FRANKLIN MUTUAL SERIES FUND INC, N-30D, 1998-02-25

FRANKLIN MUTUAL SERIES FUND INC
N-30D, 1998-02-25

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<PAGE> 1

Annual Report

DECEMBER 31, 1997

MUTUAL SHARES FUND

[Logo]

Franklin Templeton
<PAGE> 2
TECHNOLOGY UPDATE:
FRANKLIN TEMPLETON
COMBATS THE YEAR 2000 PROBLEM

By Charles B. Johnson,
President of Franklin Resources, Inc.

As we near the 21st century, Franklin Templeton is taking important steps to
tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the Millennium
Bug. The problem originated from the software designers' attempt to save memory
by recording years in a two-digit format -- "98" instead of "1998", for example
- -- but didn't take into account that the year 2000 or "00", could also be
interpreted as 1900. Uncorrected, this problem could prevent computers from
accurately processing date-sensitive data after 1999.

Franklin Templeton's Information Services & Technology division established a
Year 2000 Project Team that has already begun making the necessary software
changes to help ensure that our computer systems, which service the funds and
their shareholders, will be Year 2000 Compliant. As changes reach completion, we
will conduct comprehensive tests to verify their effectiveness. We will also
require all of our major software or data-services suppliers to be Year-2000
Compliant.

In addition, with an estimated 80% of businesses facing the Year 2000 Problem,
mutual fund portfolio managers must be aware of the impact it could have on
companies in their portfolios. That's why Franklin Templeton portfolio managers
consistently keep this issue in mind while selecting investments and managing
their portfolios.

<PAGE> 3

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 annual report of the Mutual Shares Fund, which
covers the 12 months ended December 31, 1997. The fund's Class Z shares
produced a 26.44% cumulative total return for the year, as discussed in the
Performance Summary on page 5. This performance was somewhat ahead of the Dow
Jones(R) Industrial Average, which returned 24.99%(1) for the year, while
slightly behind that of the Lipper Growth & Income Funds' average of 26.99%.(2)
For comparative purposes, during the same period the Standard and Poor's(R) 500
Stock Index (S&P 500(R)) had a 31.63%(3) return.

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

2. Source: Lipper Growth and Income Fund average consists of 624 funds. Lipper
calculations do not include sales charges; past and current expense reductions
by the fund's manager increased the fund's total return. If these factors had
been considered, the fund's performance relative to the Lipper average may have
been different.

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

You may find a complete listing of the fund's portfolio holdings, including the
number of shares and dollar value, beginning on page 17 of this report.

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

Performance Summary
Class Z.......................... 5
Class I.......................... 8
Class II......................... 11

Financial Highlights &
Statement of Investments........... 14

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

Notes to Financial Statements...... 31

Report of Independent
Auditors........................... 40

Tax Designation.................... 41
</TABLE>

[FUND CATEGORY PYRAMID]
<PAGE> 4

PORTFOLIO BREAKDOWN
Based on Total Net Assets
12/31/97
Equities 74.2%
Bonds 2.4%
Short-Term Investments &
Other Net Assets
23.4%

TOP 10 INDUSTRIES
12/31/97

% OF TOTAL
INDUSTRY NET ASSETS
--------------------------------------------
Broadcasting &
Publishing 9.7%

Food & Household
Products 7.0%
Multi-Industry 5.3%
Banking 5.3%
Financial Services 4.8%

Health & Personal Care 4.3%

Energy Sources 4.3%

Beverages & Tobacco 4.3%

Telecommunications 4.1%

Insurance 3.9%

Despite occasional setbacks caused by warnings of "irrational exuberance" in the
domestic equity market and Asia's economic crises, the U.S. and European stock
markets demonstrated tremendous resilience, making 1997 yet another year in the
extraordinary bull market that began at least three years ago. From the
beginning of 1995 through the end of 1997, U.S. stock prices more than doubled,
as measured by the S&P 500. Finding cheap stocks became even tougher during the
past year as investors looking to "buy the dips" were willing to purchase some
securities at historically high valuations. As a result, our cash level
increased somewhat by year-end but it remained well within the fund's historical
range. Over the past ten years, year-end cash levels for the fund have been as
high as 33% and as low as 15%.

At the end of the reporting period, stocks in the S&P 500 were trading at an
average of 24 times earnings, with many of the names that dominate the index
valued too high for our standards. However, we still were able to find
opportunities in the domestic equity market. We purchased additional shares of
U.S. West Media Group, which rose over 50% this year as the company's
restructuring complemented investors' recognition of the value of its core cable
business. In addition, during this period, the merger and acquisition
environment, as well as divestiture activity, continued to be strong.

The fund also benefited from its European holdings, particularly in the small
and mid-capitalization stocks. For example, in the U.K., investors embraced the
privatized railroad firm, Railtrack Group Plc., as they began to understand the
potential value of relaxation from government regulation, and the company's
stock appreciated 164.87% over the year. Reflecting the relative attractiveness
of the European

2
<PAGE> 5

sector, the fund had 13.5% of its total net assets invested there at the end of
the year.

We believe equity markets will present us with substantial opportunities in
1998. Although our direct exposure to Asia was virtually non-existent, the Asian
economic crises of late 1997 may have a greater impact on some companies than
the market has reflected. We are looking to see if these crises have created
opportunities for us. However, we are always mindful of the lower risk, lower
volatility philosophy of the fund and our investments everywhere are intended to
be consistent with this.

In Europe, we anticipate an exciting year as the continent prepares for the
limited introduction of the eurocurrency on January 1, 1999. While it may be
years before the success or failure of the new system is known, we expect
mistakes to occur and hope they force greater flexibility on the system, as well
as offer us investment opportunities in the process.

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

Sincerely,
Franklin Mutual Advisers Senior Portfolio Management Team

TOP 10 HOLDINGS
12/31/97
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
----------------------------------------------------------------

Sunbeam Corp.,
Food & Household Products 4.4%

Chase Manhattan Corp.,
Banking 4.1%

Investor AB, A & B,
Multi-Industry 3.2%

U.S. West Media Group,
Broadcasting & Publishing 3.0%

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

MCI Communication Corp.,
Telecommunications 1.5%

RJR Nabisco Holdings Corp.,
Beverages & Tobacco 1.5%

General Motors Corp.,
Automobiles 1.4%

Railtrack Group Plc.,
Transportation 1.2%

Telephone & Data
Systems Inc.,
Telecommunications 1.1%

3
<PAGE> 6

Please remember, this discussion reflects our views and opinions as of December
31, 1997, the end of the reporting period. Market and economic conditions are
changing constantly, which may affect our strategies and portfolio holdings.
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.

4
<PAGE> 7

PERFORMANCE SUMMARY

CLASS Z

Mutual Shares Fund - Class Z produced a 26.44% cumulative total return for the
12-month period ended December 31, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains.

The fund's Class Z share price increased $2.73, from $18.57 on December 31,
1996, to $21.30 on December 31, 1997.* During the reporting period, Class Z
shareholders received per-share distributions of 54.00 cents ($0.5400) in
dividend income, 45.00 cents ($0.4500) in short-term capital gains, and $1.13 in
long-term capital gains. Distributions will vary depending on income earned by
the fund and any profits realized from the sale of securities in the portfolio,
as well as the level of the fund's operating expenses.

The graph on page 6 compares the performance of Mutual Shares Fund - Class Z and
the unmanaged Standard & Poor's 500 Stock Index (S&P 500), as well as the Lipper
Growth & Income Funds' average, for the 10-year period ended December 31, 1997.

*Per-share amount for all periods prior to February 3, 1997, have been restated
to reflect a 5-for-1 share split effective at the close of business on Friday,
January 31, 1997.

Past performance is not predictive of future results.

5
<PAGE> 8

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index does not pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes all fund expenses and
account fees. The index's performance would have been lower if the fund's costs
had been applied to it. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.

MUTUAL SHARES FUND - CLASS Z
Index Comparison
Ten-Year (1/1/88 - 12/31/97)

<TABLE>
<CAPTION>
LIPPER GROWTH &
DATE MUTUAL SHARES - CLASS Z* S&P 500** INCOME AVERAGE*** S&P Lpper
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/1/88 $10,000 $10,000 $10,000
12/31/88 $13,069 $11,661 $11,507 16.61% 15.07%
12/31/89 $15,020 $15,356 $14,180 31.69% 23.23%
12/31/90 $13,544 $14,880 $13,543 -3.10% -4.49%
12/31/91 $16,387 $19,414 $17,455 30.47% 28.88%
12/31/92 $19,881 $20,894 $18,958 7.62% 8.61%
12/31/93 $24,054 $23,000 $21,147 10.08% 11.55%
12/31/94 $25,148 $23,303 $20,948 1.32% -0.94%
12/31/95 $32,469 $32,061 $27,405 37.58% 30.82%
12/31/96 $39,208 $39,422 $33,099 22.96% 20.78%
12/31/97 $49,551 $52,573 $42,033 33.36% 26.99%
</TABLE>

The historical performance data shown pertains only to the fund's Class Z
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. Please see the prospectus for more
information.

*Performance figures represent the change in value of an investment over the
periods shown, assuming reinvestment of dividends and capital gains at net asset
value. This was a period of generally rising security prices.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

Past performance is not predictive of future results.

6
<PAGE> 9

CLASS Z
Periods ended 12/31/97

<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) 26.44% 149.34% 395.78%
Average Annual Total Return(2) 26.44% 20.04% 17.36%
Value of $10,000 Investment(3) $12,644 $24,934 $49,578
</TABLE>

<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 21.00% 4.53% 29.11% 20.76% 26.44%
</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 specified dates.

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.

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.

7
<PAGE> 10

CLASS I

Mutual Shares Fund - Class I produced a 26.03% cumulative total return for the
12-month period ended December 31, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, and does not include the initial sales charge.

The fund's Class I share price, as measured by net asset value, increased $2.70,
from $18.56 on December 31, 1996, to $21.26 on December 31, 1997.* During the
reporting period, Class I shareholders received per-share distributions of 49.42
cents ($0.4942) in dividend income, 45.00 cents ($0.4500) in short-term capital
gains, and $1.13 in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.

The graph on page 9 compares the performance of Mutual Shares Fund - Class I
since inception on November 1, 1996, and the unmanaged Standard & Poor's 500
Stock Index (S&P 500), as well as the Lipper Growth & Income Funds' average.

*Per-share amounts for all periods prior to February 3, 1997, have been restated
to reflect a 5-for-1 share split effective at the close of business on Friday,
January 31, 1997.

Past performance is not predictive of future results.

8
<PAGE> 11

the performance shown for the fund includes the initial sales charge, all fund
expenses and account fees. The index's performance would have been lower if the
fund's costs had been applied to it. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.

MUTUAL SHARES FUND - CLASS I
Index Comparison
(11/1/96 - 12/31/97)

<TABLE>
<CAPTION>
LIPPER GROWTH &
DATE MUTUAL SHARES - CLASS I* S&P 500** INCOME AVERAGE*** S&P Lipper
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/1/96 $ 9,550 $10,000 $10,000
11/30/96 $10,076 $10,756 $10,650 7.56% 6.50%
12/31/96 $10,186 $10,543 $10,538 -1.98% -1.05%
1/31/97 $10,503 $11,202 $10,992 6.25% 4.31%
2/28/97 $10,750 $11,289 $11,048 0.78% 0.51%
3/31/97 $10,607 $10,825 $10,654 -4.11% -3.57%
4/30/97 $10,717 $11,472 $11,038 5.97% 3.60%
5/31/97 $11,222 $12,170 $11,728 6.09% 6.26%
6/30/97 $11,562 $12,715 $12,180 4.48% 3.85%
7/31/97 $12,202 $13,728 $13,076 7.96% 7.36%
8/31/97 $12,119 $12,959 $12,640 -5.60% -3.34%
9/30/97 $12,668 $13,669 $13,281 5.48% 5.07%
10/31/97 $12,441 $13,212 $12,814 -3.34% -3.51%
11/30/97 $12,596 $13,824 $13,158 4.63% 2.68%
12/31/97 $12,835 $14,062 $13,378 1.72% 1.67%
</TABLE>

The historical performance data shown pertains only to the fund's Class I
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. Please see the prospectus for more
details.

*Performance figures represent the change in value of an investment over the
periods shown and include the maximum 4.5% initial sales charge, assuming
reinvestment of dividends and capital gains at net asset value. This was a
period of generally rising security prices.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

9
<PAGE> 12

CLASS I
Periods ended 12/31/97

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (11/1/96)
----------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 26.03% 34.74%
Average Annual Total Return(2) 20.35% 24.11%
Value of $10,000 Investment(3) $12,035 $12,867
</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.

10
<PAGE> 13

CLASS II

Mutual Shares Fund - Class II produced a 25.17% cumulative total return for the
12-month period ended December 31, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and
capitals gains, and does not include sales charges.

The fund's Class II share price, as measured by net asset value, increased
$2.62, from $18.56 on December 31, 1996, to $21.18 on December 31, 1997.* During
the reporting period, Class II shareholders received per-share distributions of
41.85 cents ($0.4185) in dividend income, 45.00 cents ($0.4500) in short-term
capital gains, and $1.13 in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.

The graph on page 12 compares the performance of Mutual Shares Fund - Class II
since inception on November 1, 1996, and the unmanaged Standard & Poor's 500
Stock Index (S&P 500), as well as the Lipper Growth & Income Funds' average.

*Per-share amounts for all periods prior to February 3, 1997, have been restated
to reflect a 5-for-1 share split effective at the close of business on Friday,
January 31, 1997.

Past performance is not predictive of future results.

11
<PAGE> 14

the performance shown for the fund includes sales charges, all fund expenses and
account fees. The index's performance would have been lower if the fund's costs
had been applied to it. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.

MUTUAL SHARES FUND - CLASS II
Index Comparison
(11/1/96 - 12/31/97)

<TABLE>
<CAPTION>
LIPPER GROWTH &
DATE MUTUAL SHARES - CLASS II* S&P 500** INCOME AVERAGE*** S&P Lipper
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/1/96 $ 9,900 $10,000 $10,000
11/30/96 $10,441 $10,756 $10,650 7.56% 6.50%
12/31/96 $10,550 $10,543 $10,538 -1.98% -1.05%
1/31/97 $10,874 $11,202 $10,992 6.25% 4.31%
2/28/97 $11,126 $11,289 $11,048 0.78% 0.51%
3/31/97 $10,967 $10,825 $10,654 -4.11% -3.57%
4/30/97 $11,075 $11,472 $11,038 5.97% 3.60%
5/31/97 $11,592 $12,170 $11,728 6.09% 6.26%
6/30/97 $11,939 $12,715 $12,180 4.48% 3.85%
7/31/97 $12,592 $13,728 $13,076 7.96% 7.36%
8/31/97 $12,494 $12,959 $12,640 -5.60% -3.34%
9/30/97 $13,057 $13,669 $13,281 5.48% 5.07%
10/31/97 $12,816 $13,212 $12,814 -3.34% -3.51%
11/30/97 $12,971 $13,824 $13,158 4.63% 2.68%
12/31/97 $13,103 $14,062 $13,378 1.72% 1.67%
</TABLE>

The historical performance shown pertains only to the fund's Class II shares.
The fund offers other share classes subject to different fees and expenses,
which affect their performance. Please see the prospectus for more details.

* Performance figures represent the change in value of an investment over the
periods shown and include all sales charges, assuming reinvestment of dividends
and capital gains at net asset value. This was a period of generally rising
security prices.

**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

Past performance is not predictive of future results.

12
<PAGE> 15

CLASS II
Periods ended 12/31/97

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (11/1/96)
----------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 25.17% 33.71%
Average Annual Total Return(2) 22.94% 26.34%
Value of $10,000 Investment(3) $12,294 $13,138
</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
within 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.

13
<PAGE> 16

MUTUAL SHARES FUND
Financial Highlights

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+ - CLASS Z
(For a share outstanding throughout the year)
Net asset value, beginning of year.............. $18.57 $17.29 $15.74 $16.19 $14.67
------------------------------------------------------------------
Income from investment operations:
Net investment income.......................... .42 .55 .40 .27 .28
Net realized and unrealized gain............... 4.43 2.96 4.10 .46 2.78
------------------------------------------------------------------
Total from investment operations................ 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 year.................... $21.30 $18.57 $17.29 $15.74 $16.19
==================================================================
Total Return.................................... 26.44% 20.76% 29.11% 4.53% 21.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)................. $7,918,986 $6,543,063 $5,229,574 $3,745,726 $3,527,076
Ratios to average net assets:
Expenses....................................... .72% .70% .69% .72% .74%
Expenses, excluding waiver and payments by .75% .72% .69% .72% .74%
affiliate....................................
Net investment income.......................... 1.92% 3.02% 2.47% 1.80% 1.90%
Portfolio turnover rate......................... 49.61% 58.35% 79.32% 66.55% 48.78%
Average commission rate paid*................... $.0350 $.0410 -- -- --
</TABLE>

*Relates to purchases and sales of equity securities. Prior to fiscal year 1996
disclosure of average commission rate was not required.
+Per share amounts for all periods prior to December 31, 1997, have been
restated to reflect a 5-for-1 stock split effective February 3, 1997.

14
<PAGE> 17

MUTUAL SHARES FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997+++ 1996+
---------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE++ - CLASS I
(For a share outstanding throughout the year)
Net asset value, beginning of year................................................. $18.56 $18.90
---------------------------
Income from investment operations:
Net investment income............................................................. .34 .21
Net realized and unrealized gain.................................................. 4.43 1.08
---------------------------
Total from investment operations................................................... 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 year....................................................... $21.26 $18.56
===========================
Total Return*...................................................................... 26.03% 6.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's).................................................... $1,043,262 $35,634
Ratios to average net assets:
Expenses.......................................................................... 1.07% 1.09%**
Expenses, excluding waiver and payments by affiliate.............................. 1.10% 1.18%**
Net investment income............................................................. 1.58% 2.44%**
Portfolio turnover rate............................................................ 49.61% 58.35%
Average commission rate paid***.................................................... $.0350 $.0410
</TABLE>

*Total return does not reflect sales commissions and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
+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.

15
<PAGE> 18

MUTUAL SHARES FUND
Financial Highlights (continued)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997+++ 1996+
-------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE++ - CLASS II
(For a share outstanding throughout the year)
Net asset value, beginning of year................................................. $18.56 $18.90
-------------------------
Income from investment operations:
Net investment income............................................................. .20 .20
Net realized and unrealized gain.................................................. 4.42 1.08
-------------------------
Total from investment operations................................................... 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 year....................................................... $21.18 $18.56
=========================
Total Return*...................................................................... 25.17% 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's).................................................... $636,838 $16,873
Ratios to average net assets:
Expenses.......................................................................... 1.72% 1.71%**
Expenses, excluding waiver and payments by affiliate.............................. 1.75% 1.80%**
Net investment income............................................................. 0.92% 1.69%**
Portfolio turnover rate............................................................ 49.61% 58.35%
Average commission rate paid***.................................................... $.0350 $.0410
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
+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.

16
<PAGE> 19

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997

*General Motors Corp., H.......................................... United States 274,900 10,154,119

*Hexcel Corp...................................................... United States 1,740,895 43,413,569

*+Kreisler Manufacturing Corp..................................... United States 184,480 1,867,860

*Litton Industries Inc............................................ United States 352,700 20,280,250

Lockheed Martin Corp.............................................. United States 114,818 11,309,573

Northrop Grumman Corp............................................. United States 148,300 17,054,500

Primex Technologies Inc........................................... United States 63,990 2,159,663

Raytheon Co., A................................................... United States 231,234 11,402,727
--------------
136,843,379
--------------
APPLIANCES & HOUSEHOLD DURABLES 0.3%
Black & Decker Corp............................................... United States 708,375 27,670,898
--------------
AUTOMOBILES 2.1%
General Motors Corp............................................... United States 2,279,000 138,164,375

Regie Nationale des Usines Renault SA............................. France 1,216,468 34,219,163

Volvo AB, B....................................................... Sweden 1,080,300 28,980,705
--------------
201,364,243
--------------
BANKING 5.3%
Barnett Banks Inc................................................. United States 87,800 6,310,625

Chase Manhattan Corp.............................................. United States 3,566,988 390,585,186

Corestates Financial Corp......................................... United States 21,000 1,681,313

First Union Corp.................................................. United States 336,320 17,236,400

Fleet Financial Group Inc......................................... United States 375,400 28,131,538

Mellon Bank Corp.................................................. United States 225,000 13,640,625

PNC Bank Corp..................................................... United States 258,700 14,762,069

Wells Fargo & Co.................................................. United States 92,900 31,533,744
--------------
503,881,500
--------------
BEVERAGES & TOBACCO 4.3%
B.A.T. Industries PLC............................................. United Kingdom 5,234,483 47,669,834

Brown-Forman Corp., B............................................. United States 354,700 19,597,175

Diageo PLC........................................................ United Kingdom 3,044,738 27,928,100

Gallaher Group PLC................................................ United Kingdom 1,350,000 7,161,510

Gallaher Group PLC, ADR........................................... United Kingdom 715,500 15,293,813

+Genesee Corp., A................................................. United States 15,911 644,396

Genesee Corp., B.................................................. United States 103,550 4,193,775

Heineken Holding NV, A............................................ Netherlands 110,493 17,001,857

Philip Morris Cos. Inc............................................ United States 2,185,700 99,039,531

RJR Nabisco Holdings Corp......................................... United States 3,829,599 143,609,963

UST Inc. ......................................................... United States 713,000 26,336,438
--------------
408,476,392
--------------
BROADCASTING & PUBLISHING 9.7%
+BHC Communications Inc., A....................................... United States 283,317 36,902,039

*Chris Craft Industries Inc....................................... United States 210,549 11,014,345

Comcast Corp., A.................................................. United States 105,500 3,362,813

</TABLE>

17
<PAGE> 20

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

Daily Mail & General Trust PLC.................................... United Kingdom 65,000 2,241,821

Daily Mail & General Trust PLC, A................................. United Kingdom 1,284,500 42,455,923

Dow Jones & Co. Inc............................................... United States 1,295,800 69,568,263

Dun & Bradstreet Corp. ........................................... United States 1,566,400 48,460,500

Houghton Mifflin Co............................................... United States 1,475,300 56,614,638

Readers Digest Association Inc., A................................ United States 497,900 11,762,888

Scripps Co., A.................................................... United States 1,477,500 71,566,406

*SFX Broadcasting Inc., A......................................... United States 215,480 17,292,270

+Southam Inc. .................................................... Canada 3,996,700 76,211,522

Time Warner Inc. ................................................. United States 1,078,600 66,873,200

United News & Media PLC........................................... United Kingdom 4,062,118 45,832,924

*US West Media Group.............................................. United States 10,044,173 290,025,495

*Valassis Communications Inc...................................... United States 950,000 35,150,000
--------------
930,179,647
--------------
BUILDING MATERIALS & COMPONENTS 0.6%
*American Standard Cos. Inc. ..................................... United States 1,046,000 40,074,875

Johns-Manville Corp. ............................................. United States 1,392,935 14,016,408

Lone Star Industries Inc. ........................................ United States 63,095 3,351,922

Noland Co. ....................................................... United States 134,475 3,025,688
--------------
60,468,893
--------------
BUSINESS & PUBLIC SERVICES 1.2%
Moore Corp. Ltd. ................................................. Canada 228,900 3,462,113

Moore Corp. Ltd., fgn. ........................................... Canada 943,000 14,187,397

Suez Lyonnaise des Eaux SA........................................ France 849,380 93,991,373
--------------
111,640,883
--------------
CHEMICALS 1.7%
General Chemical Group Inc. ...................................... United States 432,700 11,574,725

Morton International Inc.......................................... United States 1,411,700 48,527,188

Olin Corp. ....................................................... United States 1,899,100 89,020,313

Rohm & Haas Co. .................................................. United States 98,800 9,460,100

*W.R. Grace and Co. .............................................. United States 55,800 4,488,413
--------------
163,070,739
--------------
CONSTRUCTION & HOUSING 0.2%
Martin Marietta Materials Inc. ................................... United States 470,015 17,184,923
--------------
DATA PROCESSING & REPRODUCTION 0.3%
First Data Corp................................................... United States 181,500 5,308,875

*NCR Corp. ....................................................... United States 794,600 22,099,813
--------------
27,408,688
--------------
ELECTRICAL & ELECTRONICS 0.4%
Philips Electronics NV ADR........................................ Netherlands 563,300 34,079,650
--------------
</TABLE>

18
<PAGE> 21

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC COMPONENTS & INSTRUMENTS 0.1%
Fisher Scientific International Inc. ............................. United States 294,600 $ 14,067,150
--------------
ENERGY EQUIPMENT & SERVICES 1.9%
*Noble Drilling Corp. ............................................ United States 633,400 19,397,875

*Reading & Bates Corp. ........................................... United States 980,000 41,037,500

*Rowan Companies Inc. ............................................ United States 916,000 27,938,000

Transocean Offshore Inc. ......................................... United States 1,524,900 73,481,119

*United Meridian Corp. ........................................... United States 743,200 20,902,500

*Veritas DGC Inc. ................................................ United States 75,700 2,990,150
--------------
185,747,144
--------------
ENERGY SOURCES 4.3%
Amerada Hess Corp. ............................................... United States 337,800 18,536,775

Imperial Oil Ltd. ................................................ Canada 810,400 51,814,950

Kerr McGee Corp................................................... United States 579,300 36,676,931

Noble Affiliates Inc. ............................................ United States 368,300 12,982,575

*Nuevo Energy Co. ................................................ United States 325,000 13,243,750

Pennzoil Co. ..................................................... United States 1,163,100 77,709,619

Royal Dutch Petroleum Co.......................................... Netherlands 884,000 47,901,750

Saga Petroleum AS, A.............................................. Norway 948,500 16,333,492

*Santa Fe Energy Resources Inc. .................................. United States 1,255,900 14,128,875

Shell Transport & Trading Co. PLC................................. United Kingdom 3,300,000 23,928,360

Societe Elf Aquitane SA........................................... France 683,528 79,499,809

Societe Elf Aquitaine SA, ADR..................................... France 222,200 13,026,475

Tidewater Inc. ................................................... United States 97,100 5,352,638

Union Texas Petroleum Holdings Inc................................ United States 294,200 6,123,038
--------------
417,259,037
--------------
FINANCIAL SERVICES 4.8%
Advanta Corp., A.................................................. United States 214,800 5,638,500

Advanta Corp., B.................................................. United States 862,100 21,875,787

Astoria Financial Corp. .......................................... United States 47,621 2,654,871

Bear Stearns Co. Inc. ............................................ United States 208,859 9,920,803

Beneficial Corp. ................................................. United States 289,500 24,064,688

*CIT Group Inc., A................................................ United States 350,000 11,287,500

*Cityscape Financial Corp. ....................................... United States 1,311,000 655,500

Equifax Inc. ..................................................... United States 830,800 29,441,475

*(R)FBR Asset Investment Corp. ................................... United States 750,000 15,000,000

Finova Group Inc. ................................................ United States 1,249,400 62,079,565

(R)Laser Mortgage Management Inc. ................................ United States 350,000 5,075,000

Lehman Brothers Holdings Inc. .................................... United States 393,800 20,083,800

Morgan Stanley, Dean Witter Discover & Co......................... United States 3,296,000 194,876,000

Power Financial Corp.............................................. Canada 252,500 8,834,540

Providian Financial Corp.......................................... United States 45,000 2,033,438

United Asset Management Corp...................................... United States 2,102,900 51,389,619
--------------
464,911,086
--------------
</TABLE>

19
<PAGE> 22

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

Nabisco Holdings Corp., A......................................... United States 1,934,000 93,678,125

+Seaboard Corp.................................................... United States 76,450 33,638,000

+(R)Sunbeam Corp. ................................................ United States 11,260,174 426,901,347

U.S. Industries Inc. ............................................. United States 1,001,400 30,167,175

+Van Melle NV..................................................... Netherlands 925,076 66,153,439
--------------
670,303,019
--------------
FOREST PRODUCTS & PAPER 1.0%
Bowater Inc. ..................................................... United States 475,200 21,116,700

Champion International Corp. ..................................... United States 385,900 17,486,094

Fletcher Challenge Canada Ltd., A................................. Canada 168,000 2,292,432

Greif Brothers Corp., A........................................... United States 205,400 6,880,900

Longview Fibre Co................................................. United States 316,700 4,809,881

St. Joe Paper Corp................................................ United States 346,075 31,319,788

Temple Inland Inc. ............................................... United States 160,547 8,398,615
--------------
92,304,410
--------------
HEALTH & PERSONAL CARE 4.3%
Aetna Inc. ....................................................... United States 270,000 19,051,875

*Apria Healthcare Group Inc. ..................................... United States 1,139,000 15,305,312

*Beverly Enterprises Inc. ........................................ United States 3,317,000 43,121,000

*Foundation Health Systems, A..................................... United States 3,702,790 82,849,926

*(R)Kendall International Inc., Residual Ownership Certificates... United States 379 4,548

*Kindercare Learning Centers Inc.................................. United States 95,891 1,821,929

*Maxicare Health Plans Inc........................................ United States 318,900 3,468,038

*Mid-Atlantic Medical Services Inc................................ United States 1,953,000 24,900,750

*Oxford Health Plans Inc. ........................................ United States 669,500 10,419,094

*Pacificare Health Systems Inc., A................................ United States 579,924 29,141,181

*Pacificare Health Systems Inc., B................................ United States 536,220 28,084,523

*Paragon Health Networks Inc...................................... United States 513,975 10,054,636

*Perrigo Co. ..................................................... United States 626,100 8,374,088

*Pharmerica Inc. ................................................. United States 1,509,567 15,661,755

*Tenet Healthcare Corp. .......................................... United States 2,597,700 86,048,813

United States Surgical Corp. ..................................... United States 452,500 13,263,906

*Vencor Inc....................................................... United States 1,057,600 25,845,100
--------------
417,416,474
--------------

INDUSTRIAL COMPONENTS 1.0%
*ITT Industries Inc. ............................................. United States 1,678,200 52,653,525

*+(R)Lancer Industries Inc., B.................................... United States 3 4,357,546

Lucas Varity PLC.................................................. United Kingdom 7,911,790 28,002,082

*Owens-Illinois Inc. ............................................. United States 241,900 9,177,081

*PXL Holdings Corp. .............................................. United States 21 46,305
--------------
94,236,539
--------------
</TABLE>

20
<PAGE> 23

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

COMMON STOCKS (CONT.)
INSURANCE 3.9%
*Alleghany Corp. ................................................. United States 199,922 $ 56,927,789

Allmerica Financial Corp. ........................................ United States 423,150 21,131,053

American General Corp. ........................................... United States 176,948 9,566,251

AON Corp.......................................................... United States 1,044,600 61,239,675

Argonaut Group Inc. .............................................. United States 320,300 10,850,162

Financial Security Assurance Holding Ltd. ........................ United States 474,500 22,894,625

+Fund American Enterprises Holdings Inc. ......................... United States 674,084 81,564,164

Kansas City Life Insurance Co. ................................... United States 78,300 7,751,700

Old Republic International Corp. ................................. United States 666,080 24,769,850

Provident Companies Inc. ......................................... United States 398,762 15,402,182

SAFECO Corp. ..................................................... United States 267,000 13,016,250

Selective Insurance Group Inc. ................................... United States 671,908 18,141,516

Twentieth Century Industries California........................... United States 155,000 4,030,000

Unitrin Inc. ..................................................... United States 200,600 12,963,775

Western National Corp. ........................................... United States 396,000 11,731,500
--------------
371,980,492
--------------

LEISURE & TOURISM 1.7%
*Circus Circus Enterprises Inc. .................................. United States 1,084,400 22,230,200

Hilton Hotels Corp. .............................................. United States 1,036,500 30,835,875

ITT Corp. ........................................................ United States 883,300 73,203,488

*MGM Grand Inc. .................................................. United States 1,119,400 40,368,363
--------------
166,637,926
--------------

MACHINERY & ENGINEERING 0.4%
Briggs & Stratton Corp. .......................................... United States 375,100 18,215,794

New Holland NV.................................................... Netherlands 650,900 17,208,169
--------------
35,423,963
--------------

MERCHANDISING 0.6%
American Stores Co. .............................................. United States 1,046,000 21,508,375

Dillards Inc., A.................................................. United States 172,300 6,073,575

*Woolworth Corp................................................... United States 1,314,600 26,784,975
--------------
54,366,925
--------------

METALS & MINING 0.8%
Aluminum Co. of America........................................... United States 74,500 5,242,937

Commercial Metals Co.............................................. United States 374,812 11,830,004

LTV Corp.......................................................... United States 1,013,300 9,879,675

+(R)Metallurg Inc................................................. United States 589,939 7,964,177

Reynolds Metals Co................................................ United States 708,600 42,516,000
--------------
77,432,793
--------------

MULTI-INDUSTRY 5.3%
*Berkshire-Hathaway Inc., A....................................... United States 1,025 47,150,000

Canadian Pacific Ltd.............................................. Canada 299,000 8,147,750

Harcourt General Inc.............................................. United States 633,100 34,662,225

Investor AB, A.................................................... Sweden 1,770,400 86,291,364
</TABLE>

21
<PAGE> 24

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY (CONT.)
Investor AB, B.................................................... Sweden 4,543,500 $ 221,455,497

Lagardere S.C.A................................................... France 999,593 33,051,260

McMillan Bloedel Ltd.............................................. Canada 835,200 8,678,997

Power Corp. of Canada............................................. Canada 300,000 10,748,399

Viad Corp......................................................... United States 3,202,100 61,840,556
--------------
512,026,048
--------------

REAL ESTATE 2.1%
Alexander & Baldwin Inc........................................... United States 273,000 7,456,312

*+Alexander's Inc................................................. United States 386,000 35,053,625

*Al-Zar Ltd. LP................................................... United States 284 97,412

*Americana Hotels & Realty........................................ United States 325,300 260,240

*Cadillac Fairview Corp........................................... Canada 2,650,997 61,681,292

*Cadillac Fairview Corp., wts..................................... Canada 291,749 3,572,728

*Castle & Cooke Inc............................................... United States 115,133 1,942,888

*Insignia Financial Group Inc..................................... United States 424,000 9,752,000

*+MBO Properties Inc.............................................. United States 574,712 4,885,052

+(R)MSCW Investors I, LLC......................................... United Kingdom 40,500,000 67,240,589

Reckson Associates Realty Corp.................................... United States 223,400 5,668,775
--------------
197,610,913
--------------

RECREATION & OTHER CONSUMER GOODS
*Bulova Corp...................................................... United States 37,900 618,244

Todd A O Corp., A................................................. United States 332,723 2,786,555
--------------
3,404,799
--------------

TELECOMMUNICATIONS 4.1%
*360 Degrees Communications Company............................... United States 2,187,466 44,159,485

*Ionica Group PLC, wts............................................ United Kingdom 3,265 350,988

*Loral Space & Communications Ltd................................. United States 953,300 20,436,369

MCI Communications Corp........................................... United States 3,372,000 144,363,750

Sprint Corp....................................................... United States 572,300 33,551,088

*Telecommunications Inc.- TCI Ventures Group, A................... United States 1,587,000 44,931,938

Telephone & Data Systems Inc...................................... United States 2,224,600 103,264,650
--------------
391,058,268
--------------

TEXTILES & APPAREL 0.1%
+Fab Industries Inc............................................... United States 331,100 10,305,488
--------------

TRANSPORTATION 3.1%
Burlington Northern Santa Fe Corp................................. United States 473,800 44,033,788

Canadian National Railway Co...................................... Canada 745,400 35,220,150

+Florida East Coast Industries Inc................................ United States 513,000 49,312,125

*(R)Golden Ocean Group Ltd., wts.................................. United States 2,800 14,000

Helikopter Services Group ASA..................................... Norway 947,800 11,566,373

Railtrack Group PLC............................................... United Kingdom 7,163,871 114,244,494

Xtra Corp......................................................... United States 730,800 42,843,150
--------------
297,234,080
--------------
</TABLE>

22
<PAGE> 25

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL GAS & WATER
Nova Corp......................................................... Canada 651,500 $ 6,200,203
--------------
7,102,196,592
TOTAL COMMON STOCKS (COST $4,829,268,864)................... --------------

PREFERRED STOCKS 0.2%
Criimi Mae Inc., 10.875%, conv., pfd., B.......................... United States 51,100 1,746,981

Excel Realty Trust Inc., conv., pfd., A........................... United States 392,000 11,894,750

Gentra Inc., pfd., G.............................................. Canada 52,500 734,754

*(R)Interlake Corp., Series A3, 9.00%, conv., pfd................. United States 2,450 2,754,045

North Atlantic Trading Company Inc., 12.00%, pfd., 144A........... United States 26,462 714,474

*(R)Viasystems Inc., pfd., B...................................... United States 132,600 2,817,750

*Wundies Industries Inc., 11.25%, pfd............................. United States 30,892 106,191
--------------
20,768,945
TOTAL PREFERRED STOCKS (COST $17,111,645)................... --------------
PRINCIPAL
AMOUNT**
---------
CORPORATE BONDS AND NOTES 1.2%
American Communication Services Inc., 0/11.00%, 11/01/05.......... United States $ 3,940,000 3,171,700

American Telecasting Inc., 14.50%, 6/15/04........................ United States 6,250,000 2,093,750

Asia Pulp & Paper Co. Ltd., 144A, 12.00%, 12/29/29................ Indonesia 2,625,000 2,323,125

Australis Holdings Ltd., 0/11.00%, 11/01/02....................... Australia 5,268,000 3,055,440

Azteca Holdings, 144A, 11.00%, 6/15/02............................ Mexico 600,000 621,000

Bally Total Fitness Holding Corp., 144A, 9.875%, 10/15/07......... United States 700,000 708,750

Boston Chicken Inc., conv., zero coupon, 6/01/15.................. United States 7,775,000 1,175,969

Cadillac Fairview Corp., 12.00%, 7/31/05.......................... Canada 302,084CAD 215,616

Cityscape Financial Corp., 12.75%, 6/01/04........................ United States 7,890,000 3,471,600

Club Regina Resorts Inc., 13.00%, 12/01/00........................ United States 5,250,000 5,368,125

CML Group Inc., 5.50%, 1/15/03.................................... United States 2,000,000 1,520,000

Computervision Corp., 11.375%, 8/15/99............................ United States 1,000,000 1,011,250

Consorcio G Grupo Dina SA de CV:
conv., 8.00%, 8/08/04........................................... Mexico 3,470,000 2,966,850

0/12.00%, 11/15/02.............................................. Mexico 4,390,000 3,972,950

County Seat Stores Inc., 144A, 12.75%, 11/01/04................... United States 1,000,000 1,030,000

CS Wireless Inc., B, 0/12.25%, 3/01/06............................ United States 8,700,000 2,305,500

Del Monte Foods Co., 0/12.50%, 12/15/07........................... United States 3,000,000 1,732,500

Delco Remy International, 11.50%, 7/31/04......................... United States 5,900,000 5,988,500

(R)Fairchild Semiconductor Corp., 11.74%, 3/14/08................. United States 3,300,000 3,382,500

Falcon Building Products Inc., 144A, 10.50%, 6/15/07.............. United States 3,500,000 2,318,750

Flagstar Companies Inc., 10.75%, 9/15/01.......................... United States 1,820,000 2,033,850

FRD Acquisition Co., 12.50%, 7/15/04.............................. United States 1,875,000 1,959,375

Global Ocean Carriers Ltd., 144A, 10.25%, 7/15/07................. United States 3,650,000 3,504,000

Globalstar LP:
10.75%, 11/01/04................................................ United States 900,000 882,000

11.25%, 6/15/04................................................. United States 900,000 906,750

(R)Golden Ocean Group Ltd., 10.00%, 8/31/01....................... United States 2,400,000 1,968,000

Hurricane Hydrocarbons Ltd., 11.75%, 11/01/04..................... Canada 2,800,000 2,660,000

Ionica PLC, 0/15.00%, 5/01/07..................................... United Kingdom 17,010,000 6,889,050

Ivax Corp., conv., 6.50%, 11/15/01................................ United States 3,000,000 2,572,500
</TABLE>

23
<PAGE> 26

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

CORPORATE BONDS AND NOTES (CONT.)
Jitney Jungle Stores of America Inc.:
12.00%, 3/01/06................................................. United States $ 1,520,000 $ 1,732,800

10.375%, 9/15/07................................................ United States 1,900,000 1,980,750

Local Financial, 11.00%, 9/05/04.................................. United States 1,850,000 1,961,000

Localiza Rent-A-Car SA, 10.25%, 10/01/05.......................... Brazil 1,350,000 1,147,500

Nebco Evans Holding Company, 144A, 0/7.00%, 7/15/07............... United States 1,050,000 687,750

North Atlantic Trading Company Inc., 144A, 11.00%, 6/15/04........ United States 900,000 938,250

Olivetti International NV, conv., 3.75%, 12/31/99................. Italy 15,300,000,000 ITL 9,600,338

*Peoples Choice TV Corp., unit, 13.25%, conv., 6/01/04............ United States 3,050 1,098,000

Price Communications Wireless, 144A, 11.75%, 7/15/07.............. United States 1,020,000 1,111,800

Production Resource Group PLC, 11.50%, 12/15/07................... United States 1,750,000 1,758,750

RBX Corp., 12.00%, 1/15/03........................................ United States 1,800,000 1,845,000

Resource America Inc., 144A, 12.00%, 8/01/04...................... United States 2,300,000 2,351,750

Sassco Fashions Ltd., 12.75%, 2/15/05............................. United States 1,273,750 1,331,069

Specialty Foods Corp., B, 11.25%, 8/15/03......................... United States 3,110,000 2,923,400

Stratosphere Corp., 14.25%, 5/15/02............................... United States 1,625,000 918,125

Supermercados Norte SA, 144A, 10.875%, 2/09/04.................... Argentina 2,000,000 1,905,000

Telegroup Inc., 144A, 0/10.50%, 11/01/04.......................... United States 5,000,000 3,900,000

TFM SA de CV:
144A, 10.25%, 6/15/07........................................... Mexico 400,000 412,000

0/6.00% to 6/15/02, 11.75%, 6/15/09............................. Mexico 2,250,000 1,434,375

Uniforet Inc., 11.125%, 10/15/06.................................. Canada 1,570,000 1,499,350

US Cellular Corp., conv., 6/15/15................................. United States 5,000,000 1,806,250

Vicap SA, 144A, 11.375%, 5/15/07.................................. United States 1,000,000 1,075,000

Wavetek Corporation, 144A, 10.125%, 6/15/07....................... United States 1,500,000 1,545,000

Westbridge Capital Corp., 7.50%, 5/01/04.......................... United States 1,450,000 246,500

Wilsons The Leather Experts, 11.25%, 8/15/04...................... United States 2,150,000 2,117,750
--------------
119,136,907
TOTAL CORPORATE BONDS AND NOTES (COST $118,188,336)......... --------------

BONDS AND NOTES IN REORGANIZATION 1.2%
Adams County Co. Industrial Dev. Auth., 9.00%, 11/01/96........... United States 16,729,000 8,364

Ames Department Stores Inc., bank claim........................... United States 10,578,487 79,338

Barney's Inc., 7.18%, 6/15/00..................................... United States 4,500,000 1,642,500

Barney's Inc., bank claim......................................... United States 3,000,000 1,095,000

Dictaphone Corporation, bank claim................................ United States 1,590,301 1,574,398

Dow Corning Corp.:
bank debt....................................................... Japan 600,000,000 JPY 4,733,093

bank claim #1................................................... United States 7,500,000 9,262,500

bank claim #2................................................... United States 1,391,595 1,718,620

bank claim #3................................................... United States 2,738,952 3,382,606

9.375%, 2/01/08................................................. United States 2,170,000 2,766,750

8.15%, 10/15/29................................................. United States 5,280,000 6,336,000

9.50%, 8/10/49.................................................. United States 1,250,000 1,550,000

MTN, 8.55%, 3/01/01............................................. United States 500,000 600,000

Swap............................................................ United States 1,000,000 1,060,000

El Paso TX Housing Finance Corp., 8.88%, 10/15/96................. United States 9,355,000 4,678

Eurotunnel Finance Ltd., Credit Facility.......................... United Kingdom 2,924,547 2,545,674
</TABLE>

24
<PAGE> 27

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

BONDS AND NOTES IN REORGANIZATION (CONT.)
Eurotunnel Finance Ltd., bank claim:
tranche A....................................................... United Kingdom 11,012,599 GBP $ 9,585,924

tranche A1...................................................... United Kingdom 4,000,000 GBP 3,481,803

tranche B....................................................... United Kingdom 167,000 XEU 95,411

tranche B....................................................... United Kingdom 875,000 GBP 761,644

tranche D....................................................... United Kingdom 490,000,000 BEF 6,877,007

tranche D1...................................................... United Kingdom 128,000,000 BEF 1,796,443

tranche E....................................................... France 860,500 XEU 491,622

tranche E....................................................... France 105,500,000 FRF 9,115,228

tranche E1...................................................... France 35,735,020 FRF 3,087,515

Harrah's Jazz Finance, 14.25%, 11/15/01........................... United States 6,400,000 2,016,000

Heartland Wireless Comm. Inc.:
13.00%, 4/15/03................................................. United States 1,570,000 518,100

13.00%, 4/15/03, Series D....................................... United States 910,000 300,300

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

Mercury Finance Co., Commercial Paper:
2/03/97......................................................... United States 672,816 558,438

2/04/97......................................................... United States 125,751 104,374

2/06/97......................................................... United States 960,783 797,450

2/07/97......................................................... United States 377,076 312,973

2/11/97......................................................... United States 188,546 156,493

2/13/97......................................................... United States 320,947 266,386

2/18/97......................................................... United States 125,785 104,401

2/19/97......................................................... United States 1,654,097 1,372,901

2/20/97......................................................... United States 235,612 195,558

2/21/97......................................................... United States 1,022,938 849,038

2/24/97......................................................... United States 625,435 519,111

2/27/97......................................................... United States 89,574 74,347

3/11/97......................................................... United States 58,750 48,762

3/14/97......................................................... United States 104,972 87,127

3/17/97......................................................... United States 892,635 740,887

4/11/97......................................................... United States 62,902 52,208

4/18/97......................................................... United States 218,382 181,257

4/22/97......................................................... United States 124,791 103,577

4/24/97......................................................... United States 187,186 155,364
</TABLE>

25
<PAGE> 28

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

BONDS AND NOTES IN REORGANIZATION (CONT.)
Mercury Finance Co., Bank Claim, MTN:
5.79%, 2/02/97.................................................. United States $ 727,983 $ 604,226

5.66%, 3/10/97.................................................. United States 5,065,402 4,204,283

8.15%, 5/14/97.................................................. United States 939,157 779,500

6.29%, 12/16/97................................................. United States 5,487,518 4,554,640

6.16%, 12/15/98................................................. United States 422,117 350,357

7.33%, 6/29/99.................................................. United States 1,646,256 1,366,392

7.42%, 6/29/00.................................................. United States 5,746,124 4,769,283

7.50%, 6/29/01.................................................. United States 5,311,344 4,408,415

Mobilemedia Communications Corp., 8.47%, 1/01/99.................. United States 1,000,000 800,000

Southeast Banking Corp.:
4.75%, 10/15/97................................................. United States 3,317,000 2,122,880

6.50%, 3/15/99.................................................. United States 500,000 275,000

10.50%, 4/11/01................................................. United States 5,300,000 2,968,000

zero coupon, 12/16/96........................................... United States 2,230,000 1,471,800

zero coupon, 11/10/97........................................... United States 1,250,000 825,000

Southeast Texas Housing Finance Corp., 8.60%, 9/01/96............. United States 200,000 100

Tiphook Finance Corp., lease claim................................ United Kingdom 235,146 GBP 55,047
--------------

TOTAL BONDS AND NOTES IN REORGANIZATION 112,733,526
(COST $103,317,838)......................................... --------------
SHARES
------

COMPANIES IN LIQUIDATION
*+City Investing Co., Liquidating Trust........................... United States 4,314,037 3,774,782

*Mcorp Trust Units................................................ United States 64,172 642

*Mcorp Financial Trust, claim units............................... United States 64,189 78,471

*Ranger Industries................................................ United States 76,839 64,833

*Roeser & Pendelton............................................... United States 2,800 3,438
--------------
3,922,166
TOTAL COMPANIES IN LIQUIDATION (COST $606,486).............. --------------
PRINCIPAL
AMOUNT**
---------

SHORT TERM INVESTMENTS 21.2%
Federal Home Loan Bank, 5.106% to 5.91%,
with maturities to 12/30/99................................... United States $1,212,105,000 1,179,323,107

Federal Home Loan Mortgage Corp., 5.715% to 5.95%,
with maturities to 11/25/98................................... United States 90,365,000 88,364,838
</TABLE>

26
<PAGE> 29

MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

SHORT TERM INVESTMENTS (CONT.)
Federal National Mortgage Assn., 5.31% to 5.62%,
with maturities to 12/07/98................................... United States $ 763,514,000 $ 743,125,711

U.S. Treasury Bill, 5.28%, 12/10/98............................... United States 20,200,000 19,205,958
--------------
TOTAL SHORT TERM INVESTMENTS
(COST $2,044,597,040)................................... 2,030,019,614
--------------
TOTAL INVESTMENTS
(COST $7,113,090,209) 97.8%............................ 9,388,777,750
SECURITIES SOLD SHORT (0.5%)............................. (51,283,144)
NET EQUITY IN FORWARD CONTRACTS 0.2%..................... 17,133,871
OTHER ASSETS, LESS LIABILITIES 2.5%...................... 244,457,898
--------------
TOTAL NET ASSETS 100.0%.................................. $9,599,086,375
==============
</TABLE>

<TABLE>
<CAPTION>
SECURITIES SOLD SHORT
- ---------------------
ISSUER COUNTRY SHARES VALUE
------ ------ ------ -----
<S> <C> <C> <C>
*Nationsbank Corp............................................ United States 104,300 $ 6,342,744
*Starwood Hotels & Resorts Trust............................. United States 75,000 4,340,625
*Sealed Air Corp............................................. United States 49,400 3,050,450
*Worldcom Inc................................................ United States 1,241,300 37,549,325
--------------
TOTAL (PROCEEDS $53,263,001)........................... $ 51,283,144
==============
</TABLE>

*Non-income producing.
**Securities traded in U.S. dollars, unless otherwise indicated.
(R)Restricted securities (See note 7).
+Affiliated issuers (See note 8).

CURRENCY ABBREVIATIONS:
- --------------------

<TABLE>
<S> <C> <C>
BEF -- Belgium Franc
CAD -- Canadian Dollar
FRF -- French Franc
GBP -- British Pound
ITL -- Italian Lira
JPY -- Japenese Yen
XEU -- European Currency Unit
</TABLE>

See Notes to Financial Statements.

27
<PAGE> 30

MUTUAL SHARES FUND
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997

<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $6,803,426,409).................................... $8,482,001,599
Controlled affiliates (cost $51,214,065)...................................... 67,240,589
Non controlled affiliates (cost $258,449,735)................................. 839,535,562 $9,388,777,750
------------
Cash........................................................................... 19,641,671
Receivables:
Investment securities sold.................................................... 79,303,617
Capital shares sold........................................................... 29,094,951
Dividends and interest........................................................ 17,831,227
From affiliates............................................................... 429,697
Unrealized gain on forward exchange contracts (Note 9)......................... 26,228,694
Deposits with broker for securities sold short................................. 120,260,888
Other assets................................................................... 788,108
------------
Total Assets............................................................... 9,682,356,603
------------
Liabilities:
Payables:
Investment securities purchased............................................... 7,683,874
Capital shares redeemed....................................................... 4,922,247
To affiliates................................................................. 8,013,174
Distributions to shareholders.................................................. 16,649
Securities sold short, at value (proceeds $53,263,001)......................... 51,283,144
Unrealized loss on forward exchange contracts (Note 9)......................... 9,094,823
Other liabilities.............................................................. 2,256,317
------------
Total liabilities.......................................................... 83,270,228
------------
Net assets, at value............................................................ $9,599,086,375
============
Net assets consist of:
Undistributed net investment income............................................ $ 18,844,839
Net unrealized appreciation.................................................... 2,294,801,269
Accumulated net realized gain.................................................. 119,083,166
Capital shares................................................................. 7,166,357,101
------------
Net assets, at value............................................................ $9,599,086,375
============
CLASS Z
Net asset value per share ($7,918,985,690 / 371,790,528 shares outstanding)........................ $ 21.30
=======
CLASS I
Net asset value per share ($1,043,262,216 / 49,071,801 shares outstanding)......................... $ 21.26
=======
Maximum offering price per share ($21.26 / 95.50%)................................................. $ 22.26
=======
CLASS II
Net asset value per share ($636,838,469 / 30,071,639 shares outstanding)*.......................... $ 21.18
=======
Maximum offering price per share ($21.18 / 99.00%)................................................. $ 21.39
=======
</TABLE>

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

See Notes to Financial Statements.

28
<PAGE> 31

MUTUAL SHARES FUND
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $5,261,334)
Dividends......................................................... $100,311,857
Interest.......................................................... 113,737,119
-----------
Total investment income....................................... $ 214,048,976
-----------
Expenses:
Management fees (Note 4).......................................... 48,600,626
Administrative fees (Note 4)...................................... 6,267,404
Distribution fees (Note 4)
Class I..................................................... 1,762,168
Class II.................................................... 2,804,663
Transfer agent fees (Note 4)...................................... 3,493,796
Custodian fees.................................................... 598,031
Reports to shareholders........................................... 531,849
Registration and filing fees...................................... 796,820
Professional fees................................................. 197,190
Directors' fees and expenses...................................... 85,744
Other............................................................. 206,754
-----------
Total expenses................................................ 65,345,045
Expenses waived/paid by affiliate (Note 4).................... (2,507,119)
-----------
Net expenses............................................. 62,837,926
-----------
Net investment income.................................. 151,211,050
-----------
Realized and unrealized gains:
Net realized gain from:
Investments...................................................... 662,792,509
Foreign currency transactions.................................... 100,953,278
-----------
Net realized gain............................................. 763,745,787
Net unrealized appreciation on:
Investments...................................................... 910,814,421
Translation of assets and liabilities denominated in foreign
currencies..................................................... 21,751,312
-----------
Net unrealized appreciation................................... 932,565,733
-----------
Net realized and unrealized gain................................... 1,696,311,520
-----------
Net increase in net assets resulting from operations............... $1,847,522,570
===========
</TABLE>

See Notes to Financial Statements.

29
<PAGE> 32

MUTUAL SHARES FUND
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income........................................... $ 151,211,050 $ 179,689,254
Net realized gain from investments and foreign currency
transactions.................................................. 763,745,787 466,793,142
Net unrealized appreciation on investments and translation of
assets and liabilities denominated in foreign currencies...... 932,565,733 478,415,187
-----------------------------------
Net increase in net assets resulting from operations.......... 1,847,522,570 1,124,897,583
Distributions to shareholders from:
Net investment income:
Class Z......................................................... (186,061,271) (161,313,930)
Class I......................................................... (20,965,055) (548,439)
Class II........................................................ (10,947,344) (259,046)
Net realized gains:
Class Z......................................................... (544,604,116) (560,755,894)
Class I......................................................... (64,397,717) (1,352,354)
Class II........................................................ (38,739,615) (652,745)
Capital share transactions (Note 3):
Class Z......................................................... 410,817,174 911,577,294
Class I......................................................... 994,313,815 35,916,388
Class II........................................................ 617,578,010 17,487,150
-----------------------------------
Net increase in net assets.................................... 3,004,516,451 1,364,996,007
Net assets:
Beginning of year................................................ 6,594,569,924 5,229,573,917
-----------------------------------
End of year...................................................... $9,599,086,375 $6,594,569,924
===================================
Undistributed net investment income (distributions in excess of
net investment income) included in net assets:
End of year...................................................... $ 18,844,839 $ (3,613,636)
===================================
</TABLE>

See Notes to Financial Statements.

30
<PAGE> 33

MUTUAL SHARES FUND
Notes to Financial Statements

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 the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

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

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

31
<PAGE> 34

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
(CONTINUED)
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. 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 with the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.

32
<PAGE> 35

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

h. 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. MERGER OF HEINE SECURITIES AND FRANKLIN RESOURCES

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

3. CAPITAL STOCK

The Fund offers three classes of shares: Class Z, Class I and Class II. 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 December 31, 1997, 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>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold........................................... 6,313,080 $ 551,052,039 8,816,934 $ 806,551,841
Shares issued on reinvestment of distributions........ 32,082,168 672,754,666 7,201,944 662,499,126
Shares issued on 5-for-1 stock split.................. 297,727,890 -- -- --
Shares redeemed....................................... (34,805,380) (812,989,531) (6,037,372) (557,473,673)
-------------------------------------------------------------------
Net increase.......................................... 301,317,758 $ 410,817,174 9,981,506 $ 911,577,294
===================================================================
</TABLE>

33
<PAGE> 36

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

3. CAPITAL STOCK (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996*
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold................................................ 45,117,270 $988,714,584 381,958 $36,900,354
Shares issued on reinvestment of distributions............. 3,784,679 79,046,346 17,819 1,639,210
Shares issued on 5-for-1 stock split....................... 3,159,210 -- -- --
Shares redeemed............................................ (3,362,536) (73,447,115) (26,599) (2,623,176)
----------------------------------------------------------
Net increase............................................... 48,698,623 $994,313,815 373,178 $35,916,388
==========================================================
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996*
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold................................................ 26,987,282 $593,740,934 174,376 $16,809,900
Shares issued on reinvestment of distributions............. 2,226,926 46,322,849 8,879 816,609
Shares issued on 5-for-1 stock split....................... 1,696,268 -- -- --
Shares redeemed............................................ (1,020,690) (22,485,773) (1,402) (139,359)
----------------------------------------------------------
Net increase............................................... 29,889,786 $617,578,010 181,853 $17,487,150
==========================================================
</TABLE>

*Effective date of Class I and II shares was November 1, 1996.

4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Series Fund are also officers and/or directors of
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. In connection with the Merger, FRI
and 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.

34
<PAGE> 37

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONTINUED)

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 year of $1,489,247 and $102,161, respectively.

5. INCOME TAXES

At December 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $7,115,330,563 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $2,448,034,495
Unrealized depreciation..................................... (174,587,308)
--------------
Net unrealized appreciation................................. $2,273,447,187
==============
</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.

6. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $4,145,388,056 and $3,179,387,905,
respectively.

35
<PAGE> 38

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

6. INVESTMENT TRANSACTIONS (CONTINUED)
Transactions in options written during the year ended December 31, 1997 were as
follows:

<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
--------- -------
<S> <C> <C>
Options outstanding at December 31, 1996.................................... 425 $ 184,656
Options written............................................................. 2,678 750,060
Options expired............................................................. (962) (191,196)
Options terminated in closing transactions.................................. (425) (184,656)
Options exercised........................................................... (1,716) (558,864)
----------------------
Options outstanding at December 31, 1997.................................... -- $ --
======================
</TABLE>

7. 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 December 31, 1997 are as follows:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
3,300,000 Fairchild Semiconductor Corp., 11.74%, 3/14/08.......................... 4/02/97 $ 3,382,500
750,000 FBR Asset Investment Corp............................................... 12/12/97 15,000,000
2,400,000 Golden Ocean Group Ltd., 10.00%, 8/31/01................................ 8/26/97 1,968,000
2,800 Golden Ocean Group Ltd., wts. .......................................... 8/26/97 14,000
2,450 Interlake Corp., Series A3, 9.00%, conv., pfd. ......................... 6/17/92 2,754,045
379 Kendall International Inc., Residual Ownership Certificates............. 7/06/92 4,548
3 Lancer Industries Inc., B............................................... 8/11/89 4,357,546
350,000 Laser Mortgage Management Inc. ......................................... 11/26/97 5,075,000
589,939 Metallurg Inc. ......................................................... 4/14/97 7,964,177
40,500,000 MSCW Investors I, LLC................................................... 12/27/95 67,240,589
11,260,174 Sunbeam Corp. .......................................................... 2/23/90 426,901,347
132,600 Viasystems Inc., pfd., B................................................ 12/12/97 2,817,750
------------
TOTAL RESTRICTED SECURITIES (COST $115,662,841) (5.60% OF NET ASSETS)...................... $537,479,502
============
</TABLE>

8. 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 December 31, 1997
were $906,776,151. For the year ended December 31, 1997, dividend income from
"affiliated companies" was $3,414,759 and net realized gains from disposition of
"affiliated companies" were $36,633,712.

36
<PAGE> 39

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

8. INVESTMENT IN AFFILIATES (CONTINUED)

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF REALIZED
SHARES HELD GROSS GROSS SHARES HELD VALUE DIVIDEND INCOME CAPITAL
NAME OF ISSUER DEC. 31, 1996 ADDITIONS REDUCTIONS DEC. 31, 1997 DEC. 31, 1997 1/1/97-12/31/97 GAIN
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
MSCW Investors I, LLC..... 40,500,000 -- -- 40,500,000 $ 67,240,589 -- --
--------------------------------------------
TOTAL CONTROLLED
AFFILIATES............. $ 67,240,589 -- --
============================================
NON CONTROLLED AFFILIATES
Aerospace Credit
Liquidating Trust, CBI.. 279,703 -- (279,703) ** ** -- $ 310,470
Alexander's Inc. ......... 386,000 -- -- 386,000 $ 35,053,625 $ 302,817 --
BHC Communications Inc., A... 302,817 -- (19,500) 283,317 36,902,039 -- 1,409,617
City Investing Co.,
Liquidating Trust....... 4,314,037 -- -- 4,314,037 3,774,782 -- --
Fab Industries Inc. ...... 331,100 -- -- 331,100 10,305,488 231,770 --
FHP International
Corp. .................. 2,143,300 -- (2,143,300) ** ** -- 31,863,870
Florida East Coast
Industries Inc. ........ 442,500 70,500 -- 513,000 49,312,125 195,570 --
Fund American Enterprises
Holdings Inc. .......... 657,782 16,302 -- 674,084 81,564,164 536,007 --
Genesee Corp., A.......... 15,911 -- -- 15,911 644,396 17,502 --
Genesee Corp., B.......... 103,550 -- -- 103,550 ** 77,662 **
Health Systems
International, Inc.+.... 1,526,400 -- (1,526,400) ** ** ** **
Kreisler Manufacturing
Corp. .................. 54,470 163,410 (33,400) 184,480 1,867,860 -- 375,984
Lancer Industries Inc.,
B....................... 3 -- -- 3 4,357,546 -- --
Lancer Industries Inc.,
C, pfd. ................ 174,359 -- (174,359) ** ** 261,539 2,673,771
MBO Properties Inc. ...... 167,437 407,275 -- 574,712 4,885,052 -- --
Metallurg Inc. ........... -- 589,939 -- 589,939 7,964,177 -- --
Seaboard Corp. ........... 76,450 -- -- 76,450 33,638,000 57,338 --
Southam Inc. ............. -- 3,996,700 -- 3,996,700 76,211,522 404,761 --
Sunbeam Corp. ............ 11,260,174 -- -- 11,260,174 426,901,347 337,805
Van Melle NV.............. 916,266 8,810 -- 925,076 66,153,439 991,988
--------------------------------------------
TOTAL NON CONTROLLED
AFFILIATES............. $ 839,535,562 $ 3,414,759 $36,633,712
============================================
</TABLE>

*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of December 31, 1997, no longer an affiliate.
+Health Systems International, Inc. merged with Foundation Health Corp. to form
Foundation Health systems.

9. 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

37
<PAGE> 40

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
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.

As of December 31, 1997, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ----------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
30,000,000 British Pounds......................................... U.S. $ 48,168,000 2/18/98 U.S. $ 986,085
10,810,618 British Pounds......................................... 17,335,343 3/18/98 352,446
------------ ------------
U.S. $ 65,503,343 1,338,531
============ ------------

<CAPTION>
CONTRACTS TO SELL:
- ------------------
<S> <C> <C> <C> <C> <C> <C>
168,998,000 Swedish Krona.......................................... U.S. $ 22,000,000 1/12/98 707,894
320,682,700 French Francs.......................................... 53,497,799 1/20/98 151,151
13,200,000 British Pounds......................................... 21,957,000 1/20/98 299,667
556,072,352 Swedish Krona.......................................... 71,915,281 1/21/98 1,837,158
11,480,000 British Pounds......................................... 19,229,000 1/30/98 403,155
100,404,414 Canadian Dollars....................................... 70,687,422 1/30/98 349,116
510,455,447 Swedish Krona.......................................... 67,305,310 2/17/98 2,928,402
196,739,604 French Francs.......................................... 34,209,837 2/17/98 1,429,027
56,646,255 British Pounds......................................... 95,788,817 2/17/98 2,971,448
126,096,800 Canadian Dollars....................................... 91,267,914 2/27/98 2,867,229
63,158,500 French Francs.......................................... 10,701,602 2/27/98 172,237
113,559,397 Norwegian Krone........................................ 15,814,750 3/9/98 355,967
118,384,439 Dutch Guilders......................................... 60,234,272 3/17/98 1,576,833
173,907,422 Swedish Krona.......................................... 23,181,166 3/18/98 1,232,557
16,562,651 British Pounds......................................... 27,295,249 3/18/98 196,273
27,600,000 British Pounds......................................... 45,400,350 4/15/98 305,749
290,244,014 French Francs.......................................... 49,925,435 4/17/98 1,407,623
392,445,743 Swedish Krona.......................................... 51,617,223 4/21/98 2,050,452
58,500,000 British Pounds......................................... 98,625,150 5/18/98 3,190,566
4,230,660 Dutch Guilders......................................... 2,123,825 6/10/98 17,557
42,766,920 French Francs.......................................... 7,200,000 6/11/98 29,528
</TABLE>

38
<PAGE> 41

MUTUAL SHARES FUND
Notes to Financial Statements (continued)

<TABLE>
<CAPTION>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
534,000,000 Japanese Yen........................................... U.S. $ 4,308,189 6/19/98 U.S. $ 112,998
16,099,947,917 Italian Lira........................................... 9,156,021 7/2/98 45,641
------------ ------------
U.S. $953,441,612 24,638,228
============
Net unrealized gain on offsetting forward exchange contracts..... 251,935
------------
Unrealized gain on forward exchange contracts.................. 26,228,694
------------
CONTRACTS TO BUY:
- -----------------
22,573,500 Swedish Krona.......................................... U.S. $ 3,000,000 1/12/98 (155,958)
66,463,405 French Francs.......................................... 11,525,904 1/20/98 (469,493)
10,000,000 British Pounds......................................... 16,874,500 2/18/98 (489,805)
9,000,000 Dutch Guilders......................................... 4,485,646 3/9/98 (28,528)
2,900,000 British Pounds......................................... 4,814,000 3/18/98 (69,166)
------------ ------------
U.S. $ 40,700,050 (1,212,950)
============ ------------
CONTRACTS TO SELL:
- ------------------
30,647,087 British Pounds......................................... U.S. $ 49,433,752 1/20/98 (849,140)
477,080,000 French Francs.......................................... 77,451,299 1/20/98 (1,912,566)
294,640,526 Swedish Krona.......................................... 36,972,410 2/17/98 (186,653)
40,000,000 British Pounds......................................... 63,029,200 2/18/98 (2,509,581)
63,491,241 French Francs.......................................... 10,557,240 2/27/98 (27,597)
110,473,349 Dutch Guilders......................................... 54,423,050 3/9/98 (287,257)
81,711,284 Norwegian Krone........................................ 11,080,999 3/10/98 (42,895)
32,785,227 British Pounds......................................... 51,928,521 3/18/98 (1,713,020)
300,000,000 Swedish Krona.......................................... 37,871,615 5/15/98 (37,567)
35,000,000 British Pounds......................................... 56,700,000 6/18/98 (315,597)
------------ ------------
U.S. $449,448,086 (7,881,873)
============
Unrealized loss on forward exchange contracts.................. (9,094,823)
------------
Net unrealized gain on forward exchange contracts............ U.S. $17,133,871
============
</TABLE>

39
<PAGE> 42

REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Franklin Mutual Series Fund Inc.

We have audited the accompanying statement of assets and liabilities of Mutual
Shares Fund, a portfolio of Franklin Mutual Series Fund Inc. ("Fund"), including
the schedule of investments, as of December 31, 1997, the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion of these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the custodian
and brokers, or other appropriate auditing procedures when replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Mutual
Shares Fund, a portfolio of Franklin Mutual Series Fund Inc., at December 31,
1997, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods in conformity with generally
accepted accounting principles.

[ERNST & YOUNG LLP SIGNATURE]

Boston, Massachusetts
January 30, 1998

40
<PAGE> 43

MUTUAL SHARES FUND
Tax Designation

Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
16.78% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.

41
<PAGE> 44

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<PAGE> 45

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<PAGE> 46

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<PAGE> 47

LITERATURE REQUEST

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

FRANKLIN TEMPLETON GROUP

GLOBAL GROWTH
Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global
Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund

GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton Global
Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund

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

Franklin Templeton High Income
Currency Fund
Templeton Americas Government
Securities Fund

GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
Mutual Discovery Fund

GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund*
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund*
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund

Mutual Shares Fund
Templeton American Trust, Inc.

Fund Allocator Series
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund

INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund

For Corporations
Franklin Corporate Qualified
Dividend Fund

FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund

FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona**
Arkansas***
California**
Colorado
Connecticut
Florida**
Georgia
Hawaii***
Indiana
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan**
Minnesota+
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas
Virginia
Washington***

VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)

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

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

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

+Portfolio of insured municipal securities.

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

10/97.1
<PAGE> 48
BOARD OF DIRECTORS
Michael F. Price (Chairman)
Peter A. Langerman
Edward I. Altman
Ann Torre Grant
Andrew H. Hines, Jr.
William J. Lippman
Bruce A. MacPherson
Fred R. Millsaps
Leonard Rubin
Barry F. Schwartz
Vaughn R. Sturtevant, M.D.
Robert E. Wade

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)

FUND INFORMATION
1-800-342-5236

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.

[Recycled Logo] Printed on recycled paper

474 A97 12/97