FRANKLIN MUTUAL SERIES FUND INC, 497, 1999-05-05

FRANKLIN MUTUAL SERIES FUND INC
497, 1999-05-05

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PROSPECTUS

FRANKLIN
MUTUAL SERIES FUND INC.

CLASS A, B & C

INVESTMENT STRATEGY

GROWTH & INCOME o VALUE

Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund

GLOBAL o VALUE

Mutual Discovery Fund
Mutual European Fund

MAY 1, 1999

[Insert Franklin Templeton Ben Head]

THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

CONTENTS

THE FUNDS

[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

2 Mutual Beacon Fund; Mutual
Qualified Fund; Mutual Shares Fund; Mutual Discovery Fund

18 Mutual Financial Services Fund

30 Mutual European Fund

42 Management

45 Distributions and Taxes;
Year 2000 Problem

47 Financial Highlights

YOUR ACCOUNT

[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

53 Choosing a Share Class

59 Buying Shares

61 Investor Services

64 Selling Shares

66 Account Policies

69 Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]

Back Cover

MUTUAL BEACON FUND
MUTUAL QUALIFIED FUND
MUTUAL SHARES FUND
MUTUAL DISCOVERY FUND

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

GOALS The principal investment goal of Mutual Beacon, Mutual Qualified and
Mutual Shares is capital appreciation, which may occasionally be short-term.
Their secondary goal is income. The principal investment goal of Mutual
Discovery is capital appreciation.

PRINCIPAL INVESTMENTS The funds primarily invest in domestic and foreign
equity securities of companies that the manager believes are available at
prices less than their actual value based on certain recognized or objective
criteria (intrinsic value). Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.

In following this investment strategy, the funds primarily invest in the
equity securities of companies with market capitalization values (share price
times the number of common stock shares outstanding) of more than $1.5
billion. In addition, each fund may invest a substantial portion of its
assets in securities of companies with smaller market capitalization values.
Each fund may invest a substantial portion of its assets in the securities of
domestic or foreign companies involved in mergers, acquisitions,
consolidations, liquidations, spinoffs, reorganizations or financial
restructurings, as well as distressed companies and those in bankruptcy
(Reorganizing Companies), or as to which there are outstanding tender or
exchange offers. Each fund may participate in outstanding tender or exchange
offers. Investments in Reorganizing Companies may, but are not expected to,
exceed 50% of a fund's assets.

The funds may invest a substantial portion of their assets in foreign equity
securities. To hedge (protect) against currency exchange rate fluctuations,
the funds enter into forward foreign currency exchange contracts to the
extent that hedging is available and, in the manager's opinion, it is
economical to do so. A forward foreign currency exchange contract is an
agreement to buy or sell a specific currency at a future date and at a price
set at the time of the contract. Forward foreign currency exchange contracts
may reduce the risk of loss from a change in value of a currency, but they
also limit any potential gains and do not protect against fluctuations in the
value of the underlying position.

Each fund invests to a lesser extent in domestic and foreign debt securities
as compared to equity securities. Debt securities represent an obligation of
the issuer to repay a loan of money to it, and generally provide for the
payment of interest. These include bonds, including those convertible into
common stock, notes and debentures. The funds may invest in debt securities
rated in any rating category established by an independent rating
organization, including lower rated or defaulted debt securities ("junk
bonds"), or in unrated debt securities. The funds typically invest in unrated
debt securities of Reorganizing Companies.

The funds may invest in the direct indebtedness, or participation interests
in the indebtedness, of Reorganizing Companies. Indebtedness may not be a
security but, rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the direct
indebtedness of companies, a fund steps into the shoes of the financial
institution which made the loan to the company prior to its restructuring or
refinancing.

Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or supranational organizations. Supranational organizations are
entities established or financially supported by the national governments of
one or more countries to promote reconstruction or development.

The funds may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to a Reorganizing Company.

While the funds generally purchase securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use a fund's ownership interest in a company to seek to influence
or control management when the manager perceives a benefit. The funds may
invest in entities whose business is to acquire securities of companies for
the purpose of influencing or controlling management or with the expectation
of taking over such companies. The funds also may invest in the securities of
a particular company which the manager believes may be an attractive company
to be taken over by another entity.

[Begin callout]
The funds invest primarily in securities of companies that the manager
believes are undervalued.
[End callout]

PORTFOLIO SELECTION In choosing equity securities for the fund, the manager
bases its opinions as to whether a security is available at less than its
intrinsic value upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities, including
indebtedness, participations and Trade Claims, are generally selected based
on the manager's opinion that the securities are available at less than their
intrinsic value, and the manager's own analysis of the security has greater
influence over the investment decision than the coupon rate or rating of the
security. The smaller companies in which the funds invest may not be as well
known as the larger companies in which the funds invest, their securities may
trade in the securities markets below their book values and may not be
followed by established securities analysts.

While the manager follows the same strategy in choosing investments for all
of the funds, there are certain differences among the funds. Mutual Beacon
generally invests to a greater extent in foreign securities as compared to
Mutual Qualified and Mutual Shares. Mutual Shares generally invests to a
lesser extent in foreign securities as compared to Mutual Beacon and Mutual
Qualified. Mutual Discovery may invest most of its assets in foreign
securities, and generally invests substantially more of its assets in
securities of companies with smaller market capitalization values than the
other funds. In addition, each fund has different portfolio managers who have
primary responsibility for selecting the investments for the funds. As a
result of these differences, the funds' performance will vary.

TEMPORARY INVESTMENTS The manager may keep a portion of the assets of each
fund invested in short-term debt positions when insufficient investment
opportunities meeting the manager's investment criteria exist. For example,
when prevailing market valuations for securities are high, there may be fewer
securities available at prices below their intrinsic value. The manager may
also make temporary short-term investments in anticipation of cash
requirements. Under these circumstances, a fund may be unable to pursue its
investment goals because it may not invest or may invest less in equity and
debt securities that the manager believes are available at prices below their
intrinsic value.

[Insert graphic of chart with line going up and down] MAIN RISKS

VALUE INVESTING Each fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value,
including securities of Reorganizing Companies, differs from the approach
followed by many other managers, and may result in the fund choosing
securities that are not widely followed by other investors. There is always
the possibility that the manager may be incorrect in its assessment of a
particular company or that the manager may not buy these securities at their
lowest possible price or sell them at their highest.

[Begin callout]
Because the securities the funds hold fluctuate in price with market
conditions, the value of your investment in a fund will go up and down. This
means you could lose money over short or even extended periods.
[End callout]

STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.

SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity
in the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.

In addition, small companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.

Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.

REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time a fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.

FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
funds.

COUNTRY. General securities market movements in any country where a fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country. These movements will affect the fund's share
price and fund performance.

The political, economic and social structures of some countries the funds
invest in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.

A fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.

COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The funds may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

CURRENCY. To the extent a fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.

EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.

Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Forward foreign currency
exchange contracts are considered derivative investments, since their value
depends on the value of an underlying asset. The funds' investments in these
derivatives may involve a small investment relative to the amount of risk
assumed. The funds can incur a loss in these transactions due to the
imposition of controls by a foreign or the U.S. government on the exchange of
foreign currencies or the inability to deliver or receive a foreign currency.
The success of forward foreign currency exchange contracts will depend on the
manager's ability to predict market movements. Losses resulting from the use
of forward foreign currency exchange contracts can reduce a fund's share
price, and possibly income, and such losses can be greater than if the
contract had not been entered into by the fund.

CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.

LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds" or "high yield debt securities," and the
type of unrated debt securities purchased by the funds, generally have more
risk than higher-rated securities.

INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. Typically,
purchasers of participations, such as the funds, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness. When a fund purchases a
participation, it takes on the risk associated with the financial soundness
of the bank or other financial intermediary issuing the participation, as
well as the credit risk associated with the financial soundness of the issuer
of the underlying indebtedness. When a fund purchases a Trade Claim, there is
no guarantee that the debtor will ever be able to satisfy the obligation on
the Trade Claim. There are no established markets for indebtedness,
participations and Trade Claims and, thus, they are less liquid than
securities which are heavily traded and may often be considered illiquid
investments.

ILLIQUID SECURITIES Each fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by a fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.

YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the funds' manager considers.

[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]

The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.

If a company in which a fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of a fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 46 for more information.

More detailed information about the funds, their policies (including
temporary investments), risks and bond ratings can be found in the funds'
Statement of Additional Information (SAI).

[Insert graphic of a bull and a bear] PERFORMANCE

These bar charts and tables show the volatility of each fund's returns, which
is one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.

MUTUAL BEACON FUND
CLASS A ANNUAL TOTAL RETURNS 1

[Insert bar graph]

16.72% -8.5% 17.08% 22.42% 22.42% 5.20% 25.43% 20.74% 22.55% 2.02%
89 90 91 92 93 94 95 96 97 98
YEAR

[Begin callout]
Best
Quarter:
Q4 '98
12.57%

Worst
Quarter:
Q3 '98
- -17.67%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------

Mutual Beacon Fund - Class A 2 -3.85% 13.42% 13.40%
S&P 500(R) Index 3 28.58% 24.06% 19.21%

1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------

Mutual Beacon Fund - Class B 2 -2.32% 13.78% 13.35%
S&P 500(R) Index 3 28.58% 24.06% 19.21%

1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------

Mutual Beacon Fund - Class C 2 -0.52% 13.79% 13.09%
S&P 500(R) Index 3 28.58% 24.06% 19.21%

1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 5.12% for Class A.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.

MUTUAL QUALIFIED FUND
CLASS A ANNUAL TOTAL RETURNS 1

[Insert bar graph]

13.64% -10.57%20.62% 22.17% 22.13% 5.32% 26.12% 20.75% 24.44% 0.15%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '98
12.56%

WORST
QUARTER:
Q3 '98
- -17.73%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS

For the periods ended December 31, 1998

1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------

Mutual Qualified Fund - Class A 2 -5.62% 13.50% 13.17%
S&P 500(R)Index 3 28.58% 24.06% 19.21%

1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------

Mutual Qualified Fund - Class B 2 -4.19% 13.84% 13.07%
S&P 500(R)Index 3 28.58% 24.06% 19.21%

1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------

Mutual Qualified Fund - Class C 2 -2.45% 13.85% 12.81%
S&P 500(R)Index 3 28.58% 24.06% 19.21%

1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 2.86% for Class A.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.

MUTUAL SHARES FUND
CLASS A ANNUAL TOTAL RETURNS 1

[Insert bar graph]

14.15% -10.28%20.47% 20.81% 20.47% 4.13% 28.60% 20.32% 26.01% 0.01%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '98
13.24%

WORST
QUARTER:
Q3 '98
- -17.03%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------

Mutual Shares Fund - Class A 2 -5.75% 13.86% 13.14%
S&P 500(R)Index 3 28.58% 24.06% 19.21%

1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------

Mutual Shares Fund - Class B 2 -4.21% 14.21% 13.05%
S&P 500(R)Index 3 28.58% 24.06% 19.21%

1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
tual Shares Fund - Class C 2 -2.43% 14.22% 12.79%
S&P 500(R)Index 3 28.58% 24.06% 19.21%

1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 4.87% for Class A.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.

MUTUAL DISCOVERY FUND
CLASS A ANNUAL TOTAL RETURNS 1

[Insert bar graph]

35.33% 3.20% 28.17% 24.41% 22.46% -2.37%
93 94 95 96 97 98
YEAR

[Begin callout]
BEST
QUARTER:
Q1 '93
12.21%

WORST
QUARTER:
Q3 '98
- -19.55%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- ---------------------------------------------------------------------------
Mutual Discovery Fund - Class A 2 -7.99% 13.15% 16.57%
S&P 500(R)Index 3 28.58% 24.06% 21.61%
MSCI World Index 4 24.80% 16.19% 17.32%

SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- -----------------------------------------------------------------------------
Mutual Discovery Fund - Class B 2 -6.57% 13.53% 16.89%
S&P 500(R)Index 3 28.58% 24.06% 21.61%
MSCI World Index 4 24.80% 16.19% 17.32%

SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- -----------------------------------------------------------------------------
Mutual Discovery Fund - Class C 2 -4.79% 13.54% 16.78%
S&P 500(R)Index 3 28.58% 24.06% 21.61%
MSCI World Index 4 24.80% 16.19% 17.32%

1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 4.07% for Class A.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index tracks
the performance of approximately 1500 securities in 22 countries and is
designed to measure world stock market performance. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.

[Insert graphic of percentage sign] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of a fund.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY
- -------------------------------------------------------------------------------
CLASS A 1

Maximum sales charge (load)
as a percentage of offering price 5.75% 5.75% 5.75% 5.75%

Load imposed on purchases 5.75% 5.75% 5.75% 5.75%

Maximum deferred sales charge (load) 3 None None None None

Exchange Fee None None None None

CLASS B 2

Maximum sales charge (load)
as a percentage of offering price 4.00% 4.00% 4.00% 4.00%

Load imposed on purchases None None None None

Maximum deferred sales charge (load) 4.00% 4.00% 4.00% 4.00%

Exchange Fee None None None None

CLASS C 1

Maximum sales charge (load)
as a percentage of offering price 1.99% 1.99% 1.99% 1.99%

Load imposed on purchases 1.00% 1.00% 1.00% 1.00%

Maximum deferred sales charge (load) 4 0.99% 0.99% 0.99% 0.99%

Exchange Fee None None None None

Please see "Choosing a Share Class" on page 53 for an explanation of how and
when these sales charges apply.

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY

CLASS A 1

Management Fees 5 0.60% 0.60% 0.60% 0.80%

Distribution and service
(12b-1) fees 6 0.35% 0.35% 0.35% 0.35%

Other expenses 0.19% 0.19% 0.17% 0.23%
-----------------------------------------

Total annual fund operating
expenses 5 1.14% 1.14% 1.12% 1.38%
==========================================

CLASS B 2

Management Fees 5 0.60% 0.60% 0.60% 0.80%

Distribution and service
(12b-1) fees 6 1.00% 1.00% 1.00% 1.00%

Other expenses 0.19% 0.19% 0.17% 0.23%
------------------------------------------

Total annual fund operating
expenses 5 1.79% 1.79% 1.77% 2.03%
==========================================

CLASS C 1

Management Fees 5 0.60% 0.60% 0.60% 0.80%

Distribution and service
(12b-1) fees 6 1.00% 1.00% 1.00% 1.00%

Other expenses 0.19% 0.19% 0.17% 0.23%
-----------------------------------------

Total annual fund operating
expenses 5 1.79% 1.79% 1.77% 2.03%
=========================================

1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The funds began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page 53) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
and total operating expenses were as follows:

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY
- ---------------------------------------------------------------------------
Management fees 0.57% 0.57% 0.56% 0.77%

Total annual fund operating expenses:

Class A 1.11% 1.11% 1.08% 1.35%

Class C 1.76% 1.76% 1.73% 2.00%

After October 31, 1999, the manager may end this arrangement at any time.
Mutual Discovery Fund's Class B and C total annual fund operating expenses
differ from the ratio of expenses to average net assets shown on page 50 due
to a timing difference between the end of the 12b-1 plan year and the fund's
fiscal year end.

6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.

EXAMPLE

This example can help you compare the cost of investing in the funds with the
cost of investing in other mutual funds.

The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the funds' operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY
- ------------------------------------------------------------------------------
CLASS A
1 Year 1 $685 $685 $683 $707
3 Years $916 $916 $911 $987
5 Years $1,167 $1,167 $1,156 $1,287
10 Years $1,881 $1,881 $1,860 $2,137

CLASS B
(Assuming you sold your shares at the end of the period)
1 Year $582 $582 $580 $606
3 Years $863 $863 $857 $937
5 Years $1,170 $1,170 $1,159 $1,293
10 Years 2 $1,938 $1,938 $1,916 $2,196

CLASS B
(Assuming you stayed in the fund)
1 Year $182 $182 $180 $206
3 Years $563 $563 $557 $637
5 Years $970 $970 $959 $1,093
10 Years 2 $1,938 $1,938 $1,916 $2,196

CLASS C
1 Year 3 $378 $378 $376 $402
3 Years $658 $658 $652 $730
5 Years $1,060 $1,060 $1,050 $1,182
10 Years $2,184 $2,184 $2,163 $2,435

1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $280 (Beacon), $280
(Qualified), $278 (Mutual Shares) and $304 (Discovery), if you did not sell
your shares at the end of the first year. Your costs for the remaining
periods would be the same.

MUTUAL FINANCIAL
SERVICES FUND

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

GOALS The fund's principal investment goal is capital appreciation, which
may occasionally be short-term. Its secondary goal is income.

PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities of financial services companies that the manager believes
are available at prices less than their actual value based on certain
recognized or objective criteria (intrinsic value). Equity securities
generally entitle the holder to participate in a company's general operating
results. These include common stocks, preferred stocks and convertible
securities.

The fund concentrates its investments in the financial services industry by
investing more than 25% of its total assets in that industry. Normally, the
fund will invest at least 65% of its total assets in securities issued by
financial services companies. Financial services companies are companies
which, in the manager's view, derive at least 50% of their assets or revenues
from the creation, purchase and sale of financial instruments. These
companies include banks, savings and loan organizations, credit card
companies, brokerage firms, finance companies, sub-prime lending
institutions, investment advisers, investment companies and insurance
companies.

Because many companies in the financial services industry are smaller
capitalization companies, the fund may invest most of its assets in the
securities of companies with market capitalization values (share price times
the number of common stock shares outstanding) of $1.5 billion or less.

The fund may invest a substantial portion of its assets in the securities of
domestic or foreign companies involved in mergers, acquisitions,
consolidations, liquidations, spinoffs, reorganizations or financial
restructurings, as well as distressed companies and those in bankruptcy
(Reorganizing Companies), or as to which there are outstanding tender or
exchange offers. The fund may participate in outstanding tender or exchange
offers. Investments in Reorganizing Companies may, but are not expected to,
exceed 50% of the fund's assets.

The fund may also invest a substantial portion of its assets in foreign
equity securities. To hedge (protect) against currency exchange rate
fluctuations, the fund enters into forward foreign currency exchange
contracts to the extent that hedging is available and, in the manager's
opinion, it is economical to do so. A forward foreign currency exchange
contract is an agreement to buy or sell a specific currency at a future date
and at a price set at the time of the contract. Forward foreign currency
exchange contracts may reduce the risk of loss from a change in value of a
currency, but they also limit any potential gains and do not protect against
fluctuations in the value of the underlying position.

The fund invests to a lesser extent in domestic and foreign debt securities
as compared to equity securities. Debt securities represent an obligation of
the issuer to repay a loan of money to it, and generally provide for the
payment of interest. These include bonds, including those convertible into
common stock, notes and debentures. The fund may invest in debt securities
rated in any rating category established by an independent rating
organization, including lower rated or defaulted debt securities ("junk
bonds"), or in unrated debt securities. The fund typically invests in unrated
debt securities of Reorganizing Companies.

The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. Indebtedness may not be a
security but, rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the direct
indebtedness of companies, a fund steps into the shoes of the financial
institution which made the loan to the company prior to its restructuring or
refinancing.

The fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.

While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.

[Begin callout]
The fund invests primarily in equity securities of financial services
companies that the manager believes are undervalued.
[End callout]

PORTFOLIO SELECTION In choosing equity securities for the fund, the manager
bases its opinions as to whether a security is available at less than its
intrinsic value upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities, including
indebtedness, participations and Trade Claims, are generally selected based
on the manager's opinion that the securities are available at less than their
intrinsic value, and the manager's own analysis of the security has greater
influence over the investment decision than the coupon rate or rating of the
security. The smaller companies in which the fund invests may not be as well
known as the larger companies in which the fund invests, their securities may
trade in the securities markets below their book values and may not be
followed by established securities analysts.

TEMPORARY INVESTMENTS The manager may keep a portion of the assets of the
fund invested in short-term debt positions when insufficient investment
opportunities meeting the manager's investment criteria exist. For example,
when prevailing market valuations for securities are high, there may be fewer
securities available at prices below their intrinsic value. The manager may
also make temporary short-term investments in anticipation of cash
requirements. Under these circumstances, the fund may be unable to pursue its
investment goals because it may not invest or may invest less in equity and
debt securities of financial services companies that the manager believes are
available at prices below their intrinsic value.

[Insert graphic of bullseye and arrows] MAIN RISKS

VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value,
including securities of Reorganizing Companies, differs from the approach
followed by many other managers, and may result in the fund choosing
securities that are not widely followed by other investors. There is always
the possibility that the manager may be incorrect in its assessment of a
particular company or that the manager may not buy these securities at their
lowest possible price or sell them at their highest.

FINANCIAL SERVICES COMPANIES The fund concentrates its investments in the
financial service industry. As a result, general market and economic
conditions as well as other risks specific to the financial services industry
will impact the fund's investments and its performance.

Financial services companies are subject to extensive government regulation
which tends to limit both the amount and types of loans and other financial
commitments the company can make, and the interest rates and fees it can
charge. These limitations can have a significant impact on the profitability
of a financial services company since profitability is impacted by the
company's ability to make financial commitments such as loans.

Insurance companies in which the fund invests may also have an impact on the
fund's performance as insurers may be subject to severe price competition,
claims activity, marketing competition and general economic conditions.
Certain lines of insurance can be significantly influenced by specific
events. For example, property and casualty insurer profits may be affected by
certain weather catastrophes and other disasters; and life and health insurer
profits may be affected by mortality risks and morbidity rates.

Pending legislation, if enacted, will also likely have an impact on the
profitability of financial services companies and on the performance of the
fund. It would reduce the separation between commercial and investment
banking businesses and permit banks to expand their services. This expansion
could expose banks to increased competition from well-established competitors.

The financial services industry is currently undergoing a number of changes
such as continuing consolidations, development of new products and structures
and changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry and the fund.

[Begin callout]
Because the securities the fund holds fluctuate in price with market
conditions, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
[End callout]

Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.

REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.

FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.

COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.

The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.

COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.

EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Forward foreign currency
exchange contracts are considered derivative investments, since their value
depends on the value of an underlying asset. The fund's investment in these
derivatives may involve a small investment relative to the amount of risk
assumed. The fund can incur a loss in these transactions due to the
imposition of controls by a foreign or the U.S. government on the exchange of
foreign currencies or the inability to deliver or receive a foreign currency.
The success of forward foreign currency exchange contracts will depend on the
manager's ability to predict market movements. Losses resulting from the use
of forward foreign currency exchange contracts can reduce the fund's share
price, and possibly income, and such losses can be greater than if the
contract had not been entered into by the fund.

LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds" or "high yield debt securities," and the
type of unrated debt securities purchased by the fund, generally have more
risk than higher-rated securities.

INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. Typically,
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness. When a fund purchases a
participation, it takes on the risk associated with the financial soundness
of the bank or other financial intermediary issuing the participation, as
well as the credit risk associated with the financial soundness of the issuer
of the underlying indebtedness. When a fund purchases a Trade Claim, there is
no guarantee that the debtor will ever be able to satisfy the obligation on
the Trade Claim. There are no established markets for indebtedness,
participations and Trade Claims and, thus, they are less liquid than
securities which are heavily traded and may often be considered illiquid
investments.

ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.

YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.

If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 46 for more information.

More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).

[Insert graphic of a bull and a bear] PERFORMANCE

This information gives some indication of the risks of investing in the fund
by comparing the fund's performance with a broad-based securities market
index. Of course, past performance cannot predict or guarantee future
results.

CLASS A ANNUAL TOTAL RETURN 1

6.81%
98
YEAR

[Begin callout]
BEST
QUARTER:
Q1 '98
17.43%

WORST
QUARTER:
Q3 '98
- -17.80%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
1 YEAR (8/19/97)
- -----------------------------------------------------------------------
Mutual Financial Services Fund - Class A 2 0.66% 17.57%
KBW 50 Total Return Index 3 8.27% 14.83%

SINCE
INCEPTION
1 YEAR (8/19/97)
- -----------------------------------------------------------------------
Mutual Financial Services Fund - Class B 2 2.12% 19.27%
KBW 50 Total Return Index 3 8.27% 14.83%

SINCE
INCEPTION
1 YEAR (8/19/97)
- -----------------------------------------------------------------------
Mutual Financial Services Fund - Class C 2 4.10% 20.44%
KBW 50 Total Return Index 8.27% 14.83%

1. Figure does not reflect sales charges. If it did, return would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.00% for Class A.
2. Figures reflect sales charges.
Class B shares were first offered on January 1, 1999. Performance for that
share class reflects a restatement of the original class to include the Rule
12b-1 fees as though in effect from the fund's inception. All fund
performance assumes reinvestment of dividends and capital gains.
3. Source: Keefe, Bruyette & Woods, Inc. The KBW 50 Index tracks the 50
largest U.S. banks' stocks. The unmanaged index differs from the fund in
composition, does not pay management fees or expenses and includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.

[Insert graphic of percentage sign] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS A 1 CLASS B 2 CLASS C 1
- ---------------------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 3 4.00% 0.99% 4
Exchange fee None None None

Please see "Choosing a Share Class" on page 53 for an explanation of how and
when these sales charges apply.

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

CLASS A 1 CLASS B 2 CLASS C 1
- ---------------------------------------------------------------------------
Management fees 5 0.80% 0.80% 0.80%
Distribution and service (12b-1) fees 6 0.35% 1.00% 1.00%
Other expenses 0.29% 0.29% 0.29%
Total annual fund operating expenses 5 1.44% 2.09% 2.09%
=================================

1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page 53) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees so that the fund's aggregate annual
operating expenses do not exceed 1.35% for Class A and 2.00% for Class B and
C for the fund's initial twenty-four months of operations. With this
reduction, management fees were 0.71% and total annual fund operating
expenses were 1.35% for Class A and 2.00% for Class C. After the first
twenty-four months, the manager may end this arrangement at any time.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------

CLASS A $713 1 $1,004 $1,317 $2,200

CLASS B

Assuming you sold your shares
at the end of the period $612 $955 $1,324 $2,260 2

Assuming you stayed in the fund $212 $655 $1,124 $2,260 2

CLASS C $408 3 $748 $1,212 $2,497

1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $310 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.

MUTUAL EUROPEAN FUND

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

GOALS The fund's principal investment goal is capital appreciation, which
may occasionally be short-term. Its secondary goal is income.

PRINCIPAL INVESTMENTS The fund will primarily invest in foreign equity
securities of companies located in European countries that the manager
believes are available at prices less than their actual value based on
certain recognized or objective criteria (intrinsic value). Equity securities
generally entitle the holder to participate in a company's general operating
results. These include common stocks, preferred stocks and convertible
securities.

Normally, the fund will invest at least 65% of its total assets in the
securities of issuers (i) organized under the laws of, (ii) whose principal
business operations are located in, or (iii) at least 50% of whose revenue is
earned from, European countries. For purposes of the fund's investments,
European countries means all of the countries that are members of the
European Union, the United Kingdom, Scandinavia, Eastern and Western Europe
and those regions of Russia and the former Soviet Union that are considered
part of Europe. The fund currently intends to invest primarily in securities
of issuers in Western Europe and Scandinavia.

The fund will normally invest in securities from at least five different
countries, although, from time to time, it may invest all of its assets in a
single country. The fund may also invest up to 35% of its total assets in
securities of U.S. issuers, as well as in securities of issuers from the
Levant, the Middle East and the remaining regions of the world.

The fund may invest most of its assets in the securities of smaller
companies, which are those companies with market capitalization values (share
price times the number of common shares outstanding) of less than $1.5
billion at the time of purchase.

The fund may also invest a substantial portion of its assets in the
securities of domestic or foreign companies involved in mergers,
acquisitions, consolidations, liquidations, spinoffs, reorganizations or
financial restructurings, as well as distressed companies and those in
bankruptcy (Reorganizing Companies), or as to which there are outstanding
tender or exchange offers. The fund may participate in outstanding tender and
exchange offers. Investments in Reorganizing Companies may, but are not
expected to, exceed 50% of the fund's assets.

The fund may invest in the direct indebtedness, or participation interests in
the indebtedness of, Reorganizing Companies. Indebtedness may not be a
security but, rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the direct
indebtedness of companies, a fund steps into the shoes of the financial
institution which made the loan to the company prior to its restructuring or
refinancing.

The fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies and represent money due to
a supplier of goods or services to the Reorganizing Company.

To hedge (protect) against currency exchange rate fluctuations, the fund
enters into forward foreign currency exchange contracts to the extent that
hedging is available and, in the manager's opinion, it is economical to do
so. A forward foreign currency exchange contract is an agreement to buy or
sell a specific currency at a future date and at a price set at the time of
the contract. Forward foreign currency exchange contracts may reduce the risk
of loss from a change in value of a currency, but they also limit any
potential gains and do not protect against fluctuations in the value of the
underlying position.

While the fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of a company, the manager
may use the fund's ownership interest in a company to seek to influence or
control management when the manager perceives a benefit. The fund may invest
in entities whose business is to acquire securities of companies for the
purpose of influencing or controlling management or with the expectation of
taking over such companies. The fund also may invest in the securities of a
particular company which the manager believes may be an attractive company to
be taken over by another entity.

[Begin callout]
The fund invests primarily in foreign equity securities of companies located
in European countries that the manager believes are undervalued.
[End callout]

PORTFOLIO SELECTION In choosing equity securities for the fund, the manager
bases its opinions as to whether a security is available at less than its
intrinsic value upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities, including
indebtedness, participations and Trade Claims, are generally selected based
on the manager's opinion that the securities are available at less than their
intrinsic value, and the manager's own analysis of the security has greater
influence over the investment decision than the coupon rate or rating of the
security. The smaller companies in which the fund invests may not be as well
known as the larger companies in which the fund invests, their securities may
trade in the securities markets below their book values and may not be
followed by established securities analysts.

TEMPORARY INVESTMENTS The manager may keep a portion of the assets of the
fund invested in short-term debt positions when insufficient investment
opportunities meeting the manager's investment criteria exist. For example,
when prevailing market valuations for securities are high, there may be fewer
securities available at prices below their intrinsic value. The manager may
also make temporary short-term investments in anticipation of cash
requirements. Under these circumstances, the fund may be unable to pursue its
investment goals because it may not invest or may invest less in equity and
debt securities of European companies that the manager believes are available
at prices below their intrinsic value.

[Insert graphic of chart with line going up and down] MAIN RISKS

FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in
the fund.

Because the fund invests primarily in securities of issuers located in a
particular region of the world, it may be subject to greater risks and may
experience greater volatility than a fund that is more broadly diversified
geographically.

COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

CURRENCY. Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.

EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Forward foreign currency
exchange contracts are considered derivative investments, since their value
depends on the value of an underlying asset. The fund's investment in these
derivatives may involve a small investment relative to the amount of risk
assumed. The fund can incur a loss in these transactions due to the
imposition of controls by a foreign or the U.S. government on the exchange of
foreign currencies or the inability to deliver or receive a foreign currency.
The success of forward foreign currency exchange contracts will depend on the
manager's ability to predict market movements. Losses resulting from the use
of forward foreign currency exchange contracts can reduce the fund's share
price, and possibly income, and such losses can be greater than if the
contract had not been entered into by the fund.

Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.

LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds" or "high yield debt securities," and the
type of unrated debt securities purchased by the fund, generally have more
risk than higher-rated securities.

INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. Typically,
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness. When a fund purchases a
participation, it takes on the risk associated with the financial soundness
of the bank or other financial intermediary issuing the participation, as
well as the credit risk associated with the financial soundness of the issuer
of the underlying indebtedness. When a fund purchases a Trade Claim, there is
no guarantee that the debtor will ever be able to satisfy the obligation on
the Trade Claims. There are no established markets for indebtedness,
participations and Trade Claims and, thus, they are less liquid than
securities which are heavily traded and may often be considered illiquid
investments.

YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.

More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).

[Insert graphic of a bull and a bear] PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 2 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.

CLASS A ANNUAL TOTAL RETURNS 1
22.55% 2.02%
97 98
YEAR
[Begin callout]
Best
Quarter:
Q1 '98
14.64%

Worst
Quarter:
Q3 '98
- -20.38%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
1 YEAR (7/3/96)
- -------------------------------------------------------------------------
Mutual European Fund - Class A 2 -1.94% 13.66%
MSCI All Country Europe Index 3 27.18% 26.80%

SINCE
1 YEAR INCEPTION
(7/3/96)
- --------------------------------------------------------------------------
Mutual European Fund - Class B 2 -0.32% 14.78%
MSCI All Country Europe Index 3 27.18% 26.80%

AVERAGE ANNUAL TOTAL RETURNS (CONT.)
For the periods ended December 31, 1998

SINCE
INCEPTION
1 YEAR (7/3/96)
- ---------------------------------------------------------------------------
Mutual European Fund - Class C 2 1.61% 15.30%
MSCI All Country Europe Index 3 27.18% 26.80%

1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 3.69% for Class A.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country Europe
Index measures the weighted average performance, in U.S. dollars, of about
60% of the market capitalization listed on 21 European stock exchanges
(approximately 700 securities). It includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the fund's
portfolio.

[Insert graphic of percentage sign] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

CLASS A 1 CLASS B 2 CLASS C 1
- ------------------------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 5.75% 4.00% 1.99%

Load imposed on purchases 5.75% None 1.00%

Maximum deferred sales charge (load) 4 None 3 4.00% 0.99%

Exchange fee None None None

Please see "Choosing a Share Class" on page 53 for an explanation of how and
when these sales charges apply.

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

CLASS A 1 CLASS B 2 CLASS C 1
- -----------------------------------------------------------------------------

Management fees 0.80% 0.80% 0.80%

Distribution and service (12b-1) fees 5 0.35% 1.00% 1.00%

Other expenses 0.25% 0.25% 0.25%
-------------------------------

Total annual fund operating expenses 1.40% 2.05% 2.05%
=============================

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------

CLASS A $709 1 $993 $1,297 $2,158

CLASS B

Assuming you sold your shares
at the end of the period $608 $943 $1,303 $2,218 2

Assuming you stayed in the
fund $208 $643 $1,103 $2,218 2

CLASS C $404 3 $736 $1,192 $2,455

1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $306 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.

[Insert graphic of briefcase] MANAGEMENT

Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the funds' investment manager. Together,
Franklin Mutual and its affiliates manage over $216 billion in assets.

Michael F. Price is Chairman of the Boards of Directors which oversee the
management of the funds and Franklin Mutual.

The team responsible for the funds' management is led by Peter Langerman,
Chief Executive Officer, and Robert Friedman, Chief Investment Officer, of
Franklin Mutual. Mr. Friedman has the overall supervisory responsibility for
the day to day management of all of the funds' portfolios. The team is
comprised of the following individuals:

JEFFREY A. ALTMAN, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL

Mr. Altman has been a manager of the funds since 1988. Before joining the
Franklin Templeton Group in November 1996, Mr. Altman was employed as a
research analyst and trader for Heine Securities Corporation, the funds'
former investment manager.

ROBERT L. FRIEDMAN, CHIEF INVESTMENT OFFICER AND
SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL

Mr. Friedman has been a manager of the funds since 1988. Before joining the
Franklin Templeton Group in November 1996, Mr. Friedman was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.

RAYMOND GAREA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL

Mr. Garea has been a manager of the funds since 1991. Before joining the
Franklin Templeton Group in November 1996, Mr. Garea was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.

PETER A. LANGERMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT OF FRANKLIN MUTUAL

Mr. Langerman has been a manager of the funds since 1986. Before joining the
Franklin Templeton Group in November 1996, Mr. Langerman was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.

DAVID E. MARCUS, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL

Mr. Marcus has been a manager of the funds since 1988. Before joining the
Franklin Templeton Group in November 1996, Mr. Marcus was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.

LAWRENCE N. SONDIKE, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL

Mr. Sondike has been a manager of the funds since 1984. Before joining the
Franklin Templeton Group in November 1996, Mr. Sondike was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.

DAVID J. WINTERS CFA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL

Mr. Winters has been a manager of the funds since 1987. Before joining the
Franklin Templeton Group in November 1996, Mr. Winters was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.

In addition, the following Franklin Mutual employees serve as Assistant
Portfolio Managers:

JIM AGAH CFA, ASSISTANT PORTFOLIO MANAGER OF FRANKLIN MUTUAL

Mr. Agah has been a manager of the funds since 1997, when he joined the
Franklin Templeton Group. Previously, he was a vice president of equity sales
at Keefe, Bryette & Woods.

JEFF DIAMOND, VICE PRESIDENT OF FRANKLIN MUTUAL

Mr. Diamond has been a manager of the funds since 1998, when he joined the
Franklin Templeton Group. Previously, he was vice president and co-manager of
Prudential Conservative Stock Fund.

The following Portfolio and Assistant Portfolio Managers have primary
responsibility for investments in the following funds:

MUTUAL SHARES FUND LARRY SONDIKE AND DAVID MARCUS

Mutual QUALIFIED FUND RAY GAREA AND ASSISTANT PORTFOLIO MANAGER JEFF DIAMOND

MUTUAL BEACON FUND LARRY SONDIKE AND DAVID WINTERS

MUTUAL DISCOVERY FUND ROB FRIEDMAN AND DAVID MARCUS

MUTUAL EUROPEAN FUND DAVID MARCUS

MUTUAL FINANCIAL SERVICES FUND Ray Garea and Assistant PORTFOLIO MANAGER
JIM AGAH

Each fund pays the manager a fee for managing the fund's assets and making
its investment decisions. For the fiscal year ended December 31, 1998,
Franklin Mutual agreed in advance to limit its fees. After October 31, 1999,
the manager may end this arrangement at any time upon notice to the fund's
Board of Directors. The table below shows the management fees paid by each
fund, as a percentage of average daily net assets.

MANAGEMENT
FEES BEFORE MANAGEMENT
ADVANCE WAIVER FEES PAID
- --------------------------------------------------------------
Mutual Shares 0.60% 0.56%
Qualified 0.60 0.57
Beacon 0.60 0.57
European 0.80 0.80
Discovery 0.80 0.77
Financial Services 0.80 0.71

[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES;
YEAR 2000 PROBLEM

INCOME AND CAPITAL GAINS DISTRIBUTIONS

Each fund intends to pay a dividend at least semiannually representing its
net investment income. Capital gains, if any, may be distributed twice a
year. The amount of these distributions will vary and there is no guarantee
the funds will pay dividends.

To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of
a taxable distribution. If you would like information on upcoming record
dates for the funds' distributions, please call 1-800/DIAL BEN(R).

TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of a fund or receive them in cash.
Any capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.

[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]

Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.

When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.

Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Any foreign taxes
paid by a fund that invests more than 50% of its assets in foreign securities
may be passed through to you as a foreign tax credit. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult your tax
advisor about the federal, state, local or foreign tax consequences of your
investment in a fund.

YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for
some systems.

When the Year 2000 arrives, a fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, a
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. A fund could experience difficulties in effecting transactions if any
of its foreign subcustodians, or if foreign broker-dealers or foreign markets
are not ready for Year 2000.

Each fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, a fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.

[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS

This table presents each fund's financial performance for the past three
years. This information has been audited by Ernst & Young LLP.

MUTUAL BEACON FUND
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------
1998 2 1997 2 1996 1
- ------------------------------------------------------------------

PER SHARE DATA 3 ($)

Net asset value, beginning of year 14.09 12.98 13.21
-----------------

Net investment income .27 .23 .16

Net realized and unrealized gains - 2.65 .69
-----------------

Total from investment operations .27 2.88 .85
----------------

Dividends from net investment income (.40) (.51) (.33)

Distributions from net realized gains (.87)(1.26) (.75)
-----------------

Total distributions (1.27)(1.77)(1.08)

Net asset value, end of year 13.09 14.09 12.98
=================

Total return (%) 4 2.02 22.52 6.51

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 947,444 753,519 52,070

Ratios to average net assets: (%)

Expenses 1.11 1.09 1.03 5

Expenses excluding waiver and
payments by affiliate 1.14 1.12 1.13 5

Net investment income 1.89 1.58 1.33 5

Portfolio turnover rate (%) 65.27 54.72 66.87

CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA 3 ($)

Net asset value, beginning of year 14.04 12.98 13.21
-----------------

Net investment income .18 .14 .13

Net realized and unrealized gains .01 2.63 .71
---------------

Total from investment operations .19 2.77 .84
---------------

Dividends from net investment income (.32) (.45) (.32)

Distributions from net realized gains (.87)(1.26) (.75)

Total distributions (1.19)(1.71)(1.07)

Net asset value, end of year 13.04 14.04 12.98
=================

Total return (%)4 1.40 21.65 6.45

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 500,404 362,425 16,263

Ratios to average net assets: (%)
Expenses 1.76 1.74 1.75 5

Expenses excluding waiver and
payments by affiliate 1.79 1.77 1.85 5

Net investment income 1.24 .92 .84 5

Portfolio turnover rate (%) 65.27 54.72 66.87

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

MUTUAL QUALIFIED FUND
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------
1998 1997 2 1996 1
- -----------------------------------------------------------------------

PER SHARE DATA 3 ($)

Net asset value, beginning of year 18.14 16.23 16.40
-----------------

Net investment income .35 .28 .16

Net realized and unrealized gains (.35) 3.63 .89
----------------

Total from investment operations (.00) 3.91 1.05
----------------

Dividends from net investment income (.39) (.60) (.41)

Distributions from net realized gains (1.33)(1.40) (.81)

Total distributions (1.72)(2.00) (1.22)

Net asset value, end of year 16.42 18.14 16.23
==================

Total return (%) 4 .15 24.44 6.47

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 570,143 452,590 20,381

Ratios to average net assets: (%)

Expenses 1.11 1.10 1.13 5

Expenses excluding waiver and
payments by affiliate 1.14 1.13 1.28 5

Net investment income 1.66 1.48 3.19 5

Portfolio turnover rate (%) 66.84 52.76 65.03

CLASS C
- ------------------------------------------------------------------------------

PER SHARE DATA 3 ($)

Net asset value, beginning of year 18.09 16.23 16.40
-----------------

Net investment income .24 .16 .13

Net realized and unrealized gains (.37) 3.63 .91
----------------

Total from investment operations (.13) 3.79 1.04
----------------

Dividends from net investment income (.28) (.53) (.39)

Distributions from net realized gains (1.33)(1.40) (.82)

Total distributions (1.61)(1.93)(1.21)

Net asset value, end of year 16.35 18.09 16.23
=================

Total return (%)4 (.58)23.66 6.37

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 322,609 231,721 9,963

Ratios to average net assets: (%)

Expenses 1.76 1.75 1.78 5

Expenses excluding waiver and
payments by affiliate 1.79 1.78 1.93 5

Net investment income 1.01 .84 2.59 5

Portfolio turnover rate (%) 66.84 52.76 65.03

1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. Per share amounts for period ended December 31, 1996, have been restated
to reflect a 2-for-1 stock split effective February 3, 1997.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.

MUTUAL SHARES FUND
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------
1998 1997 2 1996 1
- -----------------------------------------------------------------------

PER SHARE DATA 3 ($)

Net asset value, beginning of year 21.26 18.56 18.90
----------------------

Net investment income .40 .34 .21

Net realized and unrealized gains (.41) 4.43 1.08
---------------------

Total from investment operations (.01) 4.77 1.29
---------------------

Dividends from net investment income (.46) (.49) (.47)

Distributions from net realized gains (1.29) (1.58) (1.16)

Total distributions (1.75) (2.07) (1.63)

Net asset value, end of year 19.50 21.26 18.56
======================

Total return (%) 4 .06 26.03 6.91

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 1,509,647 1,043,262 35,634

Ratios to average net assets: (%)

Expenses 1.08 1.07 1.09 5

Expenses excluding waiver and payments
by affiliate 1.12 1.10 1.18 5

Net investment income 1.78 1.58 2.44 5

Portfolio turnover rate (%) 69.46 49.61 58.35

CLASS C
- ------------------------------------------------------------------------------

Per share data3 ($)

Net asset value, beginning of year 21.18 18.56 18.90
------------------------

Net investment income .28 .20 .20

Net realized and unrealized gains (.43) 4.42 1.08
-----------------------

Total from investment operations (.15) 4.62 1.28
-----------------------

Dividends from net investment income (.33) (.42) (.46)

Distributions from net realized gains (1.29) (1.58) (1.16)

Total distributions (1.62) (2.00) (1.62)

Net asset value, end of year 19.41 21.18 18.56
========================

Total return (%)4 (.59) 25.17 6.82

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 993,931 636,838 16,873

Ratios to average net assets: (%)

Expenses 1.73 1.72 1.71 5

Expenses excluding waiver and
payments by affiliate 1.77 1.75 1.80 5

Net investment income 1.12 .92 1.69 5

Portfolio turnover rate (%) 69.46 49.61 58.35

1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. 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.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.

MUTUAL DISCOVERY FUND
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------
1998 1997 2 1996 1
- -----------------------------------------------------------------------

Per share data ($)

Net asset value, beginning of year 18.83 17.15 17.66

Net investment income .32 .27 .11

Net realized and unrealized gains (.74) 3.54 .74
--------------------

Total from investment operations (.42) 3.81 .85
--------------------

Dividends from net investment income (.41) (.77) (.29)

Distributions from net realized gains (.81) (1.36) (1.07)

Total distributions (1.22) (2.13) (1.36)
---------------------

Net asset value, end of year 17.19 18.83 17.15
======================

Total return (%) 3 (2.37) 22.54 4.85

Ratios/supplemental data

Net assets, end of year ($ x 1,000) 859,848 693,952 29,903

Ratios to average net assets: (%)

Expenses 1.35 1.33 1.38 4

Expenses excluding waiver and
payments by affiliate 1.38 1.35 1.51 4

Net investment income 1.46 1.39 .74 4

Portfolio turnover rate (%) 83.57 58.15 80.18

CLASS C
- ------------------------------------------------------------------------------

PER SHARE DATA ($)

Net asset value, beginning of year 18.79 17.17 17.66

Net investment income .23 .15 .09

Net realized and unrealized gains (.75) 3.52 .76
--------------------

Total from investment operations (.52) 3.67 .85
--------------------

Dividends from net investment income (.31) (.69) (.27)

Distributions from net realized gains (.81) (1.36) (1.07)

Total distributions (1.12) (2.05) (1.34)
---------------------

Net asset value, end of year 17.15 18.79 17.17
======================

Total return (%)3 (2.97) 21.70 4.90

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 563,761 402,625 18,038

Ratios to average net assets: (%)

Expenses 2.00 1.98 2.00 4

Expenses excluding waiver
and payments by affiliate 2.02 2.00 2.13 4

Net investment income .81 .74 .13 4

Portfolio turnover rate (%) 83.57 58.15 80.18

1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.

MUTUAL FINANCIAL SERVICES FUND
CLASS A YEAR ENDED DECEMBER 31,
1998 1997 1

PER SHARE DATA ($)

Net asset value, beginning of year 12.27 10.00
-----------

Net investment income .17 .03

Net realized and unrealized gains .69 2.35
-----------

Total from investment operations .86 2.38
-----------

Dividends from net investment income (.15) (.02)

Distributions from net realized gains (.11) (.09)
-----------

Total distributions (.26) (.11)
-----------

Net asset value, end of year 12.87 12.27
===========

Total return (%) 2 6.90 23.83

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 164,989 78,249

Ratios to average net assets: (%)

Expenses 1.35 1.35 3

Expenses excluding waiver and
payments by affiliate 1.44 1.97 3

Net investment income 1.42 1.02 3

Portfolio turnover rate (%) 136.76 42.26

CLASS C
- ------------------------------------------------------------------------------

PER SHARE DATA ($)

Net asset value, beginning of year 12.26 10.00
-----------

Net investment income .08 .01

Net realized and unrealized gains .68 2.35
----------

Total from investment operations .76 2.36
-----------

Dividends from net investment income (.08) (.01)

Distributions from net realized gains (.11) (.09)
-----------

Total distributions (.19) (.10)
-----------

Net asset value, end of year 12.83 12.26
===========

Total return (%) 2 6.13 23.57

Ratios/supplemental data

Net assets, end of year ($ x 1,000) 127,717 43,207

Ratios to average net assets: (%)

Expenses 2.00 2.00 3

Expenses excluding waiver and payments
by affiliate 2.09 2.62 3

Net investment income .77 .37 3

Portfolio turnover rate (%) 136.76 42.26

1. For the period August 19, 1997 (effective date) to December 31, 1997.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.

MUTUAL EUROPEAN FUND
CLASS A YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------
1998 1997 2 1996 1
- --------------------------------------------------------------------------

PER SHARE DATA ($)

Net asset value, beginning of year 12.56 11.38 10.84
-----------------

Net investment income .27 .24 .03

Net realized and unrealized gains .29 2.31 .58
---------------

Total from investment operations .56 2.55 .61
---------------

Dividends from net investment income (.29) (.81) (.05)
-----------------

Distributions from net realized gains (.36) (.56) (.02)
-----------------

Total distributions (.65) (1.37)(.07)
-----------------------

Net asset value, end of year 12.47 12.56 11.38
=================

Total return (%) 3 4.15 22.61 5.61

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 170,486 93,231
9,200

Ratios to average net assets: (%)

Expenses 1.40 1.37 1.32 4

Expenses excluding waiver and payments by affiliate 1.40 1.39 1.42 4

Net investment income 1.68 1.84 1.44 4

Portfolio turnover rate (%) 97.62 98.12 36.75

CLASS C
- ------------------------------------------------------------------------------

PER SHARE DATA ($)

Net asset value, beginning of year 12.52 11.38 10.84
-----------------

Net investment income .21 .13 .02

Net realized and unrealized gains .31 2.33 .58
---------------

Total from investment operations .52 2.46 .60
---------------

Dividends from net investment income (.23) (.76) (.04)

Distributions from net realized gains (.36) (.56) (.02)
-----------------

Total distributions (.59)(1.32) (.06)
-----------------

Net asset value, end of year 12.45 12.52 11.38
=================

Total return (%) 3 3.74 21.79 5.52

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 96,555 49,174 2,754

Ratios to average net assets: (%)

Expenses 2.05 2.02 1.94 4

Expenses excluding waiver and payments by affiliate 2.05 2.05 2.04 4

Net investment income 1.00 1.03 0.79 4

Portfolio turnover rate (%) 97.62 98.12 36.75

YOUR ACCOUNT

[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS

Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.

CLASS A CLASS B CLASS C
o Initial sales charge o No initial sales charge o Initial sales charge
of 5.75% or less of 1%

o Deferred sales charge o Deferred sales charge o Deferred sales charge
of 1% on purchases of of 4% or less on of 1% on shares you
$1 million or more shares you sell sell within 18 months
sold within 12 months within six years

o Lower annual expenses o Higher annual expenses o Higher annual
than Class B or C due than Class A (same as expenses than Class
to lower distribution Class C) due to A (same as Class B)
fees higher distribution due to higher
fees. Automatic distribution fees.
conversion to Class A No conversion to
shares after eight Class A shares, so
years, reducing annual expenses do
future annual not decrease.
expenses.

BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. THE FUNDS BEGAN OFFERING CLASS B SHARES ON
JANUARY 1, 1999.

SALES CHARGES - CLASS A

THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET
INVESTMENT
- ------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04

INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page 56), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 55).

DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay
distribution fees of up to 0.35% per year to those who sell and distribute
Class A shares and provide other services to shareholders. Because these fees
are paid out of Class A's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.

SALES CHARGES - CLASS B

IF YOU SELL YOUR SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- ------------------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0

With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page 55). After 8 years, your Class B shares automatically convert to Class A
shares, lowering your annual expenses from that time on.

MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.

RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.

DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.

SALES CHARGES - CLASS C

WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.

CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).

DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay
distribution and other fees of up to 1% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.

CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C

The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.

[Begin callout]
The HOLDING PERIOD for the CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.

For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
End callout]

To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 62 for exchange information).

SALES CHARGE REDUCTIONS AND WAIVERS

If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.

QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.

[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]

o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge.
You also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.

o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge
that may apply if you do not buy the amount stated in your LOI.

TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION
OF YOUR ACCOUNT APPLICATION.

REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.

If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.

Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.

This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.

WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class A shares may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:

o certain payments received under an annuity contract that offers a Franklin
Templeton insurance fund option

o distributions from an existing retirement plan invested in the Franklin
Templeton Funds

o dividend or capital gain distributions from a real estate investment trust
sponsored or advised by Franklin Properties, Inc.

o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months

o redemption proceeds from Class A of any Templeton Global Strategy Fund, if
you are a qualified investor. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but
a new CDSC will apply.

WAIVERS FOR CERTAIN INVESTORS Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions,
including:

o certain trust companies and bank trust departments investing $1 million or
more in assets over which they have full or shared investment discretion

o government entities that are prohibited from paying mutual fund sales
charges

o certain unit investment trusts and their holders reinvesting trust
distributions

o group annuity separate accounts offered to retirement plans

o employees and other associated persons or entities of Franklin Templeton
or of certain dealers

o Chilean retirement plans that meet the requirements for retirement plans
described below

ADDITIONAL SALES CHARGE WAIVERS MAY APPLY.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.

CDSC WAIVERS The CDSC for each class generally will be waived:

o to pay account fees

o to make payments through systematic withdrawal plans, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually depending on the frequency of
your plan

o for redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R) (not applicable to
Class B)

o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy (for Class B, this applies to all
retirement plan accounts, not only IRAs)

o to return excess contributions (and earnings, if applicable) from
retirement plan accounts

o for redemptions following the death of the shareholder or beneficial owner

o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)

RETIREMENT PLANS Certain retirement plans may buy Class A shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:

o with at least 100 employees, or

o with retirement plan assets of $1 million or more, or

o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period

A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify
under our group investment program to buy Class A shares without an initial
sales charge.

FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.

GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.

[Insert graphic of a paper with lines
and someone writing] BUYING SHARES

MINIMUM INVESTMENTS
INITIAL ADDITION

Regular Accounts $1,000 $50
- ---------------------------------------------------------------------------

UGMA/UTMA accounts $100 $50
- ---------------------------------------------------------------------------

Retirement accounts
(other than IRAs, IRA rollovers,
Education IRAs or Roth IRAs) NO MINIMUM NO MINIMUM
- ----------------------------------------------------------------------------
IRAS, IRA rollovers, education IRAs
or Roth IRAs $250 $50
- ----------------------------------------------------------------------------
Broker-Dealer sponsored wrap
account programs $250 $50
- -----------------------------------------------------------------------------
Full-time employees, officers, trustees and directors of
Franklin Templeton entities, and their immediate family
members $100 $50
- -----------------------------------------------------------------------------

ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will invest your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).

BUYING SHARES
- ------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
Through your representative representative
investment
representative

- ------------------------------------------------------------------------------
[Insert graphic Make your check payable Make your check payable
of envelope] to the fund. to the fund. Include
your account number on
BY MAIL Mail the check and your the check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do not
have a slip, include a
note with your name, the
fund name, and your
account number.

Mail the check and
deposit slip or note to
Investor Services.

- ------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning bolts] control number and wire control number and wire
instructions. instructions.

Wire the funds and mail To make a same day wire
BY WIRE your signed application investment, please call
to Investor Services. us by 1:00 p.m. pacific
1-800/632-2301 Please include the wire time and make sure your
(or 1-650/312-2000 control number or your wire arrives by 3:00
collect) new account number on p.m.
the application.

To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.

- ------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services Call Shareholder
two arrows pointing at the number below, or Services at the number
opposite send signed written below or our automated
directions] instructions. The TeleFACTS TeleFACTS system, or
system cannot be used to send signed written
BY EXCHANGE open a new account. instructions.

TeleFACTS(R) (Please see page 62 (Please see page 62
1-800/247-1753 for information on for information on
(around-the-clock exchanges.) exchanges.)
access)
- ------------------------------------------------------------------------------

FRANKLIN TEMPLETON INVESTOR SERVICES, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)

[Insert graphic of person with a headset] INVESTOR SERVICES

AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.

DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.

[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please
call 1-800/527-2020 for information.
[End callout]

Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.

*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.

RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.

TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.

TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.

For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.

As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.

EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.

[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]

Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.

If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.

Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 67).

SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.

[Insert graphic of a certificate] SELLING SHARES

You can sell your shares at any time.

SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the funds we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:

[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
[End callout]

A notary public CANNOT provide a signature guarantee.

o you are selling more than $100,000 worth of shares

o you want your proceeds paid to someone who is not a registered owner

o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account

We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
funds against potential claims based on the instructions received.

SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.

REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.

RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.

- ------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] share certificates (if you hold share
certificates) to Investor Services.
BY MAIL Corporate, partnership or trust accounts
may need to send additional documents.

Specify the fund, the account number and
the dollar value or number of shares you
wish to sell. If you own both Class A and
B shares, also specify the class of
shares, otherwise we will sell your Class
A shares first. Be sure to include all
necessary signatures and any additional
documents, as well as signature
guarantees if required.

A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.

- ------------------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is for
$100,000 or less, you do not hold
BY PHONE share certificates and you have not
changed your address by phone within
1-800/632-2301 the last 15 days, you can sell your
shares by phone.

A check will be mailed to the name(s) and
address on the account. Written
instructions, with a signature guarantee,
are required to send the check to another
address or to make it payable to another
person.

- ------------------------------------------------------------------------------
[Insert graphic of three You can call or write to have
lightning bolts] redemption proceeds of $1,000 or
more wired to a bank or escrow
account. See the policies
BY WIRE above for selling shares by mail
or phone.

Before requesting a bank wire, please
make sure we have your bank account
information on file. If we do not have
this information, you will need to send
written instructions with your bank's
name and address, your bank account
number, the ABA routing number, and a
signature guarantee.

Requests received in proper form by 1:00
p.m. pacific time will be wired the next
business day.

- ------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund
arows pointing in opposite you are considering.
directions]
Call Shareholder Services at the
BY EXCHANGE number below or our automated
TeleFACTS system, or send signed
TeleFACTS(R) 1-800/247-1753 written instructions. See the
(around-the-clock access) policies above for selling shares
by mail or phone.

If you hold share certificates, you will
need to return them to the fund before
your exchange can be processed.

- ------------------------------------------------------------------------------

[Insert graphic of paper and pen] ACCOUNT POLICIES

CALCULATING SHARE PRICE Each fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.

[Begin calout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.

When you sell shares, you receive the NAV minus
any applicable contingent deferred sales charge (CDSC).
[End callout]

The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.

Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.

ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.

STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the funds'
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.

If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.

STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.

JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.

MARKET TIMERS The funds do not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of a
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of a fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of a fund's
net assets, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.

ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:

o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.

o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.

o The funds may modify or discontinue the exchange privilege on 60 days'
notice.

o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.

o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.

o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of
an emergency or if the payment by check or wire would be harmful to
existing shareholders.

o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.

DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.

CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------
COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00 1 - -
12B-1 FEE TO DEALER 0.35 2 0.25 3 1.00 4

A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and up to 0.25% on Class A NAV purchases by certain
trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.

1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Of this amount, each fund may pay up to 0.35% to Distributors or others,
out of which 0.10% will generally be retained by Distributors for its
distribution expenses.
3. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
4. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.

[Insert graphic of question mark] QUESTIONS

If you have any questions about the funds or your account, you can write to
us at P.O. Box 33030, St. Petersburg, FL 33733-8030. You can also call us at
one of the following numbers. For your protection and to help ensure we
provide you with quality service, all calls may be monitored or recorded.

HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.

FOR MORE INFORMATION

You can learn more about each fund in the following documents:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).

For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.

FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com

You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.

Investment Company Act file #811-5387 MS P 05/99

Prospectus

FRANKLIN
MUTUAL SERIES FUND INC.

CLASS Z

INVESTMENT STRATEGY

GROWTH & INCOME o VALUE Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund

GLOBAL o VALUE Mutual Discovery Fund
Mutual European Fund

MAY 1, 1999

[Insert Franklin Templeton Ben Head]

THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

CONTENTS

THE FUNDS

[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

2 Mutual Beacon Fund; Mutual Qualified Fund; Mutual Shares Fund; Mutual
Discovery Fund

17 Mutual Financial Services Fund

29 Mutual European Fund

40 Management

43 Distributions and Taxes; Year 2000 Problem

45 Financial Highlights

YOUR ACCOUNT

[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

49 Qualified Investors

52 Buying Shares

53 Investor Services

56 Selling Shares

58 Account Policies

60 Questions

FOR MORE INFORMATION

[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]

Back Cover

MUTUAL BEACON FUND
MUTUAL QUALIFIED FUND
MUTUAL SHARES FUND
MUTUAL DISCOVERY FUND

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

[Begin callout]
The funds invest primarily in securities of companies that the manager
believes are undervalued.
[End callout]

[Insert graphic of chart with line going up and down] MAIN RISKS

[Begin callout]
Because the securities the funds hold fluctuate in price with market
conditions, the value of your investment
in a fund will go up and down. This means you could lose money over short or
even extended periods.
End callout]

Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.

FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
funds.

EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.

YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the funds' manager considers.

More detailed information about the funds, their policies (including
temporary investments), risks and bond ratings can be found in the funds'
Statement of Additional Information (SAI).

[Insert graphic of a bull and a bear] PERFORMANCE

MUTUAL BEACON FUND
CLASS Z ANNUAL TOTAL RETURNS 1

[Insert bar graph]

17.4% -8.13% 17.60% 22.92% 22.93%5.61% 25.89% 21.19% 22.99% 2.37%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '98
12.58%

WORST
QUARTER:
Q3 '98
- -17.54%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

1 YEAR 5 YEARS 10 YEARS
- -----------------------------------------------------------------------
Mutual Beacon Fund - Class Z 2.37% 15.20% 14.55%
S&P 500(R)Index 2 28.58% 24.06% 19.21%

1. As of March 31, 1999, the fund's year-to-date return was 5.26%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.

MUTUAL QUALIFIED FUND
CLASS Z ANNUAL TOTAL RETURNS 1

[Insert bar graph]

14.44% -10.12% 21.13% 22.70%22.71% 5.73% 26.60% 21.19% 24.92% 0.50%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '98
12.63%

WORST
QUARTER:
Q3 '98
- -17.70%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Qualified Fund - Class Z 0.50% 15.28% 14.34%
S&P 500(R)Index 2 28.58% 24.06% 19.21%

1. As of March 31, 1999, the fund's year-to-date return was 2.92%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.

MUTUAL SHARES FUND
CLASS Z ANNUAL TOTAL RETURNS 1

[Insert bar graph]

14.93% -9.82% 20.99% 21.33%20.99% 4.55% 29.11% 20.76% 26.38% 0.45%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '98
13.34%

WORST
QUARTER:
Q3 '98
- -16.96%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------

Mutual Shares Fund - Class Z 0.45% 15.65% 14.31%
S&P 500(R)Index 2 28.58% 24.06% 19.21%

1. As of March 31, 1999, the fund's year-to-date return was 4.91%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.

MUTUAL DISCOVERY FUND
CLASS Z ANNUAL TOTAL RETURNS 1

[Insert bar graph]

35.85% 3.62% 28.63% 24.93%22.94% -1.90%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '93
12.30%

WORST
QUARTER:
Q3 '98
- -19.44%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- ----------------------------------------------------------------------------
Mutual Discovery Fund - Class Z -1.90% 14.96% 18.21%
S&P 500(R)Index 2 28.58% 24.06% 21.61%
MSCI World Index 3 24.80% 16.19% 17.32%

1. As of March 31, 1999, the fund's year-to-date return was 4.11%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaGed
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
3. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index tracks
the performance of approximately 1500 securities in 22 countries and is
designed to measure world stock market performance. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.

[Insert graphic of percentage sign] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of a fund.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY
Maximum sales charge (load)
imposed on purchases None None None None

Exchange fee None None None None

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)1

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY
Management fees 2 0.60% 0.60% 0.60% 0.80%

Distribution and service
(12b-1) fees None None None None

Other expenses 0.19% 0.19% 0.17% 0.23%
-----------------------------------------

Total annual fund operating
expenses 2 0.79% 0.79% 0.77% 1.03%
=========================================

1. In connection with the transaction which resulted in Franklin Mutual
becoming each fund's investment manager, Franklin Mutual made a commitment to
the funds' board not to seek an increase in the rate of investment management
fees for a three year period beginning November 1, 1996. This agreement
applies only to those series which existed at that time. The parties also
agreed that for the same period the ordinary expenses of each series (based
on a percentage of net assets) will not be higher than they were expected to
be as of November 1, 1996, based on the annualized expense ratios of each
series as of that date. Increases in expenses beyond these expense ratios
will be permitted, however, if the board is satisfied that such expenses also
would have been higher (based upon such considerations as the amount and
composition of assets under management, the number of security transactions,
the number of shareholder accounts, regulatory requirements and general
economic conditions) had the transaction 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.

2. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
and total operating expenses were as follows:

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY
Management fees 0.57% 0.57% 0.56% 0.77%
Total annual fund
operating expenses 0.76% 0.76% 0.73% 1.00%
After October 31, 1999, the manager may end this arrangement at any time.

EXAMPLE

This example can help you compare the cost of investing in the funds with the
cost of investing in other mutual funds.

The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

MUTUAL
BEACON QUALIFIED SHARES DISCOVERY
- ---------------------------------------------------------------------------
1 Year $ 81 $ 81 $ 79 $ 105
3 Years $252 $252 $246 $ 328
5 Years $439 $439 $428 $ 569
10 Years $978 $978 $954 $1,259