 936,401 7/20/98 1,890
27,993,488 British Pounds..................................... 46,547,920 10/15/98 125,526
85,191,060 Canadian Dollars................................... 59,886,294 7/13/98 1,936,937
339,187,824 Canadian Dollars................................... 236,906,475 7/31/98 6,083,918
128,732,855 Canadian Dollars................................... 88,778,192 11/30/98 1,006,889
50,000,000 German Mark........................................ 27,932,961 9/18/98 98,225
33,708,684 German Mark........................................ 18,948,108 12/18/98 85,871
40,910,310 Dutch Guilders..................................... 20,550,000 9/17/98 341,091
18,796,210 Dutch Guilders..................................... 9,477,240 12/10/98 146,372
22,089,440 Finnish Markka..................................... 4,100,000 9/3/98 59,008
449,060,900 French Francs...................................... 74,818,061 7/17/98 463,869
285,286,441 French Francs...................................... 47,674,957 8/28/98 317,882
300,000,000 French Francs...................................... 50,516,106 9/11/98 677,445
326,906,892 French Francs...................................... 54,866,894 10/19/98 441,494
196,739,604 French Francs...................................... 33,345,696 11/18/98 535,237
226,576,252 French Francs...................................... 38,402,755 12/11/98 566,742
534,000,000 Japanese Yen....................................... 3,955,555 12/21/98 6,253
216,840,406 Norwegian Krone.................................... 29,010,093 9/10/98 706,675
371,757,452 Swedish Krona...................................... 47,249,882 9/18/98 481,173
730,534,993 Swedish Krona...................................... 95,320,842 11/16/98 3,246,481
------------ ------------
U.S. $989,224,432 17,328,978
------------
Net unrealized gain on offsetting forward exchange contracts.. 497,980
------------
Unrealized gain on forward exchange contracts............... 17,999,939
------------

CONTRACTS TO BUY:
- -----------------
16,250,000 British Pound...................................... U.S. $27,163,988 10/15/98 (216,152)
9,108,240 Norwegian Krone.................................... 1,200,000 9/10/98 (11,133)
------------ ------------
U.S. $28,363,988 (227,285)
------------ ------------
</TABLE>

PAGE

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

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)

IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------ ----------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
76,242,735 British Pounds..................................... U.S. $123,540,282 7/20/98 U.S. $ (3,528,119)
16,515,000 British Pounds..................................... 27,431,415 7/31/98 (75,980)
87,327,440 British Pounds..................................... 142,023,490 8/17/98 (3,289,259)
56,937,260 British Pounds..................................... 92,857,730 9/18/98 (1,711,440)
26,000,000 British Pounds..................................... 42,614,000 11/18/98 (417,349)
26,047,184 British Pounds..................................... 42,587,146 12/18/98 (447,272)
101,473,349 Dutch Guilders..................................... 49,839,563 9/9/98 (262,569)
118,384,439 Dutch Guilders..................................... 58,354,828 9/17/98 (124,817)
434,759,500 Finnish Markka..................................... 79,119,108 9/3/98 (414,797)
109,455,000 French Francs...................................... 18,000,000 8/28/98 (169,349)
58,482,541,366 Italian Lira....................................... 33,132,707 4/2/99 (67,148)
350,095,973 Swedish Krona...................................... 43,370,577 7/17/98 (559,902)
640,000,000 Swedish Krona...................................... 79,375,548 8/17/98 (1,034,241)
818,584,587 Swedish Krona...................................... 103,232,812 12/14/98 (130,280)
------------ ------------
U.S. $935,479,206 (12,232,522)
============ ------------
Unrealized loss on forward exchange contracts............... (12,459,807)
------------
Net unrealized gain on forward exchange contracts......... U.S. $ 5,540,132
============
</TABLE>

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
Templeton American Trust, Inc.

FUND ALLOCATOR SERIES
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund

INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin 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.

07/98

PAGE

INVESTMENT MANAGER
Franklin Mutual Advisers, Inc.
51 John F. Kennedy Parkway
Short Hills, NJ 07078

SHAREHOLDER SERVICES
1-800-632-2301-(Class I & II)
1-800-448-FUND-(Class Z)
BOARD OF DIRECTORS
Michael F. Price (Chairman) FUND INFORMATION
Peter A. Langerman 1-800-342-5236
Edward I. Altman
Ann Torre Grant
Andrew H. Hines, Jr.
William J. Lippman
Bruce A. MacPherson
Fred R. Millsaps
Leonard Rubin
Vaughn R. Sturtevant, M.D.
Robert E. Wade

This report must be preceded or
accompanied by the current
prospectus of the Mutual Shares
Fund, which contains more complete
information including risk factors,
charges and expenses.

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.

474 S98 08/98 [LOGO] Printed on recycled paper