-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pn8DpdBJeqeWlHHpWMis93ZhGMdUiSxP4SWL/Kme8bNaflDsWOZBTwNsfErQDjks tm1R/lvlABCBKbFtYZr+Tw== 0000865722-07-000005.txt : 20070301 0000865722-07-000005.hdr.sgml : 20070301 20070301095407 ACCESSION NUMBER: 0000865722-07-000005 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070301 DATE AS OF CHANGE: 20070301 EFFECTIVENESS DATE: 20070301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON INSTITUTIONAL FUNDS INC CENTRAL INDEX KEY: 0000865722 IRS NUMBER: 593020895 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-06135 FILM NUMBER: 07660760 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 FORMER COMPANY: FORMER CONFORMED NAME: TEMPLETON INSTITUTIONAL TRUST INC DATE OF NAME CHANGE: 19930326 0000865722 S000008750 Emerging Markets Series C000023824 Advisor Class TEEMX 0000865722 S000008751 Foreign Equity Series C000023825 Advisor Class TFEQX C000037509 Service Shares Class A 0000865722 S000008752 Foreign Smaller Companies Series C000023826 Advisor Class TFSCX N-CSR 1 tifi-annual1206.txt TIFI ANNUAL 1206 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06135 --------- TEMPLETON INSTITUTIONAL FUNDS, INC. ----------------------------------- (Exact name of registrant as specified in charter) 500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091 ------------------------------------------------------------------ (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (954) 527-7500 -------------- Date of fiscal year end: 12/31 ------- Date of reporting period: 12/31/06 ---------- ITEM 1. REPORTS TO STOCKHOLDERS. EMERGING MARKETS SERIES ANNUAL REPORT 12/31/2006 - -------------------------------------------------------------------------------- THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- -------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. -------------------------------------- Emerging Markets Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY Contents ANNUAL REPORT TIFI Emerging Markets Series ............................................... 1 Performance Summary ........................................................ 7 Your Fund's Expenses ....................................................... 9 Financial Highlights and Statement of Investments .......................... 11 Financial Statements ....................................................... 17 Notes to Financial Statements .............................................. 20 Report of Independent Registered Public Accounting Firm .................... 28 Tax Designation ............................................................ 29 Board Members and Officers ................................................. 32 Shareholder Information .................................................... 38 - -------------------------------------------------------------------------------- Annual Report TIFI Emerging Markets Series YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Emerging Markets Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in securities issued by emerging market companies. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This annual report for Templeton Institutional Funds, Inc. (TIFI) Emerging Markets Series (the Fund) covers the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW TIFI Emerging Markets Series posted a +29.07% cumulative total return for the 12 months ended December 31, 2006. The Fund underperformed the Standard & Poor's/International Finance Corporation Investable (S&P/IFCI) Composite Index and the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index, which returned +35.11% and +32.59% during the same period. 1 1. Source: Standard & Poor's Micropal. The S&P/IFCI Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity performance of global emerging markets. The MSCI EM Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 12. - -------------------------------------------------------------------------------- - ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE - ----------------------------------------------------- Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Asia 47.3% Europe 24.5% Middle East & Africa 14.0% Latin America 13.5% Short-Term Investments & Other Net Assets 0.7% ECONOMIC AND MARKET OVERVIEW During the 12 months under review, strong investor confidence, continuing fund inflows, robust corporate earnings and a supportive economic environment led emerging markets to end 2006 at historical highs. After the markets experienced a healthy correction in May, they recovered as fund flows stabilized, robust economic data was reported and the U.S. showed signs of an easing monetary policy. In addition, the interest rate spread on emerging market bonds relative to U.S. Treasury yields maintained a downward trend during the year, falling from about 250 basis points (100 basis points equal one percentage point) to about 170 basis points due to rising liquidity and low inflation. 2 We believe this signaled greater investor confidence in emerging markets. Eastern European markets recorded the strongest returns in 2006. Russia benefited from high commodity prices that supported its exports and from strong foreign investor participation, while a weaker U.S. dollar enhanced returns in Poland and the Czech Republic. Turkey was one of the few emerging markets to end the year with a negative return. Although that market recovered some of the losses from the correction earlier in the year, investors remained cautious due to slowing progress for European Union accession talks and expectations of slower growth after a substantial interest rate increase in the second quarter. In South Africa, a consumer spending boom, propelled by low borrowing rates and greater domestic demand, led to higher corporate earnings in related companies. Foreign investment reached a record high, which boosted returns for South Africa's markets. Latin American markets benefited from strong commodity prices, solid domestic demand and smooth power transitions in the region's key economies. International confidence in the region, especially in Brazil, remained high. A loosening monetary policy, growing foreign reserves and repayment of debt to foreign lenders further supported the Brazilian market. Asian giants China and India continued to report strong economic growth, which led to significant fund inflows that pushed markets to record highs. Elsewhere in the region, Thailand and South Korea struggled with strong local currencies, which threatened to erode their export competitiveness. North Korea's nuclear test in October exposed the region to geopolitical tensions. However, the resumption of six-party talks could yield some positive 2. SOURCE: J.P. MORGAN 2 | Annual Report results in the longer term. Although a military coup and capital controls in Thailand initially rattled investor confidence in the nation's financial markets, we continued to search for opportunities among Thai equities. INVESTMENT STRATEGY Our investment strategy employs a bottom-up, value-oriented, long-term approach. We focus on the market price of a company's securities relative to our evaluation of the company's long-term earnings, asset value, and cash flow potential. As we look for investments, we focus on specific companies and undertake in-depth research to construct an "action list" from which we make our buy decisions. Before we make a purchase, we generally look at the company's price/earnings ratio, profit margins and liquidation value. During our analysis, we also consider the company's position in its sector, the economic framework and political environment. MANAGER'S DISCUSSION During the 12 months under review, relative to the MSCI EM Index, the Fund's performance benefited from underweighted exposure to Israeli and Taiwanese securities and exposure to Croatian securities (not in the index). Stock selection in South Africa and Taiwan further enhanced relative performance. In South Africa, the Fund's overweighted exposure to non-index holdings Anglo American and Remgro benefited the Fund's relative performance. Underweighted positions in MTN Group and Sasol (sold during the period) also had a positive impact. In Israel, the largest contributor to performance was the Fund's underweighted position in Teva Pharmaceutical Industries. In Taiwan, the Fund's overweighted positions in Uni-President Enterprises (sold during the period) and Realtek Semiconductor, and zero weighting in Chi Mei Optoelectronics, which declined during the year, benefited the Fund's relative performance. The Fund only held one Croatian stock, Pliva, which outperformed the index and contributed to relative performance. At the sector level, stock selection in the pharmaceuticals and biotechnology, automobiles and components, and diversified financials sectors contributed to relative Fund performance during the period. 3 The Fund also benefited from an underweighted position in the technology hardware and equipment sector, which underperformed the broader MSCI EM Index. 4 TOP 10 COUNTRIES 12/31/06 - -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS - -------------------------------------------------------------------------------- South Korea 15.2% - -------------------------------------------------------------------------------- South Africa 13.4% - -------------------------------------------------------------------------------- Taiwan 12.4% - -------------------------------------------------------------------------------- China 11.3% - -------------------------------------------------------------------------------- Brazil 10.1% - -------------------------------------------------------------------------------- Russia 8.2% - -------------------------------------------------------------------------------- Turkey 8.0% - -------------------------------------------------------------------------------- Hungary 3.5% - -------------------------------------------------------------------------------- Mexico 3.2% - -------------------------------------------------------------------------------- Thailand 2.4% - -------------------------------------------------------------------------------- 3. The pharmaceuticals and biotechnology sector comprises pharmaceuticals in the SOI. The automobiles and components sector comprises automobiles in the SOI. The diversified financials sector comprises capital markets, consumer finance and diversified financial services in the SOI. 4. The technology hardware and equipment sector comprises communications equipment, computers and peripherals, and electronic equipment and instruments in the SOI. Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/06 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- Samsung Electronics Co. Ltd. 4.5% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, SOUTH KOREA - -------------------------------------------------------------------------------- PetroChina Co. Ltd., H., ord. & 144A 4.2% OIL, GAS & CONSUMABLE FUELS, CHINA - -------------------------------------------------------------------------------- Petroleo Brasileiro SA, ADR, pfd. 3.4% OIL, GAS & CONSUMABLE FUELS, BRAZIL - -------------------------------------------------------------------------------- Remgro Ltd. 3.0% DIVERSIFIED FINANCIAL SERVICES, SOUTH AFRICA - -------------------------------------------------------------------------------- Akbank TAS 2.8% COMMERCIAL BANKS, TURKEY - -------------------------------------------------------------------------------- Old Mutual PLC 2.6% INSURANCE, SOUTH AFRICA - -------------------------------------------------------------------------------- Gazprom, ord. & ADR 2.5% OIL, GAS & CONSUMABLE FUELS, RUSSIA - -------------------------------------------------------------------------------- Taiwan Semiconductor Manufacturing 2.5% Co. Ltd. SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, TAIWAN - -------------------------------------------------------------------------------- Banco Bradesco SA, ADR, pfd. 2.1% COMMERCIAL BANKS, BRAZIL - -------------------------------------------------------------------------------- LUKOIL, ADR 2.1% OIL, GAS & CONSUMABLE FUELS, RUSSIA - -------------------------------------------------------------------------------- It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2006, the U.S. dollar declined in value relative to most non-U.S. currencies. As a result, the Fund's performance was positively affected by the portfolio's investment predominantly in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods. Conversely, the Fund's underweighted exposure to India and overweighted exposure to Turkey detracted from Fund returns relative to the index. The Fund's position in China also detracted from relative performance mainly due to an underweighted position in China Life Insurance (sold during the period), which significantly outperformed the MSCI EM Index. Overweighted positions in Turkish companies Arcelik, Turkiye Vakiflar Bankasi (Vakifbank) and Tupras-Turkiye Petrol Rafineleri (Tupras) negatively affected relative performance as these stocks declined in value during the reporting period. Despite a small decline for the year under review, the Turkish market actually rebounded more than 20% after a June correction. Thus, we remained confident of the market's long-term uptrend. Moreover, we believed these companies' valuations generally remained attractive, so we increased our holdings at lower prices during the year. By sector, the Fund's positions in the banks, capital goods and insurance sectors had a negative impact on relative performance partly due to overweighted positions in stocks such as LG Corporation, Kasikornbank and Old Mutual. 5 The Fund increased its exposure to Eastern and Southern Europe during the year under review. More specifically, we increased our allocations in Turkey, Russia, Hungary and Austria. Turkish investments included major commercial banks Akbank and Vakifbank; Tupras, the country's largest industrial company, with a dominant market share in oil refining; and Turkcell Iletisim Hizmetleri, a leading provider of mobile communications services. Turkey's financial market correction lowered valuations and provided the Fund with an opportunity to build positions at what we considered attractive prices. The Fund also purchased MOL Magyar Olaj-es Gazipari, a Hungarian integrated 5. The banks sector comprises commercial banks in the SOI. The capital goods sector comprises building products, construction and engineering, construction materials and industrial conglomerates in the SOI. 4 | Annual Report oil and gas company with large exposure to Central and Eastern Europe; Russia's Gazprom, the world's largest gas producer in terms of reserves and production; and Austria's OMV, one of the leading oil and gas groups in Central and Eastern Europe. We also significantly increased our investments in South Africa during the reporting period. The Fund increased its holdings in consumer sectors such as insurance, wireless telecommunications, banking, home furnishing and retail clothing. Significant additions included Old Mutual, a major financial services group involved in life insurance, short-term insurance, asset management and banking; MTN Group, a dominant wireless telecommunications services provider in Africa; JD Group, the country's leading furniture retailer; and Edgars Consolidated Stores, a leading specialty fashion retailer in southern Africa. Higher disposable incomes and strong consumer demand could lead to greater consumption of the products and services offered by these sectors of the economy. We also undertook selective investments in Israel, Brazil and Pakistan. Purchases included Teva Pharmaceutical Industries, which is among the world's largest generic pharmaceutical companies; and Pakistan Telecommunications, the country's dominant integrated telecommunication services provider. The Fund increased its exposure to the oil, gas and consumable fuels industry. We believed the energy sector would benefit from greater revenues and earnings due to relatively higher oil prices in recent years. A correction in commodity prices during the period provided the Fund with an opportunity to build positions at lower prices. We believed oil prices would remain firm because of geopolitical and supply and demand problems. The Fund also invested in semiconductors and computer hardware companies in an attempt to benefit from greater export demand for Asian information technology products. On the other hand, we substantially reduced the Fund's holdings in Singapore and South Korea as certain stocks reached their sell targets. Specific sales included Daewoo Shipbuilding & Marine Engineering, South Korea's major shipbuilder; CJ Corporation, a prominent integrated food maker in South Korea; Singapore Telecommunications, a leading integrated telecommunication services provider in Singapore; and Fraser and Neave, a dominant player in the Singapore soft drinks and beer market. One of the largest sales during the year was Pliva, a Croatian pharmaceutical company. We sold our Pliva shares Annual Report | 5 after the company was the subject of a takeover battle and the share price went far above our sell limit. We also sold stocks selectively in India, Mexico and China as the Fund continued to realign its exposure seeking to benefit from the continued economic recovery in emerging markets. We thank you for your continued participation in the Fund and look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Mark Mobius Mark Mobius Managing Director Templeton Asset Management Ltd. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Annual Report Performance Summary as of 12/31/06 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------- SYMBOL: TEEMX CHANGE 12/31/06 12/31/05 - ----------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.93 $20.86 $18.93 - ----------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) - ----------------------------------------------------------------------------------------- Dividend Income $0.5444 - ----------------------------------------------------------------------------------------- Long-Term Capital Gain $2.9320 - ----------------------------------------------------------------------------------------- TOTAL $3.4764 - -----------------------------------------------------------------------------------------
PERFORMANCE 1 THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------ 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------ Cumulative Total Return 2 +29.07% +227.79% +140.98% - ------------------------------------------------------------------------------------------ Average Annual Total Return 3 +29.07% +26.80% +9.19% - ------------------------------------------------------------------------------------------ Value of $1,000,000 Investment 4 $1,290,704 $3,277,910 $2,409,799 - ------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. Annual Report | 7 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN - ------------------------------------ 12/31/06 - ------------------------------------ 1-Year +29.07% - ------------------------------------ 5-Year +26.80% - ------------------------------------ 10-Year +9.19% - ------------------------------------ [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] TIFI Emerging S&P/IFCI Markets Series Composite Index 5 MSCI EM Index 5 -------------- ----------------- --------------- Date Incept 1,000,000.00 1,000,000.00 1,000,000.00 Jan-97 1,073,895.40 1,070,641.77 1,068,209.68 Feb-97 1,114,826.91 1,123,082.05 1,113,956.14 Mar-97 1,092,272.58 1,094,947.42 1,084,694.90 Apr-97 1,102,744.16 1,076,357.48 1,086,611.06 May-97 1,155,102.51 1,112,954.69 1,117,710.27 Jun-97 1,196,988.98 1,161,011.07 1,177,526.80 Jul-97 1,251,763.93 1,172,220.53 1,195,104.83 Aug-97 1,140,603.47 1,022,557.64 1,043,028.58 Sep-97 1,193,767.10 1,055,853.06 1,071,928.88 Oct-97 971,446.34 882,605.92 896,038.79 Nov-97 899,755.88 841,513.83 863,344.45 Dec-97 886,796.45 852,640.05 884,149.33 Jan-98 814,963.61 796,731.50 814,805.27 Feb-98 895,348.42 878,083.29 899,851.13 Mar-98 930,496.90 912,516.30 938,901.04 Apr-98 932,213.67 914,985.71 928,673.25 May-98 800,879.89 800,837.93 801,407.17 Jun-98 723,624.71 718,764.74 717,342.67 Jul-98 728,775.11 747,426.54 740,086.99 Aug-98 559,671.88 537,304.74 526,098.42 Sep-98 587,998.81 563,164.17 559,471.39 Oct-98 676,413.27 627,840.51 618,384.74 Nov-98 749,376.58 675,064.51 669,814.79 Dec-98 726,898.80 664,992.65 660,107.62 Jan-99 691,909.75 649,621.26 649,457.34 Feb-99 691,909.58 661,191.42 655,774.65 Mar-99 788,628.66 737,604.39 742,199.42 Apr-99 942,678.33 838,184.29 834,025.00 May-99 917,295.22 823,201.35 829,173.08 Jun-99 1,006,574.03 912,960.24 923,277.42 Jul-99 961,934.83 899,697.57 898,196.12 Aug-99 927,798.66 909,408.73 906,368.04 Sep-99 886,660.51 884,076.47 875,694.65 Oct-99 912,043.74 899,114.90 894,340.53 Nov-99 989,068.39 979,939.51 974,531.15 Dec-99 1,138,204.76 1,111,289.92 1,098,472.23 Jan-00 1,087,029.81 1,112,871.45 1,105,019.09 Feb-00 1,048,207.38 1,111,789.35 1,119,613.11 Mar-00 1,061,936.95 1,128,048.61 1,125,077.14 Apr-00 970,131.81 1,011,348.19 1,018,427.99 May-00 892,450.57 983,185.82 976,324.22 Jun-00 958,655.95 1,011,015.23 1,010,715.15 Jul-00 918,049.85 962,403.93 958,734.54 Aug-00 935,704.60 966,038.68 963,448.41 Sep-00 843,899.54 879,637.08 879,324.02 Oct-00 773,280.13 808,412.64 815,570.40 Nov-00 732,673.83 736,993.98 744,261.94 Dec-00 773,823.21 758,330.79 762,230.85 Jan-01 861,392.22 855,719.87 867,190.06 Feb-01 793,481.64 789,794.96 799,288.10 Mar-01 719,316.19 721,761.33 720,782.43 Apr-01 756,845.77 764,490.44 756,397.57 May-01 783,652.75 787,630.75 765,426.10 Jun-01 780,078.51 773,369.22 749,714.32 Jul-01 734,506.61 720,512.75 702,339.47 Aug-01 737,187.31 710,718.35 695,411.71 Sep-01 645,150.56 600,538.28 587,776.22 Oct-01 664,808.85 637,773.65 624,252.96 Nov-01 705,018.95 712,494.10 689,427.07 Dec-01 735,163.48 771,759.94 744,150.50 Jan-02 773,377.34 799,311.89 769,368.19 Feb-02 772,467.41 814,738.77 782,007.80 Mar-02 818,780.24 871,507.45 829,046.66 Apr-02 846,133.63 879,581.59 834,427.52 May-02 840,663.07 865,181.32 821,132.56 Jun-02 787,779.76 802,752.42 759,529.61 Jul-02 745,837.72 751,921.42 701,762.29 Aug-02 744,014.08 761,660.33 712,575.58 Sep-02 689,307.03 677,034.49 635,694.98 Oct-02 707,542.69 720,512.75 676,943.80 Nov-02 764,985.01 770,539.11 723,540.22 Dec-02 749,536.25 741,377.88 699,500.17 Jan-03 741,207.99 742,043.78 696,454.62 Feb-03 740,282.81 720,068.81 677,657.37 Mar-03 713,490.61 693,626.70 658,442.63 Apr-03 787,812.55 764,434.95 717,091.51 May-03 834,263.75 817,624.37 768,558.15 Jun-03 862,134.43 868,233.40 812,361.84 Jul-03 899,295.59 914,902.47 863,238.00 Aug-03 942,030.71 980,910.63 921,178.30 Sep-03 969,901.49 991,620.65 927,931.40 Oct-03 1,045,152.48 1,072,167.81 1,006,896.15 Nov-03 1,066,520.05 1,085,929.91 1,019,271.30 Dec-03 1,153,109.36 1,165,117.51 1,093,162.90 Jan-04 1,190,062.03 1,204,933.27 1,131,986.59 Feb-04 1,233,647.10 1,263,006.02 1,184,205.05 Mar-04 1,232,383.68 1,286,562.53 1,199,421.16 Apr-04 1,162,966.97 1,189,284.43 1,101,359.77 May-04 1,148,703.02 1,173,108.40 1,079,668.33 Jun-04 1,172,476.00 1,173,163.90 1,084,600.09 Jul-04 1,154,408.55 1,149,024.72 1,065,421.94 Aug-04 1,193,395.88 1,200,382.90 1,110,020.71 Sep-04 1,255,205.22 1,269,692.85 1,174,131.95 Oct-04 1,292,290.97 1,306,401.04 1,202,260.46 Nov-04 1,391,186.19 1,419,910.66 1,313,620.15 Dec-04 1,457,550.57 1,492,688.88 1,376,859.81 Jan-05 1,446,925.76 1,496,295.89 1,381,217.72 Feb-05 1,558,970.59 1,621,902.83 1,502,500.81 Mar-05 1,484,068.61 1,520,629.28 1,403,514.61 Apr-05 1,438,447.99 1,486,556.98 1,366,106.40 May-05 1,495,721.28 1,542,271.30 1,414,204.81 Jun-05 1,544,253.23 1,594,267.64 1,463,021.76 Jul-05 1,631,621.92 1,704,614.19 1,566,542.19 Aug-05 1,623,867.89 1,718,958.96 1,580,643.87 Sep-05 1,754,905.91 1,879,470.60 1,728,034.53 Oct-05 1,656,867.65 1,757,026.72 1,615,131.28 Nov-05 1,784,986.17 1,899,586.58 1,748,859.37 Dec-05 1,867,041.94 2,018,007.27 1,852,459.64 Jan-06 2,055,420.84 2,234,566.19 2,060,488.52 Feb-06 2,060,347.57 2,236,036.74 2,058,525.79 Mar-06 2,076,142.51 2,262,423.35 2,076,978.73 Apr-06 2,216,588.20 2,454,399.16 2,225,182.76 May-06 2,004,921.51 2,211,425.88 1,992,549.96 Jun-06 1,983,164.40 2,202,075.41 1,988,328.44 Jul-06 2,033,612.04 2,230,265.53 2,018,065.39 Aug-06 2,071,184.78 2,296,134.96 2,070,491.76 Sep-06 2,071,184.91 2,316,223.19 2,087,895.14 Oct-06 2,170,084.56 2,419,966.15 2,187,145.82 Nov-06 2,291,744.42 2,607,696.79 2,350,071.94 Dec-06 2,409,799.37 2,726,616.91 2,456,108.98 ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 1. Past expense reductions by the Fund's manager and administrator increased the Fund's total returns. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. 5. Source: Standard & Poor's Micropal. The S&P/IFCI Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance of global emerging markets. The MSCI EM Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets. 8 | Annual Report Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 9 Your Fund's Expenses (CONTINUED) Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges or redemption fees, if applicable. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,215.10 $7.98 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.00 $7.27 - --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 1.43%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 10 | Annual Report Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS EMERGING MARKETS SERIES
---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 2004 2003 2002 ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 18.93 $ 15.09 $ 12.18 $ 8.10 $ 8.08 ---------------------------------------------------------------------- Income from investment operations a: Net investment income b ............................ 0.44 0.33 0.21 0.24 0.14 Net realized and unrealized gains (losses) ......... 4.96 3.89 2.97 4.10 0.02 ---------------------------------------------------------------------- Total from investment operations .................... 5.40 4.22 3.18 4.34 0.16 ---------------------------------------------------------------------- Less distributions from: Net investment income .............................. (0.54) (0.38) (0.27) (0.26) (0.14) Net realized gains ................................. (2.93) -- -- -- -- ---------------------------------------------------------------------- Total distributions ................................. (3.47) (0.38) (0.27) (0.26) (0.14) ---------------------------------------------------------------------- Redemption fees ..................................... -- c -- c -- c -- -- ---------------------------------------------------------------------- Net asset value, end of year ........................ $ 20.86 $ 18.93 $ 15.09 $ 12.18 $ 8.10 ====================================================================== Total return ........................................ 29.07% 28.09% 26.40% 53.84% 1.96% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $3,209,602 $2,841,536 $2,063,532 $2,092,229 $1,234,595 Ratios to average net assets: Expenses ........................................... 1.42% d 1.42% d 1.45% d 1.46% 1.49% Net investment income .............................. 2.09% 1.98% 1.62% 2.52% 1.67% Portfolio turnover rate ............................. 40.84% 36.42% 52.07% 46.83% 53.36%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Amount rounds to less than $0.01 per share. d Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 11 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 99.3% COMMON STOCKS AND RIGHTS 90.8% AUSTRIA 0.8% OMV AG ................................. Oil, Gas & Consumable Fuels 139,550 $ 7,919,315 Wienerberger AG ........................ Building Products 301,550 17,912,748 --------------- 25,832,063 --------------- BRAZIL 1.6% Centrais Eletricas Brasileiras SA ...... Electric Utilities 807,188,000 19,302,238 CPFL Energia SA ........................ Electric Utilities 716,178 10,056,326 Souza Cruz SA .......................... Tobacco 1,259,703 22,434,682 --------------- 51,793,246 --------------- CHINA 11.3% Aluminum Corp. of China Ltd., H ........ Metals & Mining 52,778,000 48,848,730 a,b China Coal Energy Co., H, 144A ......... Oil, Gas & Consumable Fuels 2,119,000 1,375,594 China Mobile (Hong Kong) Ltd. .......... Wireless Telecommunication Services 3,769,948 32,566,605 China Petroleum and Chemical Corp., H .. Oil, Gas & Consumable Fuels 38,776,000 35,889,165 China Shenhua Energy Co. Ltd., H ....... Oil, Gas & Consumable Fuels 1,644,500 3,957,378 Citic Pacific Ltd. ..................... Industrial Conglomerates 1,297,000 4,476,639 CNOOC Ltd. ............................. Oil, Gas & Consumable Fuels 66,754,000 63,414,648 Denway Motors Ltd. ..................... Automobiles 37,817,000 15,313,183 PetroChina Co. Ltd., H ................. Oil, Gas & Consumable Fuels 78,482,000 111,178,167 b PetroChina Co. Ltd., H, 144A ........... Oil, Gas & Consumable Fuels 16,358,000 23,172,861 Shanghai Industrial Holdings Ltd. ...... Industrial Conglomerates 7,264,000 15,463,366 Travelsky Technology Ltd., H ........... IT Services 4,568,000 6,964,319 --------------- 362,620,655 --------------- CZECH REPUBLIC 0.2% Philip Morris CR AS .................... Tobacco 10,093 5,251,170 --------------- HONG KONG 1.2% Cheung Kong (Holdings) Ltd. ............ Real Estate 1,074,000 13,219,375 Cheung Kong Infrastructure Holdings Ltd. Electric Utilities 1,838,000 5,705,983 Dairy Farm International Holdings Ltd. . Food & Staples Retailing 1,034,019 3,515,665 Hopewell Holdings Ltd. ................. Transportation Infrastructure 946,000 3,319,874 MTR Corp. Ltd. ......................... Road & Rail 5,765,120 14,495,896 --------------- 40,256,793 --------------- HUNGARY 3.5% a Magyar Telekom PLC ..................... Diversified Telecommunication Services 5,657,593 31,430,247 MOL Magyar Olaj-es Gazipari Rt. ........ Oil, Gas & Consumable Fuels 329,249 37,342,952 OTP Bank Ltd. .......................... Commercial Banks 598,566 27,501,129 Richter Gedeon Nyrt. ................... Pharmaceuticals 68,608 15,649,303 --------------- 111,923,631 --------------- INDIA 1.2% Gail India Ltd. ........................ Gas Utilities 1,933,380 11,462,667 Indian Oil Corp. Ltd. .................. Oil, Gas & Consumable Fuels 712,660 7,270,376 Oil & Natural Gas Corp. Ltd. ........... Oil, Gas & Consumable Fuels 820,153 16,175,317 b Oil & Natural Gas Corp. Ltd., 144A ..... Oil, Gas & Consumable Fuels 91,290 1,800,450 Tata Chemicals Ltd. .................... Chemicals 114,730 560,581 --------------- 37,269,391 ---------------
12 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND RIGHTS (CONTINUED) INDONESIA 0.3% PT Astra International Tbk ............. Automobiles 5,150,000 $ 8,990,382 --------------- ISRAEL 0.6% a Taro Pharmaceutical Industries Ltd. .... Pharmaceuticals 600,210 6,002,100 Teva Pharmaceutical Industries Ltd., ADR Pharmaceuticals 407,980 12,680,018 --------------- 18,682,118 --------------- MALAYSIA 1.2% Maxis Communications Bhd. .............. Wireless Telecommunication Services 9,139,500 26,408,754 Sime Darby Bhd. ........................ Industrial Conglomerates 6,112,800 12,468,034 --------------- 38,876,788 --------------- MEXICO 3.2% Grupo Bimbo SA de CV, A ................ Food Products 1,513,034 7,563,244 Kimberly Clark de Mexico SA de CV, A ... Household Products 13,840,881 63,933,717 Telefonos de Mexico SA de CV, L, ADR ... Diversified Telecommunication Services 1,120,658 31,669,795 --------------- 103,166,756 --------------- PAKISTAN 0.2% Pakistan Telecommunications Corp., A ... Diversified Telecommunication Services 8,130,500 5,925,007 --------------- PANAMA 0.2% Banco Latinoamericano de Exportaciones SA, E ................................. Commercial Banks 470,100 7,972,896 --------------- PERU 0.0% c Compania de Minas Buenaventura SA, ADR ................................... Metals & Mining 47,700 1,338,462 --------------- PHILIPPINES 1.0% San Miguel Corp., B .................... Beverages 19,771,298 31,239,054 --------------- POLAND 0.6% a Grupa Lotos SA ......................... Oil, Gas & Consumable Fuels 68,700 1,166,572 Polski Koncern Naftowy Orlen SA ........ Oil, Gas & Consumable Fuels 1,127,656 18,526,915 --------------- 19,693,487 --------------- RUSSIA 8.2% b Evraz Group SA, GDR, 144A .............. Metals & Mining 120,000 3,042,000 Gazprom ................................ Oil, Gas & Consumable Fuels 1,024,770 11,784,855 Gazprom, ADR ........................... Oil, Gas & Consumable Fuels 1,508,274 69,380,604 LUKOIL, ADR ............................ Oil, Gas & Consumable Fuels 503,120 44,023,000 LUKOIL, ADR (London Exchange) .......... Oil, Gas & Consumable Fuels 257,200 22,453,560 Mining and Metallurgical Co. Norilsk Nickel ........................ Metals & Mining 259,585 40,754,845 Mobile Telesystems, ADR ................ Wireless Telecommunication Services 274,800 13,792,212 a,b OAO TMK, 144A .......................... Energy Equipment & Services 368,784 3,060,907 TNK-BP ................................. Oil, Gas & Consumable Fuels 1,518,000 3,939,210 Unified Energy Systems ................. Electric Utilities 41,584,600 44,911,368 a ZAO Polyus Gold Co. .................... Metals & Mining 118,102 5,822,429 --------------- 262,964,990 ---------------
Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND RIGHTS (CONTINUED) SINGAPORE 0.9% ComfortDelGro Corp. Ltd. ............... Road & Rail 16,213,000 $ 17,022,355 Fraser and Neave Ltd. .................. Industrial Conglomerates 4,377,290 12,845,417 --------------- 29,867,772 --------------- SOUTH AFRICA 13.4% Anglo American PLC ..................... Metals & Mining 1,347,489 65,752,272 Edgars Consolidated Stores Ltd. ........ Specialty Retail 4,912,593 27,343,000 a Imperial Holdings Ltd. ................. Air Freight & Logistics 1,275,161 29,836,084 JD Group Ltd. .......................... Specialty Retail 1,687,419 19,152,371 Massmart Holdings Ltd. ................. Food & Staples Retailing 1,650,509 16,531,583 MTN Group Ltd. ......................... Wireless Telecommunication Services 3,630,200 44,181,353 Nedbank Group Ltd. ..................... Commercial Banks 1,969,859 37,519,338 Old Mutual PLC ......................... Insurance 24,356,820 83,115,811 Remgro Ltd. ............................ Diversified Financial Services 3,822,844 97,093,556 Standard Bank Group Ltd. ............... Commercial Banks 759,919 10,246,099 --------------- 430,771,467 --------------- SOUTH KOREA 15.2% GS Holdings Corp. ...................... Oil, Gas & Consumable Fuels 539,800 17,470,946 Hana Financial Group Inc. .............. Commercial Banks 981,716 51,619,261 a Hite Brewery Co. Ltd. .................. Beverages 67,280 8,645,118 a Hyundai Development Co. ................ Construction & Engineering 514,830 31,443,381 a Kangwon Land Inc. ...................... Hotels, Restaurants & Leisure 2,279,417 49,509,918 LG Card Co. Ltd. ....................... Consumer Finance 713,370 47,481,293 LG Corp. ............................... Industrial Conglomerates 183,600 5,892,968 Lotte Shopping Co. Ltd. ................ Multiline Retail 72,930 30,269,871 Samsung Electronics Co. Ltd. ........... Semiconductors & Semiconductor Equipment 217,350 143,264,032 Samsung Fine Chemicals Co. Ltd. ........ Chemicals 46,810 1,172,767 a Shinhan Financial Group Co. Ltd. ....... Commercial Banks 613,470 31,333,145 SK Corp. ............................... Oil, Gas & Consumable Fuels 456,880 35,862,624 SK Telecom Co. Ltd. .................... Wireless Telecommunication Services 136,769 32,721,615 --------------- 486,686,939 --------------- SWEDEN 1.0% Oriflame Cosmetics SA, SDR ............. Personal Products 760,114 31,286,803 --------------- TAIWAN 12.4% Asustek Computer Inc. .................. Computers & Peripherals 12,640,200 34,601,990 Chunghwa Telecom Co. Ltd. .............. Diversified Telecommunication Services 12,406,260 23,072,560 D-Link Corp. ........................... Communications Equipment 18,402,039 24,114,380 Lite-On Technology Corp. ............... Computers & Peripherals 17,930,602 24,239,467 MediaTek Inc. .......................... Semiconductors & Semiconductor Equipment 1,638,120 16,941,735 Mega Financial Holding Co. Ltd. ........ Commercial Banks 51,508,032 37,858,443 President Chain Store Corp. ............ Food & Staples Retailing 7,636,010 18,442,657 Realtek Semiconductor Corp. ............ Semiconductors & Semiconductor Equipment 17,423,172 29,996,623 Siliconware Precision Industries Co. ... Semiconductors & Semiconductor Equipment 10,550,001 16,576,954 Sunplus Technology Co. Ltd. ............ Semiconductors & Semiconductor Equipment 19,417,907 23,687,642 Synnex Technology International Corp. .. Electronic Equipment & Instruments 9,720,043 12,289,881 Taiwan Mobile Co. Ltd. ................. Wireless Telecommunication Services 30,918,878 32,071,753
14 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - --------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND RIGHTS (CONTINUED) TAIWAN (CONTINUED) Taiwan Semiconductor Manufacturing Co. Ltd. .............................. Semiconductors & Semiconductor Equipment 38,312,711 $ 79,364,983 United Microelectronics Corp. .......... Semiconductors & Semiconductor Equipment 36,448,000 22,650,668 a Yageo Corp. ............................ Electronic Equipment & Instruments 2,912,000 1,358,367 --------------- 397,268,103 --------------- THAILAND 2.4% Kasikornbank Public Co. Ltd., fgn. ..... Commercial Banks 13,339,200 23,517,630 PTT Public Co. Ltd., fgn. .............. Oil, Gas & Consumable Fuels 1,747,000 10,348,942 Siam Cement Public Co. Ltd., fgn. ...... Construction Materials 2,678,136 19,188,901 Siam Commercial Bank Public Co. Ltd., fgn. ............................ Commercial Banks 4,245,500 6,946,093 Thai Airways International Public Co. Ltd., fgn. ............................ Airlines 7,747,100 9,724,851 Thai Beverages Co. Ltd., fgn. .......... Beverages 33,986,000 5,984,036 a True Corp. Public Co. Ltd., fgn., rts., 3/28/08 ............................... Diversified Telecommunication Services 2,088,420 -- --------------- 75,710,453 --------------- TURKEY 8.0% Akbank TAS ............................. Commercial Banks 14,796,670 89,898,525 Anadolu Efes Biracilik Ve Malt Sanayii AS .................................... Beverages 23,700 732,515 Arcelik AS, Br. ........................ Household Durables 4,592,414 27,090,538 a KOC Holding AS ......................... Industrial Conglomerates 1,586,370 6,163,925 a Migros Turk TAS ........................ Food & Staples Retailing 139,308 1,801,015 Tupras-Turkiye Petrol Rafineleri AS .... Oil, Gas & Consumable Fuels 2,700,300 46,165,496 a Turk Hava Yollari Anonim Ortakligi ..... Airlines 828,000 3,568,209 a,b Turk Hava Yollari Anonim Ortakligi, 144A Airlines 3,314,000 14,281,456 Turkcell Iletisim Hizmetleri AS ........ Wireless Telecommunication Services 7,275,148 36,748,363 Turkiye Vakiflar Bankasi T.A.O. ........ Commercial Banks 6,233,752 29,286,083 --------------- 255,736,125 --------------- UNITED KINGDOM 2.2% HSBC Holdings PLC ...................... Commercial Banks 2,192,044 40,182,472 Provident Financial PLC ................ Consumer Finance 2,280,230 31,325,398 --------------- 71,507,870 --------------- TOTAL COMMON STOCKS AND RIGHTS (COST $1,936,667,413) ................. 2,912,632,421 --------------- PREFERRED STOCKS 8.5% BRAZIL 8.5% Banco Bradesco SA, ADR, pfd. ........... Commercial Banks 1,661,752 67,051,693 Companhia Vale do Rio Doce, ADR, pfd., A Metals & Mining 2,506,400 65,793,000 Petroleo Brasileiro SA, ADR, pfd. ...... Oil, Gas & Consumable Fuels 1,160,635 107,660,503 Unibanco - Uniao de Bancos Brasileiros SA, GDR, pfd. ......................... Commercial Banks 350,500 32,582,480 --------------- TOTAL PREFERRED STOCKS (COST $113,547,749) ................... 273,087,676 ---------------
Annual Report | 15 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- EMERGING MARKETS SERIES PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- TOTAL LONG TERM INVESTMENTS (COST $2,050,215,162).................. $ 3,185,720,097 --------------- SHORT TERM INVESTMENTS (COST $12,829,154) 0.4% UNITED STATES 0.4% d Federal Home Loan Bank, 1/02/07 ........ $ 12,836,000 12,836,000 --------------- TOTAL INVESTMENTS (COST $2,063,044,316) 99.7% ........... 3,198,556,097 OTHER ASSETS, LESS LIABILITIES 0.3% .... 11,046,150 --------------- NET ASSETS 100.0%....................... $ 3,209,602,247 ===============
SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt GDR - Global Depository Receipt SDR - Swedish Depository Receipt a Non-income producing for the twelve months ended December 31, 2006. b Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Trustees. At December 31, 2006, the aggregate value of these securities was $46,733,268, representing 1.46% of net assets. c Rounds to less than 0.1% of net assets. d The security is traded on a discount basis with no stated coupon rate. 16 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2006
--------------- EMERGING MARKETS SERIES --------------- Assets: Investments in securities: Cost ................................................................................................. $ 2,063,044,316 --------------- Value ................................................................................................ $ 3,198,556,097 Cash .................................................................................................. 144,475 Foreign currency, at value (cost $2,597,986) .......................................................... 2,448,303 Receivables: Investment securities sold ........................................................................... 17,450,359 Capital shares sold .................................................................................. 1,224,876 Dividends ............................................................................................ 6,123,214 Foreign tax .......................................................................................... 1,234,088 --------------- Total assets ..................................................................................... 3,227,181,412 --------------- Liabilities: Payables: Investment securities purchased ...................................................................... 1,581,344 Capital shares redeemed .............................................................................. 11,260,057 Affiliates ........................................................................................... 3,440,557 Deferred tax .......................................................................................... 175,198 Accrued expenses and other liabilities ................................................................ 1,122,009 --------------- Total liabilities ................................................................................ 17,579,165 --------------- Net assets, at value ........................................................................... $ 3,209,602,247 =============== Net assets consist of: Paid-in capital ....................................................................................... $ 2,055,437,040 Distributions in excess of net investment income ...................................................... (47,974,409) Net unrealized appreciation (depreciation) ............................................................ 1,135,331,135 Accumulated net realized gain (loss) .................................................................. 66,808,481 --------------- Net assets, at value ........................................................................... $ 3,209,602,247 =============== Shares outstanding ..................................................................................... 153,893,017 =============== Net asset value per share a ............................................................................ $ 20.86 ===============
a Redemption price is equal to net asset value less redemption fees retained by the Fund. Annual Report | The accompanying notes are an integral part of these financial statements. | 17 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2006
--------------- EMERGING MARKETS SERIES --------------- Investment income: Dividends (net of foreign taxes of $8,523,940) ....................................................... $ 102,776,519 Interest (net of foreign taxes of $617) .............................................................. 1,591,356 Other income (Note 8) ................................................................................ 536,396 --------------- Total investment income .......................................................................... 104,904,271 --------------- Expenses: Management fees (Note 3a) ............................................................................. 36,373,949 Administrative fees (Note 3b) ......................................................................... 2,423,059 Transfer agent fees (Note 3c) ......................................................................... 9,134 Custodian fees (Note 4) ............................................................................... 2,935,723 Reports to shareholders ............................................................................... 33,519 Registration and filing fees .......................................................................... 355,878 Professional fees ..................................................................................... 137,710 Directors' fees and expenses .......................................................................... 74,265 Other ................................................................................................. 81,675 --------------- Total expenses ....................................................................................... 42,424,912 Expense reductions (Note 4) .......................................................................... (19,252) --------------- Net expenses ..................................................................................... 42,405,660 --------------- Net investment income .......................................................................... 62,498,611 --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .......................................................................................... 490,414,572 Foreign currency transactions ........................................................................ (1,454,614) --------------- Net realized gain (loss) ......................................................................... 488,959,958 --------------- Net change in unrealized appreciation (depreciation) on: Investments .......................................................................................... 219,678,551 Translation of assets and liabilities denominated in foreign currencies .............................. 24,787 Change in deferred taxes on unrealized appreciation (depreciation) .................................... (2,829) --------------- Net change in unrealized appreciation (depreciation) ............................................. 219,700,509 --------------- Net realized and unrealized gain (loss) ................................................................ 708,660,467 --------------- Net increase (decrease) in net assets resulting from operations ........................................ $ 771,159,078 ===============
18 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------- EMERGING MARKETS SERIES YEAR ENDED DECEMBER 31, ---------------------------------- 2006 2005 ---------------------------------- Increase (decrease) in net assets: Operations: Net investment income ............................................................. $ 62,498,611 $ 46,949,051 Net realized gain (loss) from investments and foreign currency transactions ....... 488,959,958 326,585,364 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes .. 219,700,509 246,568,439 ---------------------------------- Net increase (decrease) in net assets resulting from operations ............... 771,159,078 620,102,854 ---------------------------------- Distributions to shareholders from: Net investment income .............................................................. (74,010,838) (55,791,328) Net realized gain .................................................................. (394,234,085) -- ---------------------------------- Total distributions to shareholders .................................................. (468,244,923) (55,791,328) ---------------------------------- Capital share transactions (Note 2) .................................................. 65,143,777 213,692,478 ---------------------------------- Redemption fees ...................................................................... 7,862 712 ---------------------------------- Net increase (decrease) in net assets .......................................... 368,065,794 778,004,716 Net assets: Beginning of year ................................................................... 2,841,536,453 2,063,531,737 ---------------------------------- End of year ......................................................................... $ 3,209,602,247 $ 2,841,536,453 ================================== Distributions in excess of net investment income included in net assets: End of year ......................................................................... $ (47,974,409) $ (35,986,193) ==================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 19 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment Company Act of 1940, as amended, (the 1940 Act) as an open-end investment company, consisting of three separate funds. The Emerging Markets Series (the Fund) included in this report is diversified. The financial statements of the remaining funds in TIFI are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into 20 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. FOREIGN CURRENCY CONTRACTS (CONTINUED) The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. The Fund may be subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by TIFI are allocated among the funds based on the ratio of net assets of each Fund to the combined net assets of TIFI. Fund specific expenses are charged directly to the fund that incurred the expense. 22 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. H. GUARANTEES AND INDEMNIFICATIONS Under TIFI's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, TIFI, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK At December 31, 2006, there were 1.14 billion shares of TIFI authorized ($0.01 par value), of which 325 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------- Shares sold ...................... 21,134,826 $ 441,896,309 33,273,305 $ 537,595,503 Shares issued in reinvestment of distributions ................ 21,751,689 442,666,138 2,750,866 49,329,161 Shares redeemed .................. (39,129,699) (819,418,670) (22,672,825) (373,232,186) ------------------------------------------------------------------- Net increase (decrease) .......... 3,756,816 $ 65,143,777 13,351,346 $ 213,692,478 ===================================================================
Annual Report | 23 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and/or directors of the following subsidiaries:
- -------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------------------- Templeton Asset Management Ltd. (TAML) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TAML based on the average daily net assets of the Fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% In excess of $20 billion B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT services based on the aggregate average net assets of certain funds within TIFI as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $9,134, of which $4,549 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2006, the custodian fees were reduced as noted in the Statement of Operations. 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 5. INCOME TAXES For tax purposes, capital losses may be carried forward to offset future capital gains, if any. At December 31, 2006, the Fund had no tax basis capital losses. During the the year ended December 31, 2006, the Fund utilized $25,624,201 of capital loss carryforwards. For tax purposes, realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2006, the Fund deferred realized currency losses of $660,135. The tax character of distributions paid during the years ended December 31, 2006 and 2005, was as follows: ----------------------------- 2006 2005 ----------------------------- Distributions paid from: Ordinary income .................. $ 74,010,838 $ 55,791,328 Long term capital gain ........... 394,234,085 -- ----------------------------- $ 468,244,923 $ 55,791,328 ============================= Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares and foreign taxes paid on net realized gains. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, passive foreign investment company shares and foreign taxes paid on net realized gains. At December 31, 2006, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments ............................... $ 2,139,259,350 =============== Unrealized appreciation ........................... $ 1,065,157,456 Unrealized depreciation ........................... (5,860,709) --------------- Net unrealized appreciation (depreciation) ........ $ 1,059,296,747 =============== Undistributed ordinary income ..................... $ 67,826,457 Undistributed long term capital gains ............. 27,882,785 --------------- Distributable earnings ............................ $ 95,709,242 =============== 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2006, aggregated $1,207,508,453 and $1,565,708,871, respectively. Annual Report | 25 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares ("marketing support"), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 23, 2006, the SEC approved the proposed plan of distribution for the marketing support settlement, and disbursement of the settlement monies to the designated funds, in accordance with the terms and conditions of that settlement and plan, was completed in September 2006, and is recorded as other income. The plan of distribution for the market timing settlement is currently under review by the SEC staff. After publication of notice of the plan and a 30-day comment period, the proposed plan of distribution will be submitted to the SEC for approval. Following the SEC's approval of the plan of distribution, with modifications as appropriate, distribution of the settlement monies will begin in accordance with the terms and conditions of the settlement and plan. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above, as well as to allegedly excessive commissions and advisory and distribution fees. The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. 26 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 9. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. On December 22, 2006, the Securities and Exchange Commission extended the implementation date to no later than the last net asset value calculation in the first semi-annual reporting period in 2007. The Fund is currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Fund believes the adoption of SFAS 157 will have no material impact on its financial statements. Annual Report | 27 Templeton Institutional Funds, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - EMERGING MARKETS SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Emerging Markets Series (one of the funds constituting the Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 22, 2007 28 | Annual Report Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) EMERGING MARKETS SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $422,116,870 as long term capital gain dividends for the fiscal year ended December 31, 2006. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $41,950,949 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006. Under Section 854(b)(2) of the Code, the Fund designates 0.12% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2006. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $57,570,976 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2006. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $1,577,099 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006. At December 31, 2006, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid as allowed, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 14, 2006, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund to shareholders of record. Annual Report | 29 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) EMERGING MARKETS SERIES Record Date: 12/14/2006 - -------------------------------------------------------------------------------- FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS COUNTRY PER SHARE PER SHARE PER SHARE - -------------------------------------------------------------------------------- Argentina .............. $0.0000 $0.0001 $0.0001 Austria ................ 0.0005 0.0024 0.0024 Brazil ................. 0.0067 0.0674 0.0041 China .................. 0.0000 0.0615 0.0321 Croatia ................ 0.0000 0.0028 0.0000 Czech Republic ......... 0.0001 0.0005 0.0005 Finland ................ 0.0003 0.0012 0.0012 Hong Kong .............. 0.0000 0.0166 0.0000 Hungary ................ 0.0000 0.0064 0.0064 India .................. 0.0001 0.0099 0.0093 Indonesia .............. 0.0008 0.0036 0.0036 Israel ................. 0.0000 0.0002 0.0002 Malaysia ............... 0.0000 0.0097 0.0000 Mexico ................. 0.0000 0.0388 0.0388 Pakistan ............... 0.0000 0.0002 0.0002 Panama ................. 0.0000 0.0042 0.0042 Peru ................... 0.0000 0.0004 0.0004 Philippines ............ 0.0008 0.0022 0.0022 Poland ................. 0.0032 0.0149 0.0149 Portugal ............... 0.0002 0.0010 0.0010 Russia ................. 0.0037 0.0733 0.0729 Singapore .............. 0.0000 0.0093 0.0000 South Africa ........... 0.0000 0.0659 0.0190 South Korea ............ 0.0117 0.0497 0.0456 Sweden ................. 0.0000 0.0047 0.0000 Taiwan ................. 0.0316 0.0853 0.0000 Thailand ............... 0.0022 0.0158 0.0154 Turkey ................. 0.0000 0.0236 0.0236 United Kingdom ......... 0.0000 0.0110 0.0000 -------------------------------------------------- TOTAL .................. $0.0619 $0.5826 $0.2981 ================================================== Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or, as a tax deduction. Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income. 1 30 | Annual Report Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) EMERGING MARKETS SERIES Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. 1 In January 2007, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2006 individual income tax returns. 1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax brackets). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. Annual Report | 31 Templeton Institutional Funds, Inc. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1992 142 Director, Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (1944) Director Since 1990 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1996 143 Director, Hess Corporation 500 East Broward Blvd. (formerly Amerada Hess Suite 2100 Corporation) (exploration and Fort Lauderdale, FL 33394-3091 refining of oil and gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ DAVID W. NIEMIEC (1949) Director Since 2005 20 Director, Emeritus Corporation 500 East Broward Blvd. (assisted living) and OSI Suite 2100 Pharmaceuticals, Inc. Fort Lauderdale, FL 33394-3091 (pharmaceutical products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon Read, & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2003 103 Director, Hess Corporation 500 East Broward Blvd. (formerly Amerada Hess Suite 2100 Corporation) (exploration and Fort Lauderdale, FL 33394-3091 refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly Foundation Health) (integrated managed care), The Hertz Corporation (car rental), Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly Commonwealth Edison), UAL Corporation (airlines) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation. - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since 2005 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33 INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (1930) Director Since 1993 10 Director, Hess Corporation 500 East Broward Blvd. (formerly Amerada Hess Suite 2100 Corporation) (exploration and Fort Lauderdale, FL 33394-3091 refining of oil and gas) and Weatherford International, Ltd. (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003) and Total Logistics, Inc. (operating and investment business) (until 2005). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Director and Vice 142 None One Franklin Parkway Chairman of President since San Mateo, CA 94403-1906 the Board and 1993 and Vice President Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance since Compliance February 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ GARY P. MOTYL (1952) President Since 2005 Not Applicable Not Applicable 500 East Broward Blvd. and Chief Suite 2100 Executive Fort Lauderdale, FL 33394-3091 Officer - Investment Management PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GALEN VETTER (1951) Chief Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Officer and Fort Lauderdale, FL 33394-3091 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Nicholas F. Brady is considered to be an interested person of the Fund under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Prior to December 31, 2006, S. Joseph Fortunato and Gordon S. Macklin ceased to be a director of the Fund. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT COMMITTEE MEMBER OF HESS CORPORATION (FORMERLY, AMERADA HESS CORPORATION), A FORMER DIRECTOR AND AUDIT COMMITTEE MEMBER OF WHITE MOUNTAINS INSURANCE GROUP, LTD. AND FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. Annual Report | 37 Templeton Institutional Funds, Inc. SHAREHOLDER INFORMATION EMERGING MARKETS SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 38 | Annual Report This page intentionally left blank. This page intentionally left blank. [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN(R) TEMPLETON(R) 600 Fifth Avenue INSTITUTIONAL New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKETS SERIES INVESTMENT MANAGER Templeton Asset Management Ltd. DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 franklintempletoninstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges, and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the investment manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT456 A2006 02/07 FOREIGN EQUITY SERIES ANNUAL REPORT 12/31/2006 - -------------------------------------------------------------------------------- THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- -------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. -------------------------------------- Foreign Equity Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY Contents ANNUAL REPORT TIFI Foreign Equity Series ................................................ 1 Performance Summary ....................................................... 6 Your Fund's Expenses ...................................................... 8 Financial Highlights and Statement of Investments ......................... 10 Financial Statements ...................................................... 17 Notes to Financial Statements ............................................. 20 Report of Independent Registered Public Accounting Firm ................... 29 Tax Designation ........................................................... 30 Board Members and Officers ................................................ 33 Shareholder Information ................................................... 39 - -------------------------------------------------------------------------------- Annual Report TIFI Foreign Equity Series YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Foreign Equity Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in foreign (non-U.S.) equity securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Templeton Institutional Funds, Inc. (TIFI) Foreign Equity Series' (the Fund's) annual report for the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW For the year under review, the Fund's Primary Shares posted a cumulative total return of +29.04%. The Fund outperformed its benchmarks, the Morgan Stanley Capital International (MSCI) All Country (AC) World ex USA Index; the MSCI Europe, Australasia, Far East (EAFE) Index; and the MSCI AC World Index, which posted total returns of +27.16%, +26.86%, and +21.53%, respectively, for the same period. 1 Please note that index 1. Source: Standard & Poor's Micropal. The MSCI AC World ex USA Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets, excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The MSCI AC World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 12. - ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE - ----------------------------------------------------- Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Europe 65.4% Asia 21.5% North America 3.6% Australia & New Zealand 2.4% Latin America 2.1% Middle East & Africa 0.6% Short-Term Investments & Other Net Assets 4.4% performance information is provided for reference and that we do not attempt to track an index but rather undertake investments on the basis of fundamental research. You can find the Fund's long-term performance data in the Performance Summary beginning on page 6. ECONOMIC AND MARKET OVERVIEW The global economy grew in 2006, although gross domestic product growth slowed in the U.S. while it accelerated in Europe. The economic drivers remained consistent over the past four years: strong corporate and consumer demand, reasonably low inflation, a tight or improving labor market, and a relatively moderate interest rate environment, despite recent interest rate hikes by many of the world's central banks. However, the economy also faced head-winds from elevated energy prices, higher global interest rates and a weaker U.S. housing market. These factors dampened investor confidence mid-year, when many equity markets declined before rebounding later in the year. Despite such challenges, global economic activity was healthy. Strong global liquidity -- whether petrodollars, corporate cash, private equity, household savings or central banks' reserves -- continued to search for a home. Largely as a result, bond yield spreads over U.S. Treasuries narrowed, and equity and commodity markets rose in the latter part of the year. The shift from risk aversion to risk tolerance was concurrent with the U.S. Federal Reserve Board's decisions since June to hold the federal funds target rate at 5.25%, as well as with lower oil prices in the second half of the year. Narrowing corporate credit spreads globally reflected greater risk tolerance, while abundant cash supplies in the capital markets contributed to record global merger and acquisition activity in 2006. The total value of deals announced as a result of hostile takeovers, private equity buyouts and broad corporate consolidation was $3.8 trillion. 2 This figure surpassed the $3.4 trillion mark set in 2000. 2 Announced deals from private equity alone reached a record $700 billion, more than double the record set in 2005 and 20 times greater than a decade ago. 3 2. Source: "Can M&A's `Best of Times' Get Better?," THE WALL STREET JOURNAL, 1/2/07. 3. Source: "TPG tops buy-out league with $101bn," THE WALL STREET JOURNAL, 12/27/06. 2 | Annual Report With this economic backdrop, the non-U.S. equity markets -- including emerging markets that remained a major magnet for global fund flows -- led global equity markets to end 2006 on a strong note, and all major regions delivered double-digit total returns for the year. Stock market indexes in the U.S. and most European countries reached six-year highs in the fourth quarter, and many emerging market indexes in Asia, Europe and Latin America neared or reached all-time highs. INVESTMENT STRATEGY We employ a bottom-up, value-oriented, long-term investment strategy. Our in-depth fundamental internal research evaluates a company's potential to grow earnings, asset value and/or cash flow over a five-year horizon. Stocks are selected for purchase or sale utilizing strict valuation parameters, reflecting our focus on individual companies rather than countries or sectors. MANAGER'S DISCUSSION During the year under review, the Fund benefited from cash availability in the capital markets, which had a broad-based impact across countries and sectors. Each of the Fund's 10 major investment sectors contributed double-digit absolute total returns over the past year. Relative to the MSCI AC World ex USA Index, the Fund's returns were higher in eight out of ten major sectors, with industrials and telecommunication services providing the highest relative returns. 4 Holdings that delivered the strongest returns within these sectors included Vestas Wind Systems (wind turbines; Demark) and British Airways in industrials; and Telenor (Norway) and China Mobile in telecommunication services. It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Commercial Banks 13.3% Diversified Telecommunication Services 9.2% Oil, Gas & Consumable Fuels 5.8% Insurance 5.1% Pharmaceuticals 4.4% Electric Utilities 3.6% Household Durables 3.6% Food Products 3.5% Media 3.5% Semiconductors & Semiconductor Equipment 3.4% Aerospace & Defense 3.3% Industrial Conglomerates 2.9% Wireless Telecommunication Services 2.2% Paper & Forest Products 2.1% Metals & Mining 2.0% Other 27.7% Short-Term Investments & Other Net Assets 4.4% 4. The industrials sector comprises aerospace and defense, air freight and logistics, airlines, building products, commercial services and supplies, construction and engineering, electrical equipment, industrial conglomerates, machinery, marine, road and rail, trading companies and distributors, and transportation infrastructure in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/06 - --------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - --------------------------------------------------------------- Samsung Electronics Co. Ltd. 2.4% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, SOUTH KOREA - --------------------------------------------------------------- Housing Development Finance Corp. Ltd. 1.8% THRIFTS & MORTGAGE FINANCE, INDIA - --------------------------------------------------------------- Nordea Bank AB, FDR 1.8% COMMERCIAL BANKS, SWEDEN - --------------------------------------------------------------- E.ON AG 1.8% ELECTRIC UTILITIES, GERMANY - --------------------------------------------------------------- Compagnie Generale des Etablissements Michelin, B 1.8% AUTO COMPONENTS, FRANCE - --------------------------------------------------------------- Celesio AG 1.7% HEALTH CARE PROVIDERS & SERVICES, GERMANY - --------------------------------------------------------------- Atlas Copco AB, A 1.7% MACHINERY, SWEDEN - --------------------------------------------------------------- Rolls-Royce Group PLC, ord. & B 1.6% AEROSPACE & DEFENSE, U.K. - --------------------------------------------------------------- Telefonica SA, ord. & ADR 1.6% DIVERSIFIED TELECOMMUNICATION SERVICES, SPAIN - --------------------------------------------------------------- Sanofi-Aventis, ord. & ADR 1.6% PHARMACEUTICALS, FRANCE - --------------------------------------------------------------- performance. For the 12 months ended December 31, 2006, the U.S. dollar declined in value relative to most non-U.S. currencies. As a result, the Fund's performance was positively affected by the portfolio's investment predominantly in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods. The Fund's consumer staples and materials sector holdings slightly underperformed those of the index. 5 This was partly due to stock selection in food, beverage and tobacco stocks, and our underweighted position in metals and mining stocks. The demand for industrial commodities such as metals -- and related equities -- remained heightened, partly as a result of interest from financial players, such as hedge funds, as opposed to the underlying commodities' end-users. Our value-focused, bottom-up process has always driven our stock selection and, thus, the Fund's absolute and relative weightings whether by sector, country or industry. Based on this investment strategy, we believed that certain of our materials-related holdings' valuations exceeded what we could justify based on underlying company and industry fundamentals. As a result -- and given other stock alternatives that our analyses revealed as having greater potential to unlock value over the longer term -- we reduced or liquidated these positions. We used part of these proceeds to buy telecommunications companies despite their apparent unattractiveness in the broader market. As of December 31, 2006, the Fund's largest relative overweighted position was in telecommunication services, which had the greatest positive effect on performance relative to the benchmark, and served as a measure of confirmation of our stock selection process. 5. The consumer staples sector comprises beverages, food and staples retailing, food products, household products, personal products, and tobacco in the SOI. The materials sector comprises chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products in the SOI. 4 | Annual Report Thank you for your continued participation in the Fund. We look forward to serving your future investment needs. [PHOTO] /s/ Gary P. Motyl, CFA Gary P. Motyl, CFA President - Templeton Investment Counsel, LLC Chief Investment Officer - Templeton Institutional Global Equities THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 Performance Summary as of 12/31/06 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------------------------------------- PRIMARY SHARES (SYMBOL: TFEQX) CHANGE 12/31/06 12/31/05 - --------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.36 $26.67 $22.31 - --------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) - --------------------------------------------------------------------------------------------------------------- Dividend Income $0.7356 - --------------------------------------------------------------------------------------------------------------- Short-term Capital Gain $0.1321 - --------------------------------------------------------------------------------------------------------------- Long-Term Capital Gain $1.1844 - --------------------------------------------------------------------------------------------------------------- TOTAL $2.0521 - --------------------------------------------------------------------------------------------------------------- SERVICE SHARES (SYMBOL: N/A) CHANGE 12/31/06 9/18/06 - --------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.52 $26.67 $25.15 - --------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/18/06-12/31/06) - --------------------------------------------------------------------------------------------------------------- Dividend Income $0.6577 - --------------------------------------------------------------------------------------------------------------- Short-term Capital Gain $0.1321 - --------------------------------------------------------------------------------------------------------------- Long-Term Capital Gain $1.0480 - --------------------------------------------------------------------------------------------------------------- TOTAL $1.8378 - ---------------------------------------------------------------------------------------------------------------
PERFORMANCE THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------------------------- PRIMARY SHARES 1 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +29.04% +115.98% +179.34% - --------------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +29.04% +16.65% +10.82% - --------------------------------------------------------------------------------------------------------------- Value of $1,000,000 Investment 4 $1,290,417 $2,159,829 $2,793,367 - --------------------------------------------------------------------------------------------------------------- SERVICE SHARES INCEPTION (9/18/06) - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +13.31% - --------------------------------------------------------------------------------------------------------------- Aggregate Total Return 5 +13.31% - --------------------------------------------------------------------------------------------------------------- Value of $1,000,000 Investment 4 $1,133,066 - ---------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. 6 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. PRIMARY SHARES (1/1/97-12/31/06) $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
TIFI Foreign MSCI AC World MSCI AC Calendar Month Equity Series ex USA Index 6 MSCI EAFE Index 6 World Index 6 CPI 6 Incept 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 Jan-97 1,018,359.85 981,629.54 1,016,776.35 965,233.77 1,003,165.63 Feb-97 1,032,425.95 999,630.59 1,030,639.10 981,254.15 1,006,218.20 Mar-97 1,042,842.12 997,535.48 1,010,022.29 985,049.29 1,008,705.48 Apr-97 1,037,940.39 1,005,947.57 1,042,462.73 990,514.24 1,009,949.12 May-97 1,080,830.49 1,068,083.11 1,104,663.77 1,055,216.35 1,009,270.77 Jun-97 1,128,622.31 1,127,015.29 1,161,190.75 1,113,648.90 1,010,514.41 Jul-97 1,169,674.26 1,149,834.56 1,213,695.91 1,131,894.19 1,011,758.06 Aug-97 1,103,500.97 1,059,380.76 1,128,540.74 1,047,592.00 1,013,680.05 Sep-97 1,192,344.75 1,116,655.85 1,188,726.84 1,106,513.38 1,016,167.33 Oct-97 1,104,113.68 1,021,584.37 1,117,946.22 1,021,703.81 1,018,767.67 Nov-97 1,096,761.10 1,008,818.45 1,135,048.98 1,011,524.00 1,018,089.32 Dec-97 1,114,295.83 1,020,428.63 1,149,951.44 1,020,579.62 1,016,845.68 Jan-98 1,127,775.21 1,050,952.83 1,175,267.08 1,067,491.58 1,018,767.67 Feb-98 1,199,665.27 1,121,078.27 1,255,667.00 1,136,236.09 1,020,802.71 Mar-98 1,287,865.96 1,159,814.03 1,309,244.12 1,171,479.41 1,022,837.76 Apr-98 1,304,616.59 1,168,120.58 1,321,515.07 1,181,018.56 1,024,646.69 May-98 1,290,442.98 1,146,937.29 1,296,441.22 1,175,554.36 1,026,455.62 Jun-98 1,278,202.13 1,142,625.69 1,319,798.35 1,184,715.25 1,027,699.27 Jul-98 1,300,751.06 1,153,497.04 1,320,229.54 1,196,989.33 1,028,942.91 Aug-98 1,091,368.15 990,822.69 1,135,262.57 1,048,959.28 1,030,186.55 Sep-98 1,075,261.77 969,892.71 1,157,845.95 1,017,074.14 1,031,430.19 Oct-98 1,158,370.68 1,071,481.72 1,263,589.73 1,123,380.78 1,033,917.47 Nov-98 1,220,863.43 1,129,062.90 1,340,302.32 1,181,211.66 1,033,917.47 Dec-98 1,227,516.17 1,167,962.26 1,402,547.68 1,228,095.98 1,033,239.12 Jan-99 1,214,383.96 1,166,711.52 1,431,212.14 1,224,747.27 1,035,839.46 Feb-99 1,186,737.20 1,140,588.64 1,395,241.53 1,195,841.67 1,036,856.98 Mar-99 1,250,857.96 1,195,657.80 1,457,998.69 1,246,048.20 1,040,022.61 Apr-99 1,353,421.38 1,255,466.02 1,520,989.57 1,296,823.07 1,047,484.45 May-99 1,303,525.66 1,196,496.89 1,467,243.21 1,230,322.40 1,047,484.45 Jun-99 1,365,202.31 1,251,476.34 1,540,292.65 1,278,572.86 1,047,484.45 Jul-99 1,372,825.27 1,280,828.97 1,533,997.99 1,316,870.70 1,050,310.91 Aug-99 1,365,895.31 1,285,272.50 1,532,156.34 1,321,974.05 1,053,476.54 Sep-99 1,338,175.47 1,293,964.29 1,515,637.91 1,335,575.28 1,057,998.87 Oct-99 1,359,658.35 1,342,146.51 1,592,398.86 1,385,892.37 1,060,146.98 Nov-99 1,427,571.96 1,395,811.89 1,641,877.60 1,434,330.26 1,060,599.21 Dec-99 1,563,077.93 1,528,933.08 1,778,659.42 1,563,344.87 1,060,599.21 Jan-00 1,466,519.94 1,445,967.84 1,682,720.32 1,464,284.32 1,063,538.72 Feb-00 1,507,175.94 1,485,025.52 1,688,426.62 1,503,979.35 1,069,643.87 Mar-00 1,537,552.68 1,540,912.67 1,799,425.34 1,562,569.79 1,078,236.29 Apr-00 1,471,782.84 1,454,912.95 1,718,703.03 1,480,623.90 1,079,140.76 May-00 1,466,667.41 1,417,697.07 1,674,100.43 1,444,752.41 1,079,932.17 Jun-00 1,541,937.34 1,478,048.86 1,730,853.08 1,501,592.00 1,085,811.19 Jul-00 1,520,744.83 1,419,697.19 1,680,016.28 1,438,931.53 1,088,185.42 Aug-00 1,543,398.89 1,437,260.21 1,732,239.36 1,451,716.03 1,088,185.42 Sep-00 1,471,052.06 1,357,535.27 1,637,098.17 1,381,316.85 1,093,838.33 Oct-00 1,410,397.66 1,314,387.64 1,605,068.77 1,348,968.25 1,095,647.26 Nov-00 1,400,897.57 1,255,418.52 1,505,631.74 1,298,670.09 1,096,325.61 Dec-00 1,471,554.99 1,298,281.17 1,530,786.19 1,345,132.98 1,095,421.14 Jan-01 1,494,995.69 1,317,765.15 1,569,485.02 1,344,498.75 1,102,656.87 Feb-01 1,445,509.77 1,213,437.19 1,437,430.23 1,243,802.47 1,107,292.26 Mar-01 1,336,159.46 1,127,664.40 1,340,656.95 1,161,449.54 1,110,005.65 Apr-01 1,411,757.96 1,204,360.15 1,438,320.83 1,242,910.01 1,113,962.69 May-01 1,402,967.44 1,171,102.28 1,422,285.98 1,200,029.46 1,118,824.19 Jun-01 1,371,321.55 1,126,186.74 1,378,698.92 1,151,401.11 1,121,085.36 Jul-01 1,337,917.57 1,101,129.88 1,356,981.95 1,130,543.19 1,117,580.55 Aug-01 1,322,973.68 1,073,782.65 1,294,619.72 1,102,138.92 1,118,032.79 Sep-01 1,160,349.01 959,865.74 1,176,363.20 990,755.43 1,122,668.17 Oct-01 1,198,148.26 986,759.13 1,201,360.48 1,016,089.67 1,118,824.19 Nov-01 1,269,351.49 1,031,891.03 1,275,244.11 1,053,611.29 1,116,902.20 Dec-01 1,293,328.24 1,045,184.68 1,287,196.70 1,059,892.22 1,112,492.93 Jan-02 1,256,682.45 1,000,422.19 1,251,927.29 1,003,655.80 1,115,432.45 Feb-02 1,277,239.84 1,007,625.77 1,242,731.12 1,010,744.37 1,119,954.78 Mar-02 1,339,323.61 1,062,362.46 1,298,851.08 1,065,925.13 1,125,833.80 Apr-02 1,341,114.15 1,069,265.23 1,257,714.18 1,073,644.52 1,132,278.12 May-02 1,365,286.44 1,080,912.35 1,259,491.35 1,088,209.40 1,132,052.01 Jun-02 1,308,884.44 1,034,239.45 1,182,629.65 1,045,297.05 1,132,956.47 Jul-02 1,168,327.08 933,457.88 1,083,450.54 942,185.02 1,134,200.11 Aug-02 1,171,012.89 933,510.65 1,086,251.29 940,269.46 1,137,817.98 Sep-02 1,026,874.45 834,581.43 967,108.21 839,523.96 1,139,626.91 Oct-02 1,083,276.45 879,354.47 1,038,324.06 884,709.68 1,142,001.13 Nov-02 1,156,688.57 921,641.89 1,095,121.04 924,975.70 1,141,775.01 Dec-02 1,101,913.06 891,867.07 1,042,910.05 893,942.89 1,139,287.73 Jan-03 1,071,935.21 860,556.55 1,012,472.45 856,690.87 1,144,375.35 Feb-03 1,040,140.52 843,120.18 994,728.93 837,107.46 1,153,193.89 Mar-03 1,006,419.62 826,765.67 990,969.06 821,287.38 1,160,090.45 Apr-03 1,121,491.20 906,432.56 1,079,464.99 902,724.37 1,157,716.22 May-03 1,184,506.58 964,172.06 1,142,290.66 958,260.30 1,155,455.06 Jun-03 1,213,731.11 991,007.39 1,164,221.21 981,976.98 1,156,698.70 Jul-03 1,274,919.96 1,017,367.76 1,190,068.79 1,005,894.33 1,157,829.28 Aug-03 1,324,236.35 1,047,580.60 1,218,306.08 1,030,360.72 1,162,464.67 Sep-03 1,333,369.01 1,076,912.12 1,226,087.76 1,062,328.03 1,165,969.47 Oct-03 1,434,741.59 1,146,720.92 1,300,467.06 1,128,609.46 1,164,838.89 Nov-03 1,460,313.05 1,171,725.01 1,320,390.74 1,153,862.29 1,161,334.09 Dec-03 1,571,454.47 1,261,186.67 1,404,119.33 1,244,059.57 1,160,203.50 Jan-04 1,595,559.37 1,281,435.86 1,428,177.65 1,261,743.70 1,165,969.47 Feb-04 1,640,060.74 1,314,018.23 1,454,533.00 1,291,085.12 1,171,848.50 Mar-04 1,625,971.19 1,322,103.13 1,446,787.59 1,298,856.01 1,178,858.11 Apr-04 1,588,699.64 1,281,013.67 1,413,577.44 1,270,576.31 1,182,362.92 May-04 1,592,426.80 1,285,066.68 1,425,501.82 1,276,078.37 1,189,485.59 Jun-04 1,625,971.19 1,312,920.54 1,454,311.36 1,304,556.47 1,193,103.45 Jul-04 1,581,245.33 1,274,659.74 1,408,177.41 1,262,399.13 1,190,729.23 Aug-04 1,591,495.01 1,284,866.14 1,417,321.18 1,268,260.15 1,191,972.87 Sep-04 1,649,265.90 1,326,177.25 1,447,182.52 1,301,593.22 1,194,347.09 Oct-04 1,714,491.11 1,372,301.29 1,482,895.22 1,346,056.11 1,200,678.35 Nov-04 1,840,282.58 1,467,552.21 1,564,350.97 1,438,382.12 1,201,356.70 Dec-04 1,905,348.96 1,530,569.06 1,625,326.92 1,501,551.11 1,196,947.43 Jan-05 1,880,909.36 1,504,203.41 1,591,197.96 1,474,113.51 1,199,434.71 Feb-05 1,969,267.92 1,578,397.69 1,647,064.04 1,538,145.05 1,206,444.32 Mar-05 1,923,686.22 1,535,582.54 1,611,560.89 1,500,098.64 1,215,828.15 Apr-05 1,863,897.26 1,497,712.27 1,576,964.46 1,466,521.34 1,223,968.34 May-05 1,887,623.04 1,507,105.95 1,607,595.50 1,468,764.80 1,222,724.70 Jun-05 1,904,705.60 1,535,461.16 1,624,553.19 1,488,841.96 1,223,403.05 Jul-05 1,991,067.44 1,592,113.53 1,685,057.65 1,534,577.86 1,229,055.96 Aug-05 2,024,283.53 1,632,859.95 1,698,638.31 1,573,797.31 1,235,387.22 Sep-05 2,085,970.56 1,717,086.48 1,750,220.64 1,644,209.36 1,250,537.03 Oct-05 2,010,048.06 1,654,576.26 1,703,405.64 1,596,303.08 1,253,024.31 Nov-05 2,062,244.78 1,710,204.81 1,766,307.87 1,635,775.09 1,242,962.13 Dec-05 2,164,701.54 1,792,489.27 1,810,185.09 1,711,998.55 1,237,987.56 Jan-06 2,290,838.34 1,917,467.50 1,899,696.55 1,817,233.25 1,247,484.45 Feb-06 2,277,254.38 1,911,931.56 1,897,677.59 1,813,511.19 1,249,971.74 Mar-06 2,333,469.51 1,967,465.13 1,938,415.54 1,874,170.91 1,256,868.29 Apr-06 2,432,370.23 2,068,911.65 2,003,913.00 1,965,066.41 1,267,608.82 May-06 2,338,365.58 1,973,528.81 1,926,603.99 1,891,117.83 1,273,940.08 Jun-06 2,339,344.80 1,971,560.35 1,926,555.63 1,891,811.13 1,276,427.36 Jul-06 2,384,388.69 1,991,730.39 1,940,180.62 1,910,755.01 1,280,158.28 Aug-06 2,451,954.53 2,048,182.22 1,991,460.71 1,963,813.86 1,282,645.56 Sep-06 2,497,977.64 2,049,512.11 2,015,212.76 1,967,231.11 1,276,314.30 Oct-06 2,600,795.22 2,132,968.14 2,091,191.91 2,043,919.92 1,269,417.75 Nov-06 2,693,820.65 2,210,407.99 2,151,341.75 2,105,569.80 1,267,495.76 Dec-06 2,793,367.25 2,279,293.26 2,199,893.61 2,171,798.22 1,274,392.31
AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------- PRIMARY SHARES 12/31/06 - ---------------------------------------- 1-Year +29.04% - ---------------------------------------- 5-Year +16.65% - ---------------------------------------- 10-Year +10.82% - ---------------------------------------- ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 1. Past expense reductions by the Fund's manager and administrator increased the Fund's total returns. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. 5. Aggregate total return represents the change in value of an investment over the period indicated. Since the share class has existed for less than one year, average annual total returns are not available. 6. Source: Standard & Poor's Micropal. The MSCI AC World ex USA Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets, excluding the U.S. and Canada. The MSCI AC World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. Annual Report | 7 Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = $8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING PRIMARY SHARES VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,194.10 $4.42 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.17 $4.08 - ----------------------------------------------------------------------------------------------------------------- SERVICE SHARES - ----------------------------------------------------------------------------------------------------------------- Actual (9/18/06-12/31/06) $1,000 $1,133.10 $2.43 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.17 $4.08 - -----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (Primary Shares: 0.80% and Service Shares: 0.80%), multiplied by the average account value over the period, multiplied by 184/365 for Primary Shares (Actual and Hypothetical) and Service Shares (Hypothetical only) to reflect the one-half year period. For actual Service Shares expenses, the multiplier is 104/365 to reflect the number of days since inception. Annual Report | 9 Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS FOREIGN EQUITY SERIES
---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, PRIMARY SHARES 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 22.31 $ 20.27 $ 16.95 $ 12.13 $ 14.47 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b ......................... 0.55 0.42 0.33 0.25 0.23 Net realized and unrealized gains (losses) ...... 5.86 2.32 3.25 4.87 (2.37) ---------------------------------------------------------------------------- Total from investment operations ................. 6.41 2.74 3.58 5.12 (2.14) ---------------------------------------------------------------------------- Less distributions from: Net investment income ........................... (0.74) (0.66) (0.26) (0.30) (0.20) Net realized gains .............................. (1.31) (0.04) -- -- -- ---------------------------------------------------------------------------- Total distributions .............................. (2.05) (0.70) (0.26) (0.30) (0.20) ---------------------------------------------------------------------------- Redemption fees .................................. -- c -- c -- c -- -- ---------------------------------------------------------------------------- Net asset value, end of year ..................... $ 26.67 $ 22.31 $ 20.27 $ 16.95 $ 12.13 ============================================================================ Total return ..................................... 29.04% 13.61% 21.25% 42.61% (14.80)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $7,311,236 $6,245,721 $5,658,170 $4,642,764 $3,164,910 Ratios to average net assets: Expenses ........................................ 0.80% d 0.81% d 0.82% d 0.83% 0.83% Net investment income ........................... 2.25% 2.01% 1.89% 1.85% 1.68% Portfolio turnover rate .......................... 7.59% 12.97% 18.25% 8.93% 16.26%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Amount rounds to less than $0.01 per share. d Benefit of expense reduction rounds to less than 0.01%. 10 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FOREIGN EQUITY SERIES ------------ PERIOD ENDED DECEMBER 31, SERVICE SHARES 2006 d ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 25.15 -------- Income from investment operations a: Net investment income b ..................................... 0.05 Net realized and unrealized gains (losses) .................. 3.31 -------- Total from investment operations ............................. 3.36 -------- Less distributions from: Net investment income ....................................... (0.66) Net realized gains .......................................... (1.18) -------- Total distributions .......................................... (1.84) -------- Redemption fees .............................................. -- e -------- Net asset value, end of period ............................... $ 26.67 ======== Total return c ............................................... 13.31% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............................ $ 11 Ratios to average net assets: Expenses .................................................... 0.80% f,g Net investment income ....................................... 2.25% g Portfolio turnover rate ...................................... 7.59% a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return is not annualized for periods less than a year. d For the period September 18, 2006 (effective date) to December 31, 2006. e Amount rounds to less than $0.01 per share. f Benefit of expense reduction rounds to less than 0.01%. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 11 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- ---------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 95.6% COMMON STOCKS 95.1% AUSTRALIA 2.4% Alumina Ltd. ............................... Metals & Mining 6,912,015 $ 34,593,225 National Australia Bank Ltd. ............... Commercial Banks 2,903,680 92,603,466 Qantas Airways Ltd. ........................ Airlines 11,228,850 46,270,363 -------------- 173,467,054 -------------- BERMUDA 1.4% ACE Ltd. ................................... Insurance 1,108,930 67,167,890 XL Capital Ltd., A ......................... Insurance 450,020 32,410,440 -------------- 99,578,330 -------------- BRAZIL 0.5% Embraer-Empresa Brasileira de Aeronautica SA, ADR ...................... Aerospace & Defense 980,000 40,601,400 -------------- CANADA 1.9% Alcan Inc. ................................. Metals & Mining 740,843 36,099,606 BCE Inc. (CAD Traded) ...................... Diversified Telecommunication Services 2,259,189 60,878,382 BCE Inc. (USD Traded) ...................... Diversified Telecommunication Services 5,416 146,232 Husky Energy Inc. .......................... Oil, Gas & Consumable Fuels 578,590 38,749,765 -------------- 135,873,985 -------------- CHINA 1.7% China Mobile (Hong Kong) Ltd. .............. Wireless Telecommunication Services 8,492,000 73,357,938 China Telecom Corp. Ltd., H ................ Diversified Telecommunication Services 89,754,000 49,150,876 -------------- 122,508,814 -------------- DENMARK 0.8% a Vestas Wind Systems AS ..................... Electrical Equipment 1,451,613 61,348,970 -------------- FINLAND 2.1% Stora Enso OYJ, R (EUR/FIM Traded) ......... Paper & Forest Products 1,673,625 26,511,223 Stora Enso OYJ, R (SEK Traded) ............. Paper & Forest Products 2,814,636 44,368,970 UPM-Kymmene OYJ ............................ Paper & Forest Products 3,278,200 82,739,653 -------------- 153,619,846 -------------- FRANCE 8.9% Accor SA ................................... Hotels, Restaurants & Leisure 494,470 38,314,963 AXA SA ..................................... Insurance 2,311,148 93,568,979 Compagnie Generale des Etablissements Michelin, B .............................. Auto Components 1,341,820 128,417,032 France Telecom SA .......................... Diversified Telecommunication Services 3,183,580 88,042,052 Sanofi-Aventis ............................. Pharmaceuticals 1,236,450 114,170,693 Sanofi-Aventis, ADR ........................ Pharmaceuticals 6,813 314,556 Suez SA .................................... Multi-Utilities 1,478,380 76,558,735 Suez SA, ADR ............................... Multi-Utilities 7,250 376,710 a Thomson SA ................................. Household Durables 2,572,370 50,289,678 Total SA, B ................................ Oil, Gas & Consumable Fuels 806,748 58,199,389 -------------- 648,252,787 -------------- GERMANY 10.0% BASF AG .................................... Chemicals 534,020 52,228,491 BASF AG, ADR ............................... Chemicals 6,430 625,060
12 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) GERMANY (CONTINUED) Bayerische Motoren Werke AG ................ Automobiles 1,647,950 $ 94,846,406 Celesio AG ................................. Health Care Providers & Services 2,357,104 125,424,363 Deutsche Post AG ........................... Air Freight & Logistics 3,524,380 106,538,989 E.ON AG .................................... Electric Utilities 956,750 130,450,908 a Infineon Technologies AG ................... Semiconductors & Semiconductor Equipment 4,780,650 67,272,027 Muenchener Rueckversicherungs- ............. Gesellschaft AG .......................... Insurance 321,287 55,559,050 Siemens AG ................................. Industrial Conglomerates 978,790 97,679,107 -------------- 730,624,401 -------------- HONG KONG 2.0% Cheung Kong (Holdings) Ltd. ................ Real Estate 2,550,000 31,386,784 Cheung Kong (Holdings) Ltd., ADR ........... Real Estate 31,535 388,150 Hutchison Whampoa Ltd. ..................... Industrial Conglomerates 5,342,550 54,289,810 Hutchison Whampoa Ltd., ADR ................ Industrial Conglomerates 4,795 243,629 Swire Pacific Ltd., A ...................... Real Estate 5,440,500 58,432,319 Swire Pacific Ltd., B ...................... Real Estate 154,500 315,389 -------------- 145,056,081 -------------- INDIA 4.2% Housing Development Finance Corp. Ltd. ..... Thrifts & Mortgage Finance 3,668,470 135,092,666 ICICI Bank Ltd. ............................ Commercial Banks 4,935,848 99,623,236 Satyam Computer Services Ltd. .............. IT Services 6,695,072 73,446,222 Satyam Computer Services Ltd., ADR ......... IT Services 95,400 2,290,554 -------------- 310,452,678 -------------- ISRAEL 0.6% a Check Point Software Technologies Ltd. ..... Software 2,073,240 45,445,421 -------------- ITALY 2.2% Eni SpA .................................... Oil, Gas & Consumable Fuels 2,433,040 81,834,990 Mediaset SpA ............................... Media 2,998,145 35,579,733 UniCredito Italiano SpA .................... Commercial Banks 5,363,030 47,007,663 -------------- 164,422,386 -------------- JAPAN 4.8% FUJIFILM Holdings Corp. .................... Leisure Equipment & Products 1,053,900 43,294,586 Hitachi Ltd. ............................... Electronic Equipment & Instruments 6,516,000 40,617,230 Hitachi Ltd., ADR .......................... Electronic Equipment & Instruments 2,275 141,869 Mitsubishi UFJ Financial Group Inc. ........ Commercial Banks 2,836 35,022,640 NEC Corp. .................................. Computers & Peripherals 3,873,000 18,513,353 NEC Corp., ADR ............................. Computers & Peripherals 14,625 70,200 Nintendo Co. Ltd. .......................... Software 171,900 44,623,094 Nomura Holdings Inc. ....................... Capital Markets 1,731,200 32,650,431 Sompo Japan Insurance Inc. ................. Insurance 3,473,000 42,451,506 Sony Corp. ................................. Household Durables 1,023,100 43,834,250 Sony Corp., ADR ............................ Household Durables 4,405 188,666 Takeda Pharmaceutical Co. Ltd. ............. Pharmaceuticals 763,500 52,403,033 -------------- 353,810,858 --------------
Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) MEXICO 1.1% Telefonos de Mexico SA de CV, L, ADR ....... Diversified Telecommunication Services 2,933,954 $ 82,913,540 -------------- NETHERLANDS 6.2% ING Groep NV ............................... Diversified Financial Services 2,548,410 112,997,716 ING Groep NV, ADR .......................... Diversified Financial Services 12,965 572,664 Koninklijke Philips Electronics NV ......... Household Durables 2,954,061 111,408,944 Koninklijke Philips Electronics NV, N.Y. shs. ................................ Household Durables 11,935 448,517 SBM Offshore NV ............................ Energy Equipment & Services 2,308,110 79,369,673 Unilever NV ................................ Food Products 3,797,500 103,766,815 Unilever NV, N.Y. shs. ..................... Food Products 7,620 207,645 Wolters Kluwer NV .......................... Media 1,499,375 43,127,855 -------------- 451,899,829 -------------- NORWAY 1.4% Telenor ASA ................................ Diversified Telecommunication Services 5,272,050 99,132,058 -------------- PORTUGAL 0.8% Portugal Telecom SGPS SA ................... Diversified Telecommunication Services 4,496,290 58,403,621 -------------- SINGAPORE 1.6% DBS Group Holdings Ltd. .................... Commercial Banks 5,624,185 82,889,290 DBS Group Holdings Ltd., ADR ............... Commercial Banks 7,605 448,330 Singapore Telecommunications Ltd. .......... Diversified Telecommunication Services 16,342,000 34,955,010 -------------- 118,292,630 -------------- SOUTH KOREA 6.5% Kookmin Bank ............................... Commercial Banks 900,573 72,530,019 a Kookmin Bank, ADR .......................... Commercial Banks 216,498 17,458,399 a Korea Electric Power Corp. ................. Electric Utilities 1,146,540 52,272,361 a Korea Electric Power Corp., ADR ............ Electric Utilities 12,195 276,948 a KT Corp., ADR .............................. Diversified Telecommunication Services 903,955 22,915,259 LG Electronics Inc. ........................ Household Durables 938,340 55,493,226 POSCO ...................................... Metals & Mining 224,020 74,432,452 POSCO, ADR ................................. Metals & Mining 4,080 337,293 Samsung Electronics Co. Ltd. ............... Semiconductors & Semiconductor Equipment 270,520 178,310,495 -------------- 474,026,452 -------------- SPAIN 5.1% Banco Santander Central Hispano SA ......... Commercial Banks 4,618,890 86,213,919 Endesa SA .................................. Electric Utilities 1,042,932 49,327,961 Iberdrola SA, Br. .......................... Electric Utilities 727,858 31,821,991 Repsol YPF SA .............................. Oil, Gas & Consumable Fuels 2,520,610 87,176,074 Telefonica SA .............................. Diversified Telecommunication Services 5,433,139 115,612,878 Telefonica SA, ADR ......................... Diversified Telecommunication Services 8,892 566,865 -------------- 370,719,688 -------------- SWEDEN 4.8% Atlas Copco AB, A .......................... Machinery 3,695,490 124,060,413 Nordea Bank AB, FDR ........................ Commercial Banks 8,593,898 132,956,069 Securitas AB, B ............................ Commercial Services & Supplies 1,926,540 29,877,230 a Securitas Direct AB, B ..................... Diversified Consumer Services 1,926,540 6,101,985
14 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) SWEDEN (CONTINUED) a Securitas Systems AB ..................... Commercial Services & Supplies 1,926,540 $ 7,789,169 Swedbank AB, A ........................... Commercial Banks 1,405,980 50,996,326 -------------- 351,781,192 -------------- SWITZERLAND 3.8% Adecco SA ................................ Commercial Services & Supplies 1,031,040 70,439,522 Lonza Group AG ........................... Chemicals 420,110 36,303,462 Nestle SA ................................ Food Products 267,320 94,989,586 Nestle SA, ADR ........................... Food Products 2,310 205,209 Swiss Reinsurance Co. .................... Insurance 922,362 78,418,369 Swiss Reinsurance Co., ADR ............... Insurance 3,295 280,138 UBS AG ................................... Capital Markets 9,510 573,738 -------------- 281,210,024 -------------- TAIWAN 0.7% Chunghwa Telecom Co. Ltd., ADR ........... Diversified Telecommunication Services 1,247,929 24,621,639 Compal Electronics Inc., GDR ............. Computers & Peripherals 1,135,589 5,178,286 b Compal Electronics Inc., GDR, 144A ....... Computers & Peripherals 4,284,621 19,537,872 -------------- 49,337,797 -------------- UNITED KINGDOM 19.3% Alliance Boots PLC ....................... Food & Staples Retailing 2,235,880 36,692,963 Amvescap PLC ............................. Capital Markets 3,236,560 37,776,367 BAE Systems PLC .......................... Aerospace & Defense 9,364,718 78,079,969 BP PLC ................................... Oil, Gas & Consumable Fuels 4,940,110 54,902,580 a British Airways PLC ...................... Airlines 7,028,710 72,608,650 a British Airways PLC, ADR ................. Airlines 8,225 849,396 British Sky Broadcasting Group PLC ....... Media 6,149,950 62,868,393 Cadbury Schweppes PLC .................... Food Products 5,278,910 56,496,910 Compass Group PLC ........................ Hotels, Restaurants & Leisure 14,860,370 84,395,228 GlaxoSmithKline PLC ...................... Pharmaceuticals 4,105,410 108,055,301 HSBC Holdings PLC ........................ Commercial Banks 3,254,421 59,656,959 HSBC Holdings PLC, ADR ................... Commercial Banks 3,790 347,354 National Grid PLC ........................ Multi-Utilities 4,010,399 57,921,511 Pearson PLC .............................. Media 3,511,000 53,046,536 a Rolls-Royce Group PLC .................... Aerospace & Defense 13,555,704 118,863,344 a,c Rolls-Royce Group PLC, B ................. Aerospace & Defense 497,494,336 988,884 Royal Bank of Scotland Group PLC ......... Commercial Banks 2,923,660 114,110,192 Royal Dutch Shell PLC, B, ADR ............ Oil, Gas & Consumable Fuels 1,415,307 100,699,093 Shire PLC ................................ Pharmaceuticals 2,293,320 47,560,991 Shire PLC, ADR ........................... Pharmaceuticals 8,590 530,518 Smiths Group PLC ......................... Industrial Conglomerates 2,980,820 57,878,697 Standard Chartered PLC ................... Commercial Banks 2,715,610 79,346,266 Vodafone Group PLC ....................... Wireless Telecommunication Services 31,957,073 88,555,126 Yell Group PLC ........................... Media 3,309,540 36,943,051 -------------- 1,409,174,279 --------------
Annual Report | 15 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- SHARES/ FOREIGN EQUITY SERIES INDUSTRY PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) UNITED STATES 0.3% News Corp., A .............................. Media 1,089,919 $ 23,411,460 -------------- TOTAL COMMON STOCKS (COST $3,544,073,765) .................... 6,955,365,581 -------------- PREFERRED STOCKS (COST $31,484,036) 0.5% BRAZIL 0.5% Tele Norte Leste Participacoes SA, ADR, pfd. ................................ Diversified Telecommunication Services 2,195,300 32,753,876 -------------- TOTAL LONG TERM INVESTMENTS (COST $3,575,557,801) .................... 6,988,119,457 -------------- SHORT TERM INVESTMENTS 4.2% UNITED STATES (COST $163,947,258) 2.2% d U.S. Treasury Bills, 1/04/07 - 5/24/07 ..... $165,505,000 164,023,821 -------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUND (COST $3,739,505,059) ............... 7,152,143,278 -------------- UNITED STATES (COST $145,485,554) 2.0% e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% ............ 145,485,554 145,485,554 -------------- TOTAL INVESTMENTS (COST $3,884,990,613) 99.8% .............. 7,297,628,832 OTHER ASSETS, LESS LIABILITIES 0.2% ........ 13,618,165 -------------- NET ASSETS 100.0% .......................... $7,311,246,997 ==============
CURRENCY ABBREVIATIONS CAD - Canadian Dollar EUR - Euro FIM - Finnish Markka SEK - Swedish Krona USD - United States Dollar SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FDR - Foreign Depository Receipt GDR - Global Depository Receipt a Non-income producing for the twelve months ended December 31, 2006. b Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At December 31, 2006, the value of this security was $19,537,872, representing 0.27% of net assets. c See Note 9 regarding restricted securities. d The security is traded on a discount basis with no stated coupon rate. e See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 16 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2006 -------------- FOREIGN EQUITY SERIES -------------- Assets: Investments in securities: Cost - Unaffiliated issuers ................................ $3,739,505,059 Cost - Sweep Money Fund (Note 7) ........................... 145,485,554 -------------- Total cost of investments .................................. $3,884,990,613 ============== Value - Unaffiliated issuers ............................... $7,152,143,278 Value - Sweep Money Fund (Note 7) .......................... 145,485,554 -------------- Total value of investments ................................. 7,297,628,832 Cash ........................................................ 171,008 Receivables: Capital shares sold ........................................ 41,227,863 Dividends .................................................. 6,471,928 -------------- Total assets ......................................... 7,345,499,631 -------------- Liabilities: Payables: Capital shares redeemed .................................... 24,664,809 Affiliates ................................................. 4,572,854 Deferred tax ................................................ 3,825,527 Accrued expenses and other liabilities ...................... 1,189,444 -------------- Total liabilities .................................... 34,252,634 -------------- Net assets, at value .............................. $7,311,246,997 ============== Net assets consist of: Paid-in capital ............................................. $3,969,041,404 Distributions in excess of net investment income ............ (102,604,468) Net unrealized appreciation (depreciation) .................. 3,408,949,345 Accumulated net realized gain (loss) ........................ 35,860,716 -------------- Net assets, at value .............................. $7,311,246,997 ============== PRIMARY SHARES: Net assets, at value ........................................ $7,311,236,393 ============== Shares outstanding .......................................... 274,123,629 ============== Net asset value per share a ................................. $ 26.67 ============== SERVICE SHARES: Net assets, at value ........................................ $ 10,604 ============== Shares outstanding (excluding fractional shares) ............ 397 ============== Net asset value per share a ................................. $ 26.67 ============== a Redemption price is equal to net asset value less redemption fees retained by the Fund. Annual Report | The accompanying notes are an integral part of these financial statements. | 17 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2006
-------------- FOREIGN EQUITY SERIES -------------- Investment income: Dividends: (net of foreign taxes of $17,270,147) Unaffiliated issuers ............................................................ $ 186,840,685 Sweep Money Fund (Note 7) ....................................................... 6,974,376 Interest ......................................................................... 9,047,904 Other income (Note 10) ........................................................... 222,204 -------------- Total investment income ................................................... 203,085,169 -------------- Expenses: Management fees (Note 3a) ........................................................ 44,644,167 Administrative fees (Note 3b) .................................................... 5,399,820 Transfer agent fees (Note 3c) .................................................... 24,493 Custodian fees (Note 4) .......................................................... 2,664,144 Reports to shareholders .......................................................... 48,115 Registration and filing fees ..................................................... 110,127 Professional fees ................................................................ 168,937 Directors' fees and expenses ..................................................... 157,723 Other ............................................................................ 154,266 -------------- Total expenses ............................................................ 53,371,792 Expense reductions (Note 4) ............................................... (296,353) -------------- Net expenses ........................................................... 53,075,439 -------------- Net investment income ............................................... 150,009,730 -------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ..................................................................... 340,362,019 Foreign currency transactions ................................................... 902,822 -------------- Net realized gain (loss) .................................................. 341,264,841 -------------- Net change in unrealized appreciation (depreciation) on: Investments ..................................................................... 1,217,102,154 Translation of assets and liabilities denominated in foreign currencies ......... 214,007 Change in deferred taxes on unrealized appreciation (depreciation) ............... (3,825,527) -------------- Net change in unrealized appreciation (depreciation) ...................... 1,213,490,634 -------------- Net realized and unrealized gain (loss) ........................................... 1,554,755,475 -------------- Net increase (decrease) in net assets resulting from operations ................... $1,704,765,205 ==============
18 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------- FOREIGN EQUITY SERIES YEAR ENDED DECEMBER 31, -------------------------------- 2006 2005 -------------------------------- Increase (decrease) in net assets: Operations: Net investment income ....................................................................... $ 150,009,730 $ 116,631,880 Net realized gain (loss) from investments and foreign currency transactions ................. 341,264,841 308,568,945 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes ..................... 1,213,490,634 328,701,779 -------------------------------- Net increase (decrease) in net assets resulting from operations ........................ 1,704,765,205 753,902,604 -------------------------------- Distributions to shareholders from: Net investment income: Primary Shares .............................................................................. (191,899,440) (183,533,480) Service Shares .............................................................................. (262) -- Net realized gains: Primary Shares .............................................................................. (343,352,663) (10,751,350) Service Shares .............................................................................. (469) -- -------------------------------- Total distributions to shareholders ........................................................... (535,252,834) (194,284,830) -------------------------------- Capital share transactions (Note 2) Primary Shares .............................................................................. (104,014,174) 27,925,243 Service Shares .............................................................................. 10,000 -- -------------------------------- Total capital share transactions .............................................................. (104,004,174) 27,925,243 -------------------------------- Redemption fees ............................................................................... 18,250 7,845 -------------------------------- Net increase (decrease) in net assets .................................................. 1,065,526,447 587,550,862 Net assets: Beginning of year ............................................................................ 6,245,720,550 5,658,169,688 -------------------------------- End of year .................................................................................. $7,311,246,997 $6,245,720,550 ================================ Distributions in excess of net investment income included in net assets: End of year .................................................................................. $ (102,604,468) $ (61,250,841) ================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 19 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment Company Act of 1940, as amended, (the 1940 Act) as an open-end investment company, consisting of three separate funds. The Foreign Equity Series (the Fund) included in this report is diversified. The Fund offers two classes of shares: Primary and Service shares. Effective September 18, 2006, the Fund began offering a new class of shares, Service shares. Each class of shares differs by its voting rights on matters affecting a single class. Unlike Primary shares, Service shares bear a sub-transfer agency fee of up to 0.15% of the average daily net assets. The financial statements of the remaining funds in TIFI are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of 20 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. The Fund is subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 22 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in class-level expenses may result in payment of different per share distributions by class. Common expenses incurred by TIFI are allocated among the funds based on the ratio of net assets of each Fund to the combined net assets of TIFI. Fund specific expenses are charged directly to the fund that incurred the expense. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. H. GUARANTEES AND INDEMNIFICATIONS Under TIFI's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, TIFI, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote. Annual Report | 23 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 2. CAPITAL STOCK At December 31, 2006, there were 1.14 billion shares of TIFI authorized ($0.01 par value), of which 755 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ----------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------- PRIMARY SHARES: Shares sold ...................... 43,115,685 $ 1,054,636,410 43,810,911 $ 915,696,969 Shares issued in reinvestment of distributions ................ 18,348,681 477,022,238 7,621,447 166,418,307 Shares redeemed .................. (67,262,525) (1,635,672,822) (50,689,026) (1,054,190,033) ----------------------------------------------------------------------- Net increase (decrease) .......... (5,798,159) $ (104,014,174) 743,332 $ 27,925,243 ======================================================================= SERVICE SHARES: a Shares sold ...................... 397 $ 10,000 -------------------------------- Net increase (decrease) .......... 397 $ 10,000 ================================
a For the period September 18, 2006 (effective date) to December 31, 2006. 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and/or directors of the following subsidiaries:
- --------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - --------------------------------------------------------------------------------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.700% Up to and including $1 billion 0.680% Over $1 billion, up to and including $5 billion 0.660% Over $5 billion, up to and including $10 billion 0.640% Over $10 billion, up to and including $15 billion 0.620% Over $15 billion, up to and including $20 billion 0.600% In excess of $20 billion 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT Services based on the aggregate average daily net assets of certain funds within TIFI as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $24,493, of which $19,735 was retained by Investor Services. D. OTHER AFFILIATED TRANSACTIONS At December 31, 2006, Franklin Advisers, Inc. (Advisers) owned 100% of the Fund's outstanding Service shares. Shares held by Advisers are not subject to sub-transfer agency fees. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2006, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES The tax character of distributions paid during the years ended December 31, 2006 and 2005, was as follows: ---------------------------- 2006 2005 ---------------------------- Distributions paid from: Ordinary income ................. $225,949,128 $183,533,480 Long term capital gain .......... 309,303,706 10,751,350 ---------------------------- $535,252,834 $194,284,830 ============================ Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares. Annual Report | 25 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 5. INCOME TAXES (CONTINUED) Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At December 31, 2006, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments ............................... $4,005,725,689 ============== Unrealized appreciation ........................... $3,331,440,425 Unrealized depreciation ........................... (39,537,282) -------------- Net unrealized appreciation (depreciation) ........ $3,291,903,143 ============== Undistributed ordinary income ..................... $ 17,815,202 Undistributed long term capital gains ............. 36,176,122 -------------- Distributable earnings ............................ $ 53,991,324 ============== 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2006, aggregated $483,964,878 and $1,021,604,684, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 26 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 9. RESTRICTED SECURITIES The Fund may invest in securities that are restricted under the Securities Act of 1933 (the 1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs. At December 31, 2006, the Fund held an investment in a restricted security, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Fund's Board of Directors as reflecting fair value, as follows:
- ------------------------------------------------------------------------------------------------------------- ACQUISITION SHARES ISSUER DATE COST VALUE - ------------------------------------------------------------------------------------------------------------- 497,494,336 Rolls-Royce Group PLC, B (0.01% OF NET ASSETS) .... 10/11/06 $945,592 $988,884 --------
10. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares ("marketing support"), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 23, 2006, the SEC approved the proposed plan of distribution for the marketing support settlement, and disbursement of the settlement monies to the designated funds, in accordance with the terms and conditions of that settlement and plan, was completed in September 2006, and is recorded as other income. The plan of distribution for the market timing settlement is currently under review by the SEC staff. After publication of notice of the plan and a 30-day comment period, the proposed plan of distribution will be submitted to the SEC for approval. Following the SEC's approval of the plan of distribution, with modifications as appropriate, distribution of the settlement monies will begin in accordance with the terms and conditions of the settlement and plan. Annual Report | 27 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 10. REGULATORY MATTERS (CONTINUED) In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above, as well as to allegedly excessive commissions and advisory and distribution fees. The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. 11. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. On December 22, 2006, the Securities and Exchange Commission extended the implementation date to no later than the last net asset value calculation in the first semi-annual reporting period in 2007. The Fund is currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Fund believes the adoption of SFAS 157 will have no material impact on its financial statements. 28 | Annual Report Templeton Institutional Funds, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - FOREIGN EQUITY SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Equity Series (one of the funds constituting the Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 22, 2007 Annual Report | 29 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) FOREIGN EQUITY SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $306,316,774 as a long term capital gain dividend for the fiscal year ended December 31, 2006. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $34,045,245 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006. Under Section 854(b)(2) of the Code, the Fund designates 0.06% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2006. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $190,280,833 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2006. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $16,024,625 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006. At December 31, 2006, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 14, 2006, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund to shareholders of record. 30 | Annual Report Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES Record Date: 12/14/2006 - -------------------------------------------------------------------------------- FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS COUNTRY PER SHARE PER SHARE PER SHARE - -------------------------------------------------------------------------------- Australia .............. $0.0000 $0.0209 $0.0209 Bermuda ................ 0.0000 0.0054 0.0054 Brazil ................. 0.0003 0.0023 0.0023 Canada ................. 0.0025 0.0295 0.0295 China .................. 0.0000 0.0070 0.0027 Finland ................ 0.0032 0.0170 0.0121 France ................. 0.0095 0.0535 0.0535 Germany ................ 0.0100 0.0624 0.0624 Hong Kong .............. 0.0000 0.0149 0.0000 India .................. 0.0000 0.0093 0.0044 Italy .................. 0.0031 0.0164 0.0164 Japan .................. 0.0012 0.0137 0.0137 Mexico ................. 0.0000 0.0066 0.0066 Netherlands ............ 0.0075 0.0394 0.0394 Norway ................. 0.0010 0.0053 0.0053 Portugal ............... 0.0016 0.0084 0.0084 Singapore .............. 0.0000 0.0069 0.0000 South Africa ........... 0.0000 0.0025 0.0025 South Korea ............ 0.0041 0.0195 0.0195 Spain .................. 0.0090 0.0477 0.0477 Sweden ................. 0.0084 0.0463 0.0463 Switzerland ............ 0.0028 0.0150 0.0150 Taiwan ................. 0.0023 0.0086 0.0049 United Kingdom ......... 0.0000 0.1685 0.1655 -------------------------------------------- TOTAL .................. $0.0665 $0.6270 $0.5844 ============================================ Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or, as a tax deduction. Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income. 1 Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. 1 Annual Report | 31 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES In January 2007, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2006 individual income tax returns. 1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax brackets). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. 32 | Annual Report Templeton Institutional Funds, Inc. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1992 142 Director, Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (1944) Director Since 1990 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1996 143 Director, Hess Corporation (formerly 500 East Broward Blvd. Amerada Hess Corporation) Suite 2100 (exploration and refining of oil and Fort Lauderdale, FL 33394-3091 gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ DAVID W. NIEMIEC (1949) Director Since 2005 20 Director, Emeritus Corporation 500 East Broward Blvd. (assisted living) and OSI Suite 2100 Pharmaceuticals, Inc. Fort Lauderdale, FL 33394-3091 (pharmaceutical products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon Read, & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2003 103 Director, Hess Corporation (formerly 500 East Broward Blvd. Amerada Hess Corporation) Suite 2100 (exploration and refining of oil and Fort Lauderdale, FL 33394-3091 gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly Foundation Health) (integrated managed care), The Hertz Corporation (car rental), Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly Commonwealth Edison), UAL Corporation (airlines) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation. - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since 2005 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (1930) Director Since 1993 10 Director, Hess Corporation (formerly 500 East Broward Blvd. Amerada Hess Corporation) Suite 2100 (exploration and refining of oil and Fort Lauderdale, FL 33394-3091 gas) and Weatherford International, Ltd. (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003) and Total Logistics, Inc. (operating and investment business) (until 2005). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Director and Vice 142 None One Franklin Parkway Chairman of President since San Mateo, CA 94403-1906 the Board and 1993 and Vice President Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance since Compliance February 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Executive Fort Lauderdale, FL 33394-3091 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; Vice President, Templeton Global Advisors Limited and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor The Chater House 8 Connaught Road Central Hong Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ GARY P. MOTYL (1952) President Since 2005 Not Applicable Not Applicable 500 East Broward Blvd. and Chief Suite 2100 Executive Fort Lauderdale, FL 33394-3091 Officer - Investment Management PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GALEN VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Officer and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Nicholas F. Brady is considered to be an interested person of the Fund under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Prior to December 31, 2006, S. Joseph Fortunato and Gordon S. Macklin ceased to be a director of the Fund. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT COMMITTEE MEMBER OF HESS CORPORATION (FORMERLY, AMERADA HESS CORPORATION), A FORMER DIRECTOR AND AUDIT COMMITTEE MEMBER OF WHITE MOUNTAINS INSURANCE GROUP, LTD. AND FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. 38 | Annual Report Templeton Institutional Funds, Inc. SHAREHOLDER INFORMATION FOREIGN EQUITY SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 39 This page intentionally left blank. [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN(R) TEMPLETON(R) 600 Fifth Avenue INSTITUTIONAL New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 franklintempletoninstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges, and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT454 A2006 02/07 FOREIGN SMALLER COMPANIES SERIES ANNUAL REPORT 12/31/2006 - -------------------------------------------------------------------------------- THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- -------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. -------------------------------------- Foreign Smaller Companies Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY Contents ANNUAL REPORT TIFI Foreign Smaller Companies Series .................................... 1 Performance Summary ...................................................... 6 Your Fund's Expenses ..................................................... 8 Financial Highlights and Statement of Investments ........................ 10 Financial Statements ..................................................... 16 Notes to Financial Statements ............................................ 19 Report of Independent Registered Public Accounting Firm .................. 27 Tax Designation .......................................................... 28 Board Members and Officers ............................................... 31 Shareholder Information .................................................. 37 - -------------------------------------------------------------------------------- Annual Report TIFI Foreign Smaller Companies Series YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Foreign Smaller Companies Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of smaller companies located outside the U.S., including emerging markets. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Templeton Institutional Funds, Inc. (TIFI) Foreign Smaller Companies Series' (the Fund's) annual report for the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW The Fund posted a +28.78% cumulative total return for the 12-month period ended December 31, 2006. The Fund outperformed its benchmark, the S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index, which returned +23.11% during the same period. 1 Please note that index performance information is provided for reference and that we do not attempt to track the index but rather undertake investments on the basis of fundamental research. You can find more of the Fund's performance data in the Performance Summary beginning on page 6. 1. Source: Standard & Poor's Micropal. The S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure performance of global developed and emerging market equity securities, excluding the U.S., with market capitalizations less than $2 billion. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. - -------------------------------------------------------------------------------- - ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE - ----------------------------------------------------- Annual Report | 1 ECONOMIC AND MARKET OVERVIEW The global economy grew in 2006, although gross domestic product growth slowed in the U.S. while it accelerated in Europe. The economic drivers remained consistent over the past four years: strong corporate and consumer demand, reasonably low inflation, a tight or improving labor market, and a relatively moderate interest rate environment, despite recent interest rate hikes by many of the world's central banks. However, the economy also faced headwinds from elevated energy prices, higher global interest rates and a weaker U.S. housing market. These factors dampened investor confidence mid-year, when many equity markets declined before rebounding later in the year. Despite such challenges, global economic activity was healthy. Strong global liquidity -- whether petrodollars, corporate cash, private equity, household savings or central banks' reserves -- continued to search for a home. Largely as a result, bond yield spreads over U.S. Treasuries narrowed, and equity and commodity markets rose in the latter part of the year. The shift from risk aversion to risk tolerance was concurrent with the U.S. Federal Reserve Board's decisions since June to hold the federal funds target rate at 5.25%, as well as with lower oil prices in the second half of the year. Narrowing corporate credit spreads globally reflected greater risk tolerance, while abundant cash supplies in the capital markets contributed to record global merger and acquisition activity in 2006. The total value of deals announced as a result of hostile takeovers, private equity buyouts and broad corporate consolidation was $3.8 trillion. 2 This figure surpassed the $3.4 trillion mark set in 2000. 2 Announced deals from private equity alone reached a record $700 billion, more than double the record set in 2005 and 20 times greater than a decade ago. 3 With this economic backdrop, the non-U.S. equity markets -- including emerging markets that remained a major magnet for global fund flows -- led global equity markets to end 2006 on a strong note, and all major regions delivered double-digit total returns for the year. Stock market indexes in the U.S. and most European countries reached six-year highs in the fourth quarter, and many emerging market indexes in Asia, Europe and Latin America neared or reached all-time highs. 2. Source: "Can M&A's 'Best of Times' Get Better?," THE WALL STREET JOURNAL, 1/2/07. 3. Source: "TPG tops buy-out league with $101bn," THE WALL STREET JOURNAL, 12/27/06. 2 | Annual Report INVESTMENT STRATEGY When choosing equity investments, we apply a bottom-up, value-oriented, long-term approach, focusing on the market price of a company's securities relative to our evaluation of the company's potential long-term (typically five years) earnings, asset value and cash flow. We also consider a company's price/earnings ratio, profit margins and liquidation value. MANAGER'S DISCUSSION Several holdings performed well during the period. One example is Vestas Wind Systems. Denmark-based Vestas is the world's leading wind turbine manufacturer. The company has a leading market share and a reputation for providing reliable and efficient products. The company's competitive advantage is its technological ability to develop durable, reliable and cost effective wind turbines. Vestas could benefit from increased demand in the coming years for environmentally friendly power sources as wind power is the cheapest renewable energy source. The Fund also benefited from its Lojas Renner holding. Lojas Renner is one of Brazil's largest apparel retailers and was listed in the Bovespa Novo Mercado in May 2005. 4 Lojas Renner offers shareholder protection that we think may enhance its share price versus those of its peers who may have lower corporate governance standards. Lojas Renner sells quality apparel under 11 private label brands, each of which targets a specific style or occasion. Most of the company's stores are located in shopping malls where they are able to reach families and different age groups. Based on our analysis, we believe that Lojas Renner could benefit from Brazil's declining interest rate cycle, decreasing unemployment, rising personal incomes and greater discretionary consumer spending. Our position in China Resources Power Holdings also boosted the Fund's performance. China Resources Power is an independent power producer controlled by The China Resources Group, a major Chinese state-owned conglomerate. The company has coal-fired plants with three under construction. Based on our analysis, we believe China Resources Power represents a good investment opportunity due to its exposure to the high growth Chinese power sector. The company is a relative newcomer to the industry but has secured a strong project pipeline to support its long-term growth. GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Europe 40.8% Asia 36.7% North America 10.4% Australia & New Zealand 4.4% Latin America 3.1% Middle East & Africa 0.8% Short-Term Investments & Other Net Assets 3.8% 4. The Novo Mercado is a trading segment designed for shares issued by companies that voluntarily undertake to abide by corporate governance practices and transparency requirements in addition to those already requested by Brazilian Law. Annual Report | 3 PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Machinery 8.3% Commercial Services & Supplies 7.0% Textiles, Apparel & Luxury Goods 5.5% Electronic Equipment & Instruments 5.5% Energy Equipment & Services 5.5% Commercial Banks 4.3% Electrical Equipment 4.1% Specialty Retail 3.7% Capital Markets 3.5% Independent Power Producers & Energy Traders 3.0% Health Care Providers & Services 2.7% Leisure Equipment & Products 2.5% Transportation Infrastructure 2.1% Communications Equipment 2.0% Auto Components 2.0% Paper & Forest Products 2.0% Computers & Peripherals 2.0% Other 30.5% Short-Term Investments & Other Net Assets 3.8% It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2006, the U.S. dollar declined in value relative to most non-U.S. currencies. As a result, the Fund's performance was positively affected by the portfolio's investment predominantly in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods. There were some detractors from Fund performance over the past year. Bio-Treat Technology negatively impacted Fund performance as the company's share price fell following news of a loss in its fourth quarter. Based in China, Bio-Treat is a pioneer in waste and wastewater management biotechnology. Through its research and development team, Bio-Treat successfully developed a proprietary application of biological processes for waste and wastewater treatment for residential, commercial and municipal projects called the BMS Biological Process Technology. Bio-Treat provides us with exposure to the high-growth wastewater treatment industry in China. In view of the widespread pollution in many cities across China and the need to clean up the environment before the 2008 Olympics, China has stepped up its pollution control efforts. Based on our analysis, we expect these efforts to continue to benefit the companies engaged in pollution control, and with its unique technology and solutions, Bio-Treat could stand out from its competition when it bids for large municipal projects. Also hindering performance during the period was Fountain Set Holdings, a vertically integrated fabric supplier. The company is one of the world's largest knitted cotton fabric producers and distributes knitted fabric and yarn products to more than 40 countries. Key customers include Wal-Mart, Target, J.C. Penney, The Gap and Marks & Spencer. Sentiment toward China garment and fabrics producers swung from optimistic in 2002 -- when the process to eliminate trade quotas set by the World Trade Organization began -- to doubtful and pessimistic as the final quota expiration created confusion and renewed protectionism from importing and competing countries. Additionally, Fountain Set announced that the company violated wastewater disposal laws. Looking at the poor performance of the shares since we initiated our position, we sold Fountain Set and used the losses to offset capital gains. 4 | Annual Report Chitaly Holdings (sold by period-end), a modern-style furniture manufacturer, also hindered Fund performance. The company sells its award-winning brand names Royal, Knight and Simplified to middle class consumers through its growing franchise distribution network in China. We originally purchased shares of Chitaly because we believed the company would be a strong beneficiary of China's rising property prices. However, prices have risen so sharply that home buyers seemed priced out of the market, leading to weak demand for home furniture. Thank you for your continued participation in TIFI Foreign Smaller Companies Series. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Tucker Scott Tucker Scott, CFA [PHOTO OMITTED] /s/ Cynthia L. Sweeting Cynthia L. Sweeting, CFA Portfolio Management Team TIFI Foreign Smaller Companies Series TOP 10 EQUITY HOLDINGS 12/31/06 - --------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - --------------------------------------------------------- Game Group PLC 2.3% SPECIALTY RETAIL, U.K. - --------------------------------------------------------- Draka Holding NV 2.1% ELECTRICAL EQUIPMENT, NETHERLANDS - --------------------------------------------------------- Vestas Wind Systems AS 2.1% ELECTRICAL EQUIPMENT, DENMARK - --------------------------------------------------------- China Resources Power Holdings Co. Ltd. 1.8% INDEPENDENT POWER PRODUCERS & ENERGY TRADERS, CHINA - --------------------------------------------------------- Vossloh AG 1.8% MACHINERY, GERMANY - --------------------------------------------------------- Aalberts Industries NV 1.8% MACHINERY, NETHERLANDS - --------------------------------------------------------- OPG Groep NV 1.7% HEALTH CARE PROVIDERS & SERVICES, NETHERLANDS - --------------------------------------------------------- Daegu Bank Co. Ltd. 1.6% COMMERCIAL BANKS, SOUTH KOREA - --------------------------------------------------------- D-Link Corp. 1.6% COMMUNICATIONS EQUIPMENT, TAIWAN - --------------------------------------------------------- Vedior NV 1.6% COMMERCIAL SERVICES & SUPPLIES, NETHERLANDS - --------------------------------------------------------- THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 Performance Summary as of 12/31/06 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------- SYMBOL: TFSCX CHANGE 12/31/06 12/31/05 - ------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.24 $22.42 $18.18 - ------------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) - ------------------------------------------------------------------------------------------- Dividend Income $0.3322 - ------------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0599 - ------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.5610 - ------------------------------------------------------------------------------------------- TOTAL $0.9531 - -------------------------------------------------------------------------------------------
PERFORMANCE 1 THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------- 1-YEAR 3-YEAR INCEPTION (10/21/02) - ---------------------------------------------------------------------------------------------- Cumulative Total Return 2 +28.78% +75.37% +167.83% - ---------------------------------------------------------------------------------------------- Average Annual Total Return 3 +28.78% +20.59% +26.47% - ---------------------------------------------------------------------------------------------- Value of $1,000,000 Investment 4 $1,287,821 $1,753,675 $2,678,251 - ----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. 6 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. 10/21/02-12/31/06 $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] S&P/Citigroup Global TIFI Foreign Smaller Equity ex-U.S. less Date Companies Series than $2 Billion Index 5 ---- ---------------------- --------------------------- Incept $ 1,000,000 $ 1,000,000 Oct-02 $ 1,012,000 $ 1,002,640 Nov-02 $ 1,032,000 $ 1,039,233 Dec-02 $ 1,010,000 $ 1,034,512 Jan-03 $ 979,000 $ 1,035,387 Feb-03 $ 946,000 $ 1,024,301 Mar-03 $ 950,000 $ 1,011,659 Apr-03 $ 1,022,000 $ 1,085,278 May-03 $ 1,106,999 $ 1,178,455 Jun-03 $ 1,152,999 $ 1,238,670 Jul-03 $ 1,217,999 $ 1,285,780 Aug-03 $ 1,286,999 $ 1,366,071 Sep-03 $ 1,316,999 $ 1,435,074 Oct-03 $ 1,411,999 $ 1,540,404 Nov-03 $ 1,430,999 $ 1,547,557 Dec-03 $ 1,527,201 $ 1,646,986 Jan-04 $ 1,580,250 $ 1,711,255 Feb-04 $ 1,624,117 $ 1,773,391 Mar-04 $ 1,603,946 $ 1,842,141 Apr-04 $ 1,566,860 $ 1,766,102 May-04 $ 1,569,951 $ 1,740,645 Jun-04 $ 1,619,398 $ 1,805,172 Jul-04 $ 1,575,101 $ 1,744,466 Aug-04 $ 1,572,011 $ 1,768,308 Sep-04 $ 1,622,489 $ 1,835,435 Oct-04 $ 1,662,664 $ 1,890,958 Nov-04 $ 1,779,072 $ 2,039,434 Dec-04 $ 1,852,238 $ 2,140,642 Jan-05 $ 1,852,238 $ 2,165,408 Feb-05 $ 1,931,848 $ 2,266,644 Mar-05 $ 1,892,013 $ 2,211,030 Apr-05 $ 1,812,423 $ 2,149,636 May-05 $ 1,833,936 $ 2,158,960 Jun-05 $ 1,882,336 $ 2,218,226 Jul-05 $ 1,973,757 $ 2,315,094 Aug-05 $ 1,981,285 $ 2,370,042 Sep-05 $ 2,043,668 $ 2,485,124 Oct-05 $ 1,951,161 $ 2,398,179 Nov-05 $ 2,008,169 $ 2,500,889 Dec-05 $ 2,079,648 $ 2,680,780 Jan-06 $ 2,211,196 $ 2,870,701 Feb-06 $ 2,254,665 $ 2,845,261 Mar-06 $ 2,326,139 $ 2,953,665 Apr-06 $ 2,444,620 $ 3,113,736 May-06 $ 2,321,530 $ 2,939,051 Jun-06 $ 2,282,410 $ 2,856,163 Jul-06 $ 2,285,858 $ 2,824,901 Aug-06 $ 2,356,022 $ 2,913,031 Sep-06 $ 2,375,581 $ 2,922,326 Oct-06 $ 2,454,958 $ 3,045,956 Nov-06 $ 2,553,904 $ 3,192,351 Dec-06 $ 2,678,251 $ 3,300,366 AVERAGE ANNUAL TOTAL RETURN - ----------------------------------- 12/31/06 - ----------------------------------- 1-Year +28.78% - ----------------------------------- 3-Year +20.59% - ----------------------------------- Since Inception (10/21/02) +26.47% - ----------------------------------- ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS CARRY SPECIAL RISKS AS SUCH STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN LARGE-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. ADDITIONALLY, SMALLER COMPANIES OFTEN HAVE RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND SMALL MARKET SHARE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 1. The Fund's manager and administrator agreed in advance to assume as their own certain expenses otherwise payable by the Fund. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. This agreement may be ended after 4/30/07 upon notice to the Board of Directors. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. 5. Source: Standard & Poor's Micropal. The S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure performance of global developed and emerging market equity securities, excluding the U.S., with market capitalizations less than $2 billion. Annual Report | 7 Your Fund's Expenses As a Fund Shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,173.40 $5.20 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.42 $4.84 - -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, of 0.95%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Annual Report | 9 Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS FOREIGN SMALLER COMPANIES SERIES
------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 2004 2003 2002 f ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 18.18 $ 17.45 $ 14.97 $ 10.10 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b .......................... 0.30 0.38 0.21 0.17 (0.01) Net realized and unrealized gains (losses) .............. 4.89 1.74 2.93 4.99 0.11 ------------------------------------------------------------------- Total from investment operations .......................... 5.19 2.12 3.14 5.16 0.10 ------------------------------------------------------------------- Less distributions from: Net investment income ................................... (0.33) (0.36) (0.16) (0.13) -- Net realized gains ...................................... (0.62) (1.03) (0.50) (0.16) -- ------------------------------------------------------------------- Total distributions ....................................... (0.95) (1.39) (0.66) (0.29) -- ------------------------------------------------------------------- Redemption fees ........................................... -- d -- d -- -- -- ------------------------------------------------------------------- Net asset value, end of year .............................. $ 22.42 $ 18.18 $ 17.45 $ 14.97 $ 10.10 =================================================================== Total return c ............................................ 28.78% 12.28% 21.28% 51.21% 1.00% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $ 170,757 $ 131,567 $ 97,495 $ 33,583 $ 6,195 Ratios to average net assets: Expenses before waiver and payments by affiliates ....... 1.07% 1.07% 1.16% 1.58% 7.71% g Expenses net of waiver and payments by affiliates ....... 0.95% e 0.95% e 0.95% e 0.95% 0.95% g Net investment income (loss) ............................ 1.45% 2.12% 1.34% 1.40% (0.55)% g Portfolio turnover rate ................................... 17.30% 24.59% 27.51% 12.58% --
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f For the period October 21, 2002 (commencement of operations) to December 31, 2002. g Annualized. 10 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- ------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 96.2% COMMON STOCKS 95.3% AUSTRALIA 4.4% Billabong International Ltd. ................ Textiles, Apparel & Luxury Goods 133,957 $ 1,839,974 Downer EDI Ltd. ............................. Commercial Services & Supplies 232,245 1,281,506 Iluka Resources Ltd. ........................ Metals & Mining 235,139 1,234,365 PaperlinX Ltd. .............................. Paper & Forest Products 832,142 2,581,589 Repco Corp. Ltd. ............................ Distributors 443,845 597,383 ------------- 7,534,817 ------------- BAHAMAS 1.0% a Steiner Leisure Ltd. ........................ Diversified Consumer Services 37,530 1,707,615 ------------- BELGIUM 1.1% Barco NV .................................... Electronic Equipment & Instruments 20,740 1,889,071 ------------- BERMUDA 0.3% a Weatherford International Ltd. .............. Energy Equipment & Services 11,732 490,280 ------------- BRAZIL 2.3% b Companhia de Saneamento de Minas Gerais, 144A ...................................... Water Utilities 141,900 1,663,747 b Lojas Renner SA, 144A ....................... Multiline Retail 162,000 2,327,826 ------------- 3,991,573 ------------- CANADA 9.1% CAE Inc. .................................... Aerospace & Defense 176,720 1,630,328 a Dorel Industries Inc., B .................... Household Durables 44,300 1,199,075 a GSI Group Inc. .............................. Electronic Equipment & Instruments 151,050 1,463,675 Legacy Hotels ............................... Real Estate 204,730 1,665,600 Linamar Corp. ............................... Auto Components 106,490 1,270,295 MDS Inc. .................................... Health Care Services 115,390 2,106,282 North West Co. Fund ......................... Diversified Financial Services 162,450 2,165,071 a Open Text Corp. ............................. Internet Software & Services 87,800 1,802,339 Precision Drilling Trust .................... Energy Equipment & Services 28,080 650,641 a Saxon Energy Services Inc. .................. Energy Equipment & Services 313,300 1,099,676 Transcontinental Inc., B .................... Commercial Services & Supplies 25,630 465,200 ------------- 15,518,182 ------------- CHINA 6.6% Bio-Treat Technology Ltd. ................... Commercial Services & Supplies 1,625,000 641,120 China Oilfield Services Ltd. ................ Energy Equipment & Services 3,454,000 2,397,640 China Resources Power Holdings Co. Ltd. ..... Independent Power Producers & Energy Traders 2,036,000 3,072,654 People's Food Holdings Ltd. ................. Food Products 1,948,000 1,587,922 Sinotrans Ltd., H ........................... Air Freight & Logistics 3,233,000 1,167,831 Travelsky Technology Ltd., H ................ IT Services 1,153,000 1,757,850 Weiqiao Textile Co. Ltd., H ................. Textiles, Apparel & Luxury Goods 488,500 658,103 ------------- 11,283,120 ------------- DENMARK 2.1% a Vestas Wind Systems AS ...................... Electrical Equipment 83,180 3,515,405 -------------
Annual Report | 11 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) FINLAND 3.7% Amer Sports OYJ ............................. Leisure Equipment & Products 123,430 $ 2,717,735 Elcoteq SE, A ............................... Communications Equipment 50,300 649,377 Huhtamaki OYJ ............................... Containers & Packaging 89,790 1,763,686 KCI Konecranes OYJ .......................... Machinery 41,560 1,223,407 ------------- 6,354,205 ------------- GERMANY 3.5% Celesio AG .................................. Health Care Providers & Services 34,250 1,822,484 a Jenoptik AG ................................. Electronic Equipment & Instruments 118,490 1,166,839 Vossloh AG .................................. Machinery 40,810 3,057,731 ------------- 6,047,054 ------------- HONG KONG 5.0% Asia Satellite Telecommunications Holdings Ltd. ...................................... Diversified Telecommunication Services 318,000 571,481 a,b China Communications Services Corp. Ltd., 144A ...................................... Diversified Telecommunication Services 188,000 107,302 Dah Sing Financial Group .................... Commercial Banks 137,600 1,246,141 Giordano International Ltd. ................. Specialty Retail 1,694,000 925,487 Hang Lung Group Ltd. ........................ Real Estate 355,000 1,079,263 Hopewell Holdings Ltd. ...................... Transportation Infrastructure 384,000 1,347,602 Ngai Lik Industrial Holding Ltd. ............ Household Durables 2,832,000 243,914 Techtronic Industries Co. Ltd. .............. Household Durables 680,000 881,125 Texwinca Holdings Ltd. ...................... Textiles, Apparel & Luxury Goods 667,000 462,150 Yue Yuen Industrial Holdings Ltd. ........... Textiles, Apparel & Luxury Goods 501,000 1,590,752 ------------- 8,455,217 ------------- INDIA 1.1% Hindustan Petroleum Corp. Ltd. .............. Oil, Gas & Consumable Fuels 141,770 894,679 Tata Motors Ltd., ADR ....................... Machinery 51,220 1,046,425 ------------- 1,941,104 ------------- INDONESIA 0.5% PT Indosat Tbk .............................. Diversified Telecommunication Services 1,215,400 912,209 ------------- ISRAEL 0.8% a Orbotech Ltd. ............................... Electronic Equipment & Instruments 54,930 1,397,419 ------------- JAPAN 4.7% Japan Airport Terminal Co. Ltd. ............. Transportation Infrastructure 80,000 940,228 Meitec Corp. ................................ Commercial Services & Supplies 51,500 1,561,851 Sangetsu Co. Ltd. ........................... Household Durables 29,300 712,593 Sohgo Security Services Co. Ltd. ............ Commercial Services & Supplies 136,200 2,740,362 Takuma Co. Ltd. ............................. Machinery 141,000 824,430 Tokyo Individualized Educational Institute Inc. ...................................... Diversified Consumer Services 506,440 1,289,128 ------------- 8,068,592 ------------- LUXEMBOURG 0.3% a Thiel Logistik AG ........................... IT Services 149,260 585,181 ------------- MEXICO 0.8% Grupo Aeroportuario del Sureste SA de CV, ADR Transportation Infrastructure 31,810 1,350,971 -------------
12 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) NETHERLANDS 9.2% Aalberts Industries NV ...................... Machinery 34,657 $ 2,996,558 a Draka Holding NV ............................ Electrical Equipment 103,895 3,538,382 Imtech NV ................................... Construction & Engineering 27,200 1,728,484 OPG Groep NV ................................ Health Care Providers & Services 24,110 2,832,550 SBM Offshore NV ............................. Energy Equipment & Services 51,800 1,781,262 Vedior NV ................................... Commercial Services & Supplies 132,640 2,750,686 ------------- 15,627,922 ------------- NORWAY 0.7% Prosafe ASA ................................. Energy Equipment & Services 80,750 1,146,060 ------------- PHILIPPINES 0.1% a,b PNOC Energy Development Corp., 144A ......... Independent Power Producers & Energy Traders 1,900,000 187,870 ------------- RUSSIA 0.6% a,b X 5 Retails Group NV, GDR, 144A ............. Food & Staples Retailing 30,750 793,350 a,b X 5 Retails Group NV, GDR, 144A (IPO) ....... Food & Staples Retailing 5,778 149,072 ------------- 942,422 ------------- SINGAPORE 2.5% Cerebos Pacific Ltd. ........................ Food Products 562,358 1,283,546 Huan Hsin Holdings Ltd. ..................... Electronic Equipment & Instruments 1,516,000 548,684 Osim International Ltd. ..................... Specialty Retail 1,443,360 1,317,750 Venture Corp. Ltd. .......................... Electronic Equipment & Instruments 131,000 1,153,282 ------------- 4,303,262 ------------- SOUTH KOREA 6.3% Bank of Pusan ............................... Commercial Banks 186,080 2,320,998 Daeduck Electronics Co. Ltd. ................ Electronic Equipment & Instruments 72,480 554,901 Daegu Bank Co. Ltd. ......................... Commercial Banks 163,580 2,796,690 a Halla Climate Control Corp. ................. Auto Components 162,580 2,158,992 a Hansol Paper Co. Ltd. ....................... Paper & Forest Products 52,730 802,290 a Sindo Ricoh Co. ............................. Office Electronics 12,820 785,742 a Youngone Corp. .............................. Textiles, Apparel & Luxury Goods 251,810 1,413,385 ------------- 10,832,998 ------------- SPAIN 1.1% Sol Melia SA ................................ Hotels, Restaurants & Leisure 91,738 1,817,692 ------------- SWEDEN 1.5% D. Carnegie & Co. AB ........................ Capital Markets 115,310 2,482,518 ------------- SWITZERLAND 3.8% a Kuoni Reisen Holding AG, B .................. Hotels, Restaurants & Leisure 2,590 1,385,811 a Medisize Holding AG ......................... Health Care Equipment & Supplies 6,600 449,551 a SIG Holding AG .............................. Machinery 3,210 1,072,151 Verwaltungs-und Privat-Bank AG .............. Capital Markets 6,760 1,802,962 Vontobel Holding AG ......................... Capital Markets 40,680 1,759,334 ------------- 6,469,809 -------------
Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) TAIWAN 7.2% D-Link Corp. ................................ Communications Equipment 2,125,420 $ 2,785,191 Fu Sheng Industrial Co. Ltd. ................ Industrial Conglomerates 1,658,408 1,623,545 Giant Manufacturing Co. Ltd. ................ Leisure Equipment & Products 940,000 1,543,348 KYE Systems Corp. ........................... Computers & Peripherals 1,286,448 1,468,647 Pihsiang Machinery Manufacturing Co. Ltd. ... Health Care Equipment & Supplies 479,000 852,601 Simplo Technology Co. Ltd. .................. Computers & Peripherals 524,000 1,897,560 Ta Chong Bank Ltd. .......................... Commercial Banks 2,673,000 898,246 Taiwan Fu Hsing ............................. Building Products 617,110 547,322 Test-Rite International Co. Ltd. ............ Distributors 1,110,613 649,292 ------------- 12,265,752 ------------- THAILAND 2.7% BEC World Public Co. Ltd., fgn. ............. Media 1,673,200 995,896 Glow Energy Public Co. Ltd., fgn. ........... Independent Power Producers & Energy Traders 708,000 659,069 b Glow Energy Public Co. Ltd., fgn., 144A ..... Independent Power Producers & Energy Traders 1,271,300 1,183,439 a Total Access Communication Public Co. Ltd., fgn. ................................ Wireless Telecommunication Services 410,000 1,763,000 ------------- 4,601,404 ------------- UNITED KINGDOM 12.3% Bodycote International PLC .................. Machinery 441,480 1,973,386 b Bodycote International PLC, 144A ............ Machinery 35,200 157,342 Burberry Group PLC .......................... Textiles, Apparel & Luxury Goods 156,510 1,978,466 DS Smith PLC ................................ Containers & Packaging 360,250 1,382,771 Electrocomponents PLC ....................... Electronic Equipment & Instruments 209,920 1,205,541 a Fiberweb PLC ................................ Personal Products 327,880 1,325,944 FKI PLC ..................................... Machinery 885,590 1,790,660 Future PLC .................................. Media 908,830 809,812 Game Group PLC .............................. Specialty Retail 1,804,650 4,011,244 Homeserve PLC ............................... Commercial Services & Supplies 69,716 2,580,385 John Wood Group PLC ......................... Energy Equipment & Services 353,390 1,813,201 Yule Catto & Company PLC .................... Chemicals 431,050 1,966,862 ------------- 20,995,614 ------------- TOTAL COMMON STOCKS (COST $106,624,294) ....................... 162,715,338 -------------
14 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) PREFERRED STOCKS (COST $482,296) 0.9% GERMANY 0.9% Hugo Boss AG, pfd. .......................... Textiles, Apparel & Luxury Goods 29,430 $ 1,506,178 ------------- TOTAL LONG TERM INVESTMENTS (COST $107,106,590) ....................... 164,221,516 ------------- ---------- PRINCIPAL AMOUNT ---------- SHORT TERM INVESTMENTS (COST $5,071,205) 2.9% UNITED STATES 2.9% c U.S. Treasury Bills, 1/25/07 - 5/24/07 ...... $5,158,000 5,073,434 ------------- TOTAL INVESTMENTS (COST $112,177,795) 99.1% ................. 169,294,950 OTHER ASSETS, LESS LIABILITIES 0.9% ......... 1,462,005 ------------- NET ASSETS 100.0% ........................... $ 170,756,955 =============
SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt GDR - Global Depository Receipt a Non-income producing during the twelve months ended December 31, 2006. b Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At December 31, 2006, the aggregate value of these securities was $6,569,948, representing 3.85% of net assets. c The security is traded on a discount basis with no stated coupon rate. Annual Report | The accompanying notes are an integral part of these financial statements. | 15 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2006
---------------- FOREIGN SMALLER COMPANIES SERIES ---------------- Assets: Investments in securities: Cost .............................................................................................. $ 112,177,795 ================ Value ............................................................................................. $ 169,294,950 Cash ............................................................................................... 14,410 Foreign currency, at value (cost $1,061,445) ....................................................... 1,052,502 Receivables: Capital shares sold ............................................................................... 293,481 Dividends ......................................................................................... 300,753 ---------------- Total assets .................................................................................. 170,956,096 ---------------- Liabilities: Payables: Investment securities purchased ................................................................... 40,565 Affiliates ........................................................................................ 105,712 Deferred tax ....................................................................................... 17,081 Accrued expenses and other liabilities ............................................................. 35,783 ---------------- Total liabilities ............................................................................. 199,141 ---------------- Net assets, at value ........................................................................ $ 170,756,955 ================ Net assets consist of: Paid-in capital .................................................................................... $ 113,628,462 Distributions in excess of net investment income ................................................... (345,904) Net unrealized appreciation (depreciation) ......................................................... 57,093,478 Accumulated net realized gain (loss) ............................................................... 380,919 ---------------- Net assets, at value ........................................................................ $ 170,756,955 ================ Shares outstanding ................................................................................. 7,617,981 ================ Net asset value per share a ........................................................................ $ 22.42 ================
a Redemption price is equal to net asset value less redemption fees retained by the Fund. 16 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2006
---------------- FOREIGN SMALLER COMPANIES SERIES ---------------- Investment income: Dividends (net of foreign taxes of $351,608) ....................................................... $ 3,041,055 Interest (net of foreign taxes of $452) ............................................................ 494,032 Other income (Note 8) .............................................................................. 54 ---------------- Total investment income ....................................................................... 3,535,141 ---------------- Expenses: Management fees (Note 3a) .......................................................................... 1,104,414 Administrative fees (Note 3b) ...................................................................... 294,510 Transfer agent fees (Note 3c) ...................................................................... 14,903 Custodian fees (Note 4) ............................................................................ 59,827 Reports to shareholders ............................................................................ 19,918 Registration and filing fees ....................................................................... 21,862 Professional fees .................................................................................. 42,383 Directors' fees and expenses ....................................................................... 13,405 Other .............................................................................................. 14,219 ---------------- Total expenses ................................................................................ 1,585,441 Expense reductions (Note 4) ................................................................... (2,021) Expenses waived/paid by affiliates (Note 3d) .................................................. (184,970) ---------------- Net expenses ................................................................................ 1,398,450 ---------------- Net investment income ..................................................................... 2,136,691 ---------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments (net of foreign taxes of $7,532) ...................................................... 4,348,167 Foreign currency transactions ..................................................................... (32,052) ---------------- Net realized gain (loss) .................................................................... 4,316,115 ---------------- Net change in unrealized appreciation (depreciation) on: Investments ....................................................................................... 31,555,269 Translation of assets and liabilities denominated in foreign currencies ........................... 12,226 Change in deferred taxes on unrealized appreciation (depreciation) ................................. (17,081) ---------------- Net change in unrealized appreciation (depreciation) ........................................ 31,550,414 ---------------- Net realized and unrealized gain (loss) ............................................................. 35,866,529 ---------------- Net increase (decrease) in net assets resulting from operations ..................................... $ 38,003,220 ================
Annual Report | The accompanying notes are an integral part of these financial statements. | 17 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------- FOREIGN SMALLER COMPANIES SERIES YEAR ENDED DECEMBER 31, ---------------------------------- 2006 2005 ---------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................................... $ 2,136,691 $ 2,469,756 Net realized gain (loss) from investments and foreign currency transactions ..... 4,316,115 6,131,736 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liablilities denominated in foreign currencies, and deferred taxes 31,550,414 5,888,506 ---------------------------------- Net increase (decrease) in net assets resulting from operations .............. 38,003,220 14,489,998 ---------------------------------- Distributions to shareholders from: Net investment income ........................................................... (2,432,984) (2,471,905) Net realized gains .............................................................. (4,533,082) (6,793,091) ---------------------------------- Total distributions to shareholders .............................................. (6,966,066) (9,264,996) ---------------------------------- Capital share transactions (Note 2) .............................................. 8,152,453 28,847,120 ---------------------------------- Redemption fees .................................................................. 300 3 ---------------------------------- Net increase (decrease) in net assets ........................................ 39,189,907 34,072,125 Net assets: Beginning of year ................................................................ 131,567,048 97,494,923 ---------------------------------- End of year ...................................................................... $ 170,756,955 $ 131,567,048 ================================== Distributions in excess of net investment income included in net assets: End of year ...................................................................... $ (345,904) $ (15,899) ==================================
18 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment Company Act of 1940, as amended, (the 1940 Act) as an open-end investment company, consisting of three separate funds. The Foreign Smaller Companies Series (the Fund) included in this report is diversified. The financial statements of the remaining funds in TIFI are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in Annual Report | 19 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. 20 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. The Fund may be subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and all return of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by TIFI are allocated among the funds based on the ratio of net assets of each Fund to the combined net assets of TIFI. Fund specific expenses are charged directly to the fund that incurred the expense. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. H. GUARANTEES AND INDEMNIFICATIONS Under TIFI's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, TIFI, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK At December 31, 2006, there were 1.14 billion shares of TIFI authorized ($0.01 par value), of which 60 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
------------------------------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- Shares sold ........................ 727,781 $ 14,831,483 1,496,864 $ 25,920,894 Shares issued in reinvestment of distributions .................. 269,840 5,836,582 447,719 8,097,280 Shares redeemed .................... (618,009) (12,515,612) (292,789) (5,171,054) ------------------------------------------------------- Net increase (decrease) ............ 379,612 $ 8,152,453 1,651,794 $ 28,847,120 =======================================================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and directors of the following subsidiaries:
- ----------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - ----------------------------------------------------------------------------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Investment Management Limited (FTIML) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
22 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the average daily net assets of of the Fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.750% Up to and including $1 billion 0.730% Over $1 billion, up to and including $5 billion 0.710% Over $5 billion, up to and including $10 billion 0.690% Over $10 billion, up to and including $15 billion 0.670% Over $15 billion, up to and including $20 billion 0.650% In excess of $20 billion Under a subadvisory agreement, FTIML, an affiliate of TIC, provides subadvisory services to the Fund and receives from TIC fees based on the average daily net assets of the Fund. B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets of the Fund. C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $14,903, of which $9,886 was retained by Investor Services. D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENT FT Services agreed in advance to voluntarily waive a portion of administrative fees through April 30, 2007, as noted in the Statement of Operations. Additionally, TIC agreed in advance to voluntarily waive a portion of management fees through April 30, 2007. Total expenses waived by FT Services and TIC are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2006, the custodian fees were reduced as noted in the Statement of Operations. Annual Report | 23 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 5. INCOME TAXES For tax purposes, realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2006, the Fund deferred realized currency losses $5,872. The tax character of distributions paid during the years ended December 31, 2006 and 2005, was as follows: ------------------------- 2006 2005 ------------------------- Distributions paid from: Ordinary income ............... $ 2,873,774 $ 5,361,453 Long term capital gain ........ 4,092,292 3,903,543 ------------------------- $ 6,966,066 $ 9,264,996 ========================= Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, foreign taxes paid on net realized gains and organizational costs. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions and foreign taxes paid on net realized gains. At December 31, 2006, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments ............................. $ 112,767,750 ============= Unrealized appreciation ......................... $ 59,249,337 Unrealized depreciation ......................... (2,722,137) ------------- Net unrealized appreciation (depreciation) ...... $ 56,527,200 ============= Undistributed ordinary income ................... $ 227,766 Undistributed long term capital gains ........... 403,202 ------------- Distributable earnings .......................... $ 630,968 ============= 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2006, aggregated $32,666,915 and $23,831,651, respectively. 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares ("marketing support"), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 23, 2006, the SEC approved the proposed plan of distribution for the marketing support settlement, and disbursement of the settlement monies to the designated funds, in accordance with the terms and conditions of that settlement and plan, was completed in September 2006, and is recorded as other income. The plan of distribution for the market timing settlement is currently under review by the SEC staff. After publication of notice of the plan and a 30-day comment period, the proposed plan of distribution will be submitted to the SEC for approval. Following the SEC's approval of the plan of distribution, with modifications as appropriate, distribution of the settlement monies will begin in accordance with the terms and conditions of the settlement and plan. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above, as well as to allegedly excessive commissions and advisory and distribution fees. The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. Annual Report | 25 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 9. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. On December 22, 2006, the Securities and Exchange Commission extended the implementation date to no later than the last net asset value calculation in the first semi-annual reporting period in 2007. The Fund is currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Fund believes the adoption of SFAS 157 will have no material impact on its financial statements. 26 | Annual Report Templeton Institutional Funds, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - FOREIGN SMALLER COMPANIES SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Smaller Companies Series (one of the funds constituting the Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 22, 2007 Annual Report | 27 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) FOREIGN SMALLER COMPANIES SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $3,906,169 as a long term capital gain dividend for the fiscal year ended December 31, 2006. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $448,962 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $2,049,854 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2006. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $492,223 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006. At December 31, 2006, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 14, 2006, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund to shareholders of record. 28 | Annual Report Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES Record Date: 12/14/2006 - -------------------------------------------------------------------------------- FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS COUNTRY PER SHARE PER SHARE PER SHARE - -------------------------------------------------------------------------------- Australia .................. $ 0.0017 $ 0.0180 $ 0.0180 Belgium .................... 0.0012 0.0053 0.0053 Bermuda .................... 0.0000 0.0012 0.0000 Brazil ..................... 0.0009 0.0102 0.0000 Canada ..................... 0.0070 0.0222 0.0056 Cayman Islands ............. 0.0000 0.0009 0.0000 China ...................... 0.0000 0.0155 0.0000 Finland .................... 0.0029 0.0132 0.0132 Germany .................... 0.0019 0.0086 0.0051 Hong Kong .................. 0.0000 0.0264 0.0000 India ...................... 0.0010 0.0039 0.0039 Indonesia .................. 0.0004 0.0018 0.0018 Japan ...................... 0.0011 0.0106 0.0106 Mexico ..................... 0.0000 0.0018 0.0018 Netherlands ................ 0.0046 0.0206 0.0206 Norway ..................... 0.0016 0.0070 0.0070 Singapore .................. 0.0000 0.0067 0.0000 South Korea ................ 0.0045 0.0186 0.0186 Spain ...................... 0.0002 0.0010 0.0010 Sweden ..................... 0.0028 0.0124 0.0124 Switzerland ................ 0.0016 0.0130 0.0087 Taiwan ..................... 0.0131 0.0380 0.0000 Thailand ................... 0.0024 0.0164 0.0164 United Kingdom ............. 0.0000 0.0378 0.0378 ------------------------------------------------ TOTAL ...................... $ 0.0489 $ 0.3111 $ 0.1878 ================================================ Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or, as a tax deduction. Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income. 1 Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. 1 Annual Report | 29 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES In January 2007, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2006 individual income tax returns. 1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax brackets). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. 30 | Annual Report Templeton Institutional Funds, Inc. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1992 142 Director, Bar-S Foods (meat 500 East Broward Blvd. packing company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (1944) Director Since 1990 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1996 143 Director, Hess Corporation 500 East Broward Blvd. (formerly Amerada Hess Suite 2100 Corporation) (exploration and Fort Lauderdale, FL 33394-3091 refining of oil and gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ DAVID W. NIEMIEC (1949) Director Since 2005 20 Director, Emeritus Corporation 500 East Broward Blvd. (assisted living) and OSI Suite 2100 Pharmaceuticals, Inc. Fort Lauderdale, FL 33394-3091 (pharmaceutical products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon Read, & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2003 103 Director, Hess Corporation 500 East Broward Blvd. (formerly Amerada Hess Suite 2100 Corporation) (exploration and Fort Lauderdale, FL 33394-3091 refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly Foundation Health) (integrated managed care), The Hertz Corporation (car rental), Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly Commonwealth Edison), UAL Corporation (airlines) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation. - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since 2005 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (1930) Director Since 1993 10 Director, Hess Corporation 500 East Broward Blvd. (formerly Amerada Hess Corporation) Suite 2100 (exploration and refining of oil Fort Lauderdale, FL 33394-3091 and gas) and Weatherford International, Ltd. (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003) and Total Logistics, Inc. (operating and investment business) (until 2005). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982- December 1982). - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Director and Vice 142 None One Franklin Parkway Chairman of President since San Mateo, CA 94403-1906 the Board and 1993 and Vice President Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance since Compliance February 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ GARY P. MOTYL (1952) President Since 2005 Not Applicable Not Applicable 500 East Broward Blvd. and Chief Suite 2100 Executive Fort Lauderdale, FL 33394-3091 Officer - Investment Management PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GALEN VETTER (1951) Chief Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Officer and Fort Lauderdale, FL 33394-3091 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Nicholas F. Brady is considered to be an interested person of the Fund under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Prior to December 31, 2006, S. Joseph Fortunato and Gordon S. Macklin ceased to be a director of the Fund. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT COMMITTEE MEMBER OF HESS CORPORATION (FORMERLY, AMERADA HESS CORPORATION), A FORMER DIRECTOR AND AUDIT COMMITTEE MEMBER OF WHITE MOUNTAINS INSURANCE GROUP, LTD. AND FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. 36 | Annual Report Templeton Institutional Funds, Inc. SHAREHOLDER INFORMATION FOREIGN SMALLER COMPANIES SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 37 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN(R) TEMPLETON(R) 600 Fifth Avenue INSTITUTIONAL NEW YORK, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN SMALLER COMPANIES SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC SUBADVISOR Franklin Templeton Investment Management Limited, London, Geneva Branch DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 franklintempletoninstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges, and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the investment manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT458 A2006 02/07 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are David W. Niemiec and Frank A. Olson and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $217,376 for the fiscal year ended December 31, 2006 and $236,756 for the fiscal year ended December 31, 2005. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $3,961 for the fiscal year ended December 31, 2006 and $4,955 for the fiscal year ended December 31, 2005. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $5,610 for the fiscal year ended December 31, 2006 and $0 for the fiscal year ended December 31, 2005. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $170,251 for the fiscal year ended December 31, 2006 and $5,835 for the fiscal year ended December 31, 2005. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and the review of the ICI transfer agent survey. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $179,822 for the fiscal year ended December 31, 2006 and $10,790 for the fiscal year ended December 31, 2005. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (A)(1) Code of Ethics (A)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMPLETON INSTITUTIONAL FUNDS, INC. By /s/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date February 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date February 27, 2007 By /s/GALEN G. VETTER ------------------ Galen G. Vetter Chief Financial Officer Date February 27, 2007 EX-99.P 2 ncsr-code1205.txt NCSR CODE 1205 Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 2005 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics December 2005 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER 2005 FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel c/o Maria Abbott within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Maria Abbott, Manager, Code of Ethics, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Abbott, Maria (internal address); mabbott@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment. - ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3 Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5 See Part X. EX-99 3 tifi1206-302cert.txt 302 CERT 1206 Exhibit 12(a)(2) I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of TEMPLETON INSTITUTIONAL FUNDS, INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 27, 2007 /S/JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of TEMPLETON INSTITUTIONAL FUNDS, INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 27, 2007 /S/GALEN G. VETTER Galen G. Vetter Chief Financial Officer EX-99 4 tifi1206-906cert.txt 906 CERT 1206 Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the TEMPLETON INSTITUTIONAL FUNDS, INC. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 12/31/06 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: February 27, 2007 /S/JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, Chief Financial Officer of the TEMPLETON INSTITUTIONAL FUNDS, INC. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 12/31/06 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: February 27, 2007 /S/GALEN G. VETTER Galen G. Vetter Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----