-----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, LtYnYvR0yCmqmEAKFU8GwhN8z7QEHifNZh2OjMDwaPkjC+7HGuesPs8cJkVEaWcp obLmtpxtuW+eP8Kc7JUZwA== 0000865722-08-000002.txt : 20080228 0000865722-08-000002.hdr.sgml : 20080228 20080228135525 ACCESSION NUMBER: 0000865722-08-000002 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080228 DATE AS OF CHANGE: 20080228 EFFECTIVENESS DATE: 20080228 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: 08649657 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_ncsr-annual1207.txt TIFI ANNUAL NCSR 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: 12/31/07 -------- Item 1. Reports to Stockholders. [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- ANNUAL REPORT | 12 31 2007 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. - -------------------------------------------------------------------------------- Foreign Equity Series [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL Contents ANNUAL REPORT TIFI Foreign Equity Series ............................................ 1 Performance Summary ................................................... 6 Your Fund's Expenses .................................................. 9 Financial Highlights and Statement of Investments ..................... 11 Financial Statements .................................................. 18 Notes to Financial Statements ......................................... 21 Report of Independent Registered Public Accounting Firm ............... 30 Tax Designation ....................................................... 31 Board Members and Officers ............................................ 33 Shareholder Information ............................................... 38 - -------------------------------------------------------------------------------- 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 CALL A FRANKLIN TEMPLETON INSTITUTIONAL SERVICES REPRESENTATIVE AT 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Templeton Institutional Funds, Inc. (TIFI) Foreign Equity Series' (Fund's) annual report for the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW For the year under review, the Fund's Primary Shares posted a cumulative total return of +18.45%. The Fund outperformed its benchmarks, the Morgan Stanley Capital International (MSCI) All Country (AC) World ex USA Index and the MSCI Europe, Australasia, Far East (EAFE) Index, which posted total returns of +17.12% and +11.63% for the same period. 1 Please note that index performance information is provided for reference 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 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 13. - -------------------------------------------------------------------------------- - ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE - ----------------------------------------------------- Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Europe 67.2% Asia 20.7% North America 2.2% Latin America 1.9% Australia & New Zealand 1.1% Middle East & Africa 0.6% Short-Term Investments & Other Net Assets 6.3% 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 In spite of elevated energy prices and widespread fears of contagion from the deteriorating U.S. housing situation, the global economy remained resilient in 2007. Consumer and corporate demand strength, particularly in China and other developing economies, generally favorable employment, and accommodative monetary policies continued to underpin the current expansionary period that began in 2002. These factors also contributed to the strength of global equity markets during 2007. However, concerns about slower growth and declining asset quality surfaced in the first quarter. These were initially centered on the U.S. subprime mortgage market but spread in August to global capital markets. Difficulties in assessing risk and the value of collateral in the structured finance industry contributed to declining risk appetite among lenders and investors. The private equity industry, which relies on the availability of cheap credit, played a pivotal role in several large and high-profile acquisitions and helped boost merger and acquisition activity in the first half of the year. This was an important driver of equity performance, but as liquidity dried up in the second half of the year, significantly slower money flows from private equity weighed on market performance. However, global merger and acquisition activity still reached record levels. The staggering $4.5 trillion of deals announced in 2007 eclipsed the previous record from 2006 by 24%. 2 To alleviate the credit crunch and restore investor confidence, the world's major central banks infused capital into the system, and the U.S. Federal Reserve Board reduced its target interest rate by a full percentage point. However, credit and equity markets continued to face headwinds as write-downs and losses from subprime mortgage financing affected many large financial institutions toward the end of the year, and equity prices remained volatile. For the year, however, global and non-U.S. equity markets registered the fifth consecutive year of double-digit total returns, making this an exceptionally strong period for investors in global equities. Broad-based stock performance by European and Asian shares at least doubled that of U.S. stocks, while 2. Source: "For Deal Makers, Tale of Two Halves," THE WALL STREET JOURNAL, 1/2/08. 2 | Annual Report emerging market equity returns more than tripled those in developed markets. Led by the BRIC countries, Brazil, Russia, India and China, emerging market economies continued to grow at accelerated rates, supporting elevated prices for oil and other commodities. At the same time, investment inflows from developed economies continued to underpin equity prices in emerging markets. In addition, U.S. dollar weakness relative to the currencies of many major trading partners enhanced equity returns for U.S.-based investors holding stocks denominated in these currencies. 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 Templeton's investment philosophy is strictly based on bottom-up stock selection, and our disciplined application of this process benefited the Fund's relative performance in 2007. Eight out of 10 major sectors contributed to the Fund's results relative to the MSCI AC World ex USA Index. Most significant were the financials and telecommunication services sectors where stock selection and relative weights contributed. 3 The Fund was underweighted in financials, which suffered from troubles in the subprime lending market and the fallout from the subsequent credit crunch. On the other hand, the Fund benefited from its overweighted exposure to telecommunications companies, which investors sought out for their defensive, utility-like characteristics and positive growth prospects in emerging economies. In the financials sector, the Fund largely avoided exposure to certain Japanese and U.K.-based banks that were top detractors from index performance in 2007. At the same time, the Fund maintained sizable positions in Indian financial companies that contributed to performance. ICICI Bank, India's second-largest bank, and Housing Development Finance Corp., which finances home ownership and insurance products throughout India, were PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Commercial Banks 13.2% Diversified Telecommunication Services 9.6% Oil, Gas & Consumable Fuels 6.6% Pharmaceuticals 5.4% Insurance 5.2% Media 4.5% Industrial Conglomerates 4.2% Food Products 3.9% Aerospace & Defense 3.9% Wireless Telecommunication Services 2.8% Semiconductors & Semiconductor Equipment 2.3% Electric Utilities 2.3% Household Durables 2.0% Other 27.8% Short-Term Investments & Other Net Assets 6.3% 3. The financials sector comprises capital markets, commercial banks, diversified financial services, insurance, real estate management and development, and thrifts and mortgage finance 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 12/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- Telefonica SA, ord. & ADR 2.0% DIVERSIFIED TELECOMMUNICATION SERVICES, SPAIN - -------------------------------------------------------------------------------- Housing Development Finance Corp. 1.9% THRIFTS & MORTGAGE FINANCE, INDIA - -------------------------------------------------------------------------------- Siemens AG 1.8% INDUSTRIAL CONGLOMERATES, GERMANY - -------------------------------------------------------------------------------- E.ON AG 1.7% ELECTRIC UTILITIES, GERMANY - -------------------------------------------------------------------------------- ICICI Bank Ltd. 1.7% COMMERCIAL BANKS, INDIA - -------------------------------------------------------------------------------- Rolls-Royce Group PLC, ord. & B 1.6% AEROSPACE & DEFENSE, U.K. - -------------------------------------------------------------------------------- Telenor ASA 1.6% DIVERSIFIED TELECOMMUNICATION SERVICES, NORWAY - -------------------------------------------------------------------------------- France Telecom SA 1.6% DIVERSIFIED TELECOMMUNICATION SERVICES, FRANCE - -------------------------------------------------------------------------------- Celesio AG 1.6% HEALTH CARE PROVIDERS & SERVICES, GERMANY - -------------------------------------------------------------------------------- Sanofi-Aventis, ord. & ADR 1.6% PHARMACEUTICALS, FRANCE - -------------------------------------------------------------------------------- among the Fund's top 10 contributors for the year. Due in part to these shares' strong performance, the Fund's weighting in financials approached that of the index after years of underexposure to this sector. In the telecommunication services sector, notable contributors included Hong Kong-based China Mobile, the world's largest wireless operator, as measured by number of subscribers, and Telefonica, a leading fixed-line and wireless services provider serving Spanish- and Portuguese-speaking populations worldwide. These two companies were also among the top 10 contributors to Fund performance for the year. 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, 2007, 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. Although the Fund performed well, there were some detractors from relative performance. The Fund's returns in the energy and materials sectors, while still strong on an absolute basis, underperformed the index's sector returns. 4 Stock selection and underweightings hindered relative performance. Sector allocations at Templeton have always resulted from our bottom-up process of stock selection. The Fund's energy exposure in 2007 was concentrated among large, integrated oil and gas companies, primarily from Europe. Our analysts have identified the greatest potential for value creation in this arena over the longer term, and these holdings generally performed well last year. The Fund's relative underperformance in the energy sector reflected, instead, the Fund's lack of exposure to several Brazilian and Indian energy companies that also performed very well. 4. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI. The materials sector comprises chemicals, and paper and forest products in the SOI. 4 | Annual Report Despite our cautionary long-term assessment for the sector, materials-related stocks continued to climb, in part because demand in emerging market countries for materials (metals and mining, in particular) remained robust. However, based on our analysis, we believed that speculative financial elements, rather than pure underlying economic demand, skewed prices -- of shares and underlying commodities -- above what the forces of supply and demand might justify. Therefore, given the high valuations already factored into these shares, we remained comfortable with the Fund's underweighted position as of year-end 2007, even if it resulted in near-term underperformance. As long-term investors, we sought to take advantage of increased market volatility and consequently paid close attention to share price movements at the company level. We added new positions and increased existing ones, or trimmed and liquidated others, as we employed our disciplined valuation parameters seeking to further what we considered was our shareholders' longer-term best interests. Thank you for your continued participation in TIFI Foreign Equity Series. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Gary P. Motyl Gary P. Motyl, CFA Chief Investment Officer - Templeton Global Equity Group President - Templeton Investment Counsel, LLC THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2007, 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 12/31/07 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 12/31/07 12/31/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.93 $28.60 $26.67 - -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) - -------------------------------------------------------------------------------- Dividend Income $1.1627 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0635 - -------------------------------------------------------------------------------- Long-Term Capital Gain $1.6468 - -------------------------------------------------------------------------------- TOTAL $2.8730 - -------------------------------------------------------------------------------- SERVICE SHARES (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.91 $28.58 $26.67 - -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) - -------------------------------------------------------------------------------- Dividend Income $1.1627 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0635 - -------------------------------------------------------------------------------- Long-Term Capital Gain $1.6468 - -------------------------------------------------------------------------------- TOTAL $2.8730 - -------------------------------------------------------------------------------- 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 +18.45% +200.28% +196.94% - ---------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +18.45% +24.60% +11.50% - ---------------------------------------------------------------------------------------------------- Value of $1,000,000 Investment 4 $1,184,528 $3,002,801 $2,969,430 - ---------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 0.82% - ---------------------------------------------------------------------------------------------------- SERVICE SHARES 1-YEAR INCEPTION (9/18/06) - ---------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +18.37% +34.27% - ---------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +18.37% +25.78% - ---------------------------------------------------------------------------------------------------- Value of $1,000,000 Investment 4 $1,183,704 $1,342,726 - ---------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 0.82% - ----------------------------------------------------------------------------------------------------
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 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 (1/1/98-12/31/07) 1 $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] TIFI Foreign MSCI AC World MSCI EAFE Date Equity Series ex USA Index 6 Index 6 CPI 6 Dec-97 $1,000,000 $1,000,000 $1,000,000 $1,000,000 Jan-98 $1,012,097 $1,029,913 $1,045,966 $1,001,890 Feb-98 $1,076,613 $1,098,635 $1,113,324 $1,003,891 Mar-98 $1,155,767 $1,136,595 $1,147,857 $1,005,893 Apr-98 $1,170,799 $1,144,735 $1,157,204 $1,007,672 May-98 $1,158,079 $1,123,976 $1,151,850 $1,009,451 Jun-98 $1,147,093 $1,119,751 $1,160,826 $1,010,674 Jul-98 $1,167,330 $1,130,404 $1,172,852 $1,011,897 Aug-98 $ 979,424 $ 970,987 $1,027,807 $1,013,120 Sep-98 $ 964,969 $ 950,476 $ 996,565 $1,014,343 Oct-98 $1,039,553 $1,050,031 $1,100,728 $1,016,789 Nov-98 $1,095,636 $1,106,459 $1,157,393 $1,016,789 Dec-98 $1,101,607 $1,144,580 $1,203,332 $1,016,122 Jan-99 $1,089,821 $1,143,354 $1,200,051 $1,018,679 Feb-99 $1,065,010 $1,117,754 $1,171,728 $1,019,680 Mar-99 $1,122,554 $1,171,721 $1,220,922 $1,022,793 Apr-99 $1,214,597 $1,230,332 $1,270,673 $1,030,131 May-99 $1,169,820 $1,172,543 $1,205,513 $1,030,131 Jun-99 $1,225,170 $1,226,422 $1,252,791 $1,030,131 Jul-99 $1,232,011 $1,255,187 $1,290,316 $1,032,911 Aug-99 $1,225,792 $1,259,542 $1,295,317 $1,036,024 Sep-99 $1,200,916 $1,268,060 $1,308,644 $1,040,471 Oct-99 $1,220,195 $1,315,277 $1,357,946 $1,042,584 Nov-99 $1,281,143 $1,367,868 $1,405,408 $1,043,029 Dec-99 $1,402,750 $1,498,324 $1,531,821 $1,043,029 Jan-00 $1,316,096 $1,417,020 $1,434,758 $1,045,920 Feb-00 $1,352,582 $1,455,296 $1,473,652 $1,051,924 Mar-00 $1,379,843 $1,510,064 $1,531,061 $1,060,374 Apr-00 $1,320,819 $1,425,786 $1,450,768 $1,061,263 May-00 $1,316,228 $1,389,315 $1,415,620 $1,062,041 Jun-00 $1,383,778 $1,448,459 $1,471,313 $1,067,823 Jul-00 $1,364,759 $1,391,275 $1,409,916 $1,070,158 Aug-00 $1,385,089 $1,408,487 $1,422,443 $1,070,158 Sep-00 $1,320,163 $1,330,358 $1,353,463 $1,075,717 Oct-00 $1,265,730 $1,288,074 $1,321,767 $1,077,496 Nov-00 $1,257,204 $1,230,285 $1,272,483 $1,078,163 Dec-00 $1,320,614 $1,272,290 $1,318,009 $1,077,274 Jan-01 $1,341,651 $1,291,384 $1,317,387 $1,084,390 Feb-01 $1,297,241 $1,189,145 $1,218,722 $1,088,948 Mar-01 $1,199,107 $1,105,089 $1,138,029 $1,091,617 Apr-01 $1,266,951 $1,180,249 $1,217,847 $1,095,508 May-01 $1,259,062 $1,147,657 $1,175,831 $1,100,289 Jun-01 $1,230,662 $1,103,641 $1,128,184 $1,102,513 Jul-01 $1,200,685 $1,079,086 $1,107,746 $1,099,066 Aug-01 $1,187,273 $1,052,286 $1,079,915 $1,099,511 Sep-01 $1,041,329 $ 940,650 $ 970,777 $1,104,069 Oct-01 $1,075,251 $ 967,005 $ 995,601 $1,100,289 Nov-01 $1,139,151 $1,011,233 $1,032,366 $1,098,399 Dec-01 $1,160,669 $1,024,260 $1,038,520 $1,094,063 Jan-02 $1,127,781 $ 980,394 $ 983,417 $1,096,954 Feb-02 $1,146,230 $ 987,453 $ 990,363 $1,101,401 Mar-02 $1,201,946 $1,041,094 $1,044,431 $1,107,183 Apr-02 $1,203,553 $1,047,859 $1,051,995 $1,113,520 May-02 $1,225,246 $1,059,273 $1,066,266 $1,113,298 Jun-02 $1,174,629 $1,013,534 $1,024,219 $1,114,187 Jul-02 $1,048,489 $ 914,770 $ 923,186 $1,115,410 Aug-02 $1,050,899 $ 914,822 $ 921,309 $1,118,968 Sep-02 $ 921,545 $ 817,873 $ 822,595 $1,120,747 Oct-02 $ 972,162 $ 861,750 $ 866,870 $1,123,082 Nov-02 $1,038,044 $ 903,191 $ 906,324 $1,122,860 Dec-02 $ 988,887 $ 874,012 $ 875,917 $1,120,414 Jan-03 $ 961,984 $ 843,329 $ 839,416 $1,125,417 Feb-03 $ 933,451 $ 826,241 $ 820,227 $1,134,089 Mar-03 $ 903,188 $ 810,214 $ 804,726 $1,140,872 Apr-03 $1,006,457 $ 888,286 $ 884,521 $1,138,537 May-03 $1,063,009 $ 944,870 $ 938,937 $1,136,313 Jun-03 $1,089,235 $ 971,168 $ 962,176 $1,137,536 Jul-03 $1,144,148 $ 997,000 $ 985,611 $1,138,648 Aug-03 $1,188,406 $1,026,608 $1,009,584 $1,143,207 Sep-03 $1,196,602 $1,055,353 $1,040,907 $1,146,653 Oct-03 $1,287,576 $1,123,764 $1,105,851 $1,145,541 Nov-03 $1,310,525 $1,148,267 $1,130,595 $1,142,095 Dec-03 $1,410,267 $1,235,938 $1,218,974 $1,140,983 Jan-04 $1,431,899 $1,255,782 $1,236,301 $1,146,653 Feb-04 $1,471,836 $1,287,712 $1,265,051 $1,152,435 Mar-04 $1,459,192 $1,295,635 $1,272,665 $1,159,328 Apr-04 $1,425,743 $1,255,368 $1,244,956 $1,162,775 May-04 $1,429,088 $1,259,340 $1,250,347 $1,169,780 Jun-04 $1,459,192 $1,286,636 $1,278,251 $1,173,338 Jul-04 $1,419,054 $1,249,142 $1,236,943 $1,171,003 Aug-04 $1,428,252 $1,259,144 $1,242,686 $1,172,226 Sep-04 $1,480,097 $1,299,628 $1,275,347 $1,174,561 Oct-04 $1,538,632 $1,344,828 $1,318,913 $1,180,787 Nov-04 $1,651,520 $1,438,172 $1,409,378 $1,181,454 Dec-04 $1,709,913 $1,499,928 $1,471,273 $1,177,118 Jan-05 $1,687,980 $1,474,090 $1,444,389 $1,179,564 Feb-05 $1,767,275 $1,546,799 $1,507,129 $1,186,458 Mar-05 $1,726,369 $1,504,841 $1,469,850 $1,195,686 Apr-05 $1,672,713 $1,467,729 $1,436,949 $1,203,691 May-05 $1,694,005 $1,476,934 $1,439,148 $1,202,468 Jun-05 $1,709,336 $1,504,722 $1,458,820 $1,203,135 Jul-05 $1,786,839 $1,560,240 $1,503,634 $1,208,695 Aug-05 $1,816,648 $1,600,171 $1,542,062 $1,214,921 Sep-05 $1,872,007 $1,682,711 $1,611,054 $1,229,820 Oct-05 $1,803,873 $1,621,452 $1,564,114 $1,232,266 Nov-05 $1,850,715 $1,675,967 $1,602,790 $1,222,370 Dec-05 $1,942,663 $1,756,604 $1,677,477 $1,217,478 Jan-06 $2,055,862 $1,879,080 $1,780,589 $1,226,818 Feb-06 $2,043,672 $1,873,655 $1,776,942 $1,229,264 Mar-06 $2,094,121 $1,928,077 $1,836,379 $1,236,046 Apr-06 $2,182,877 $2,027,493 $1,925,442 $1,246,609 May-06 $2,098,514 $1,934,019 $1,852,984 $1,252,835 Jun-06 $2,099,393 $1,932,090 $1,853,663 $1,255,281 Jul-06 $2,139,817 $1,951,857 $1,872,225 $1,258,950 Aug-06 $2,200,452 $2,007,178 $1,924,214 $1,261,396 Sep-06 $2,241,755 $2,008,482 $1,927,563 $1,255,170 Oct-06 $2,334,026 $2,090,267 $2,002,705 $1,248,388 Nov-06 $2,417,510 $2,166,156 $2,063,112 $1,246,498 Dec-06 $2,506,846 $2,233,663 $2,128,005 $1,253,280 Jan-07 $2,534,105 $2,242,005 $2,142,567 $1,257,060 Feb-07 $2,516,246 $2,255,704 $2,160,168 $1,263,843 Mar-07 $2,599,247 $2,319,259 $2,216,253 $1,275,295 Apr-07 $2,739,388 $2,426,810 $2,316,698 $1,283,634 May-07 $2,816,088 $2,493,329 $2,360,430 $1,291,528 Jun-07 $2,832,168 $2,514,564 $2,364,072 $1,294,085 Jul-07 $2,793,330 $2,507,396 $2,329,508 $1,293,751 Aug-07 $2,765,885 $2,468,897 $2,293,661 $1,291,417 Sep-07 $2,924,025 $2,632,390 $2,416,810 $1,294,974 Oct-07 $3,069,833 $2,779,329 $2,512,039 $1,297,754 Nov-07 $2,970,426 $2,654,442 $2,430,084 $1,305,426 Dec-07 $2,969,430 $2,616,074 $2,375,529 $1,304,536 AVERAGE ANNUAL TOTAL RETURN - ---------------------------------- PRIMARY SHARES 1 12/31/07 - ---------------------------------- 1-Year +18.45% - ---------------------------------- 5-Year +24.60% - ---------------------------------- 10-Year +11.50% - ---------------------------------- SERVICE SHARES (9/18/06-12/31/07) $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] TIFI Foreign MSCI AC World MSCI EAFE Date Equity Series ex USA Index 6 Index 6 CPI 6 Sep-06 $1,013,121 $1,010,904 $1,014,141 $ 998,055 Oct-06 $1,054,871 $1,052,068 $1,053,675 $ 992,662 Nov-06 $1,092,644 $1,090,264 $1,085,457 $ 991,159 Dec-06 $1,133,066 $1,124,242 $1,119,598 $ 996,552 Jan-07 $1,145,401 $1,128,440 $1,127,260 $ 999,558 Feb-07 $1,138,596 $1,135,336 $1,136,520 $1,004,951 Mar-07 $1,176,157 $1,167,324 $1,166,028 $1,014,057 Apr-07 $1,239,571 $1,221,456 $1,218,875 $1,020,688 May-07 $1,274,277 $1,254,936 $1,241,883 $1,026,965 Jun-07 $1,281,126 $1,265,624 $1,243,799 $1,028,998 Jul-07 $1,263,982 $1,262,016 $1,225,615 $1,028,733 Aug-07 $1,251,564 $1,242,639 $1,206,755 $1,026,876 Sep-07 $1,323,122 $1,324,928 $1,271,546 $1,029,706 Oct-07 $1,389,102 $1,398,885 $1,321,649 $1,031,916 Nov-07 $1,344,124 $1,336,027 $1,278,530 $1,038,016 Dec-07 $1,343,674 $1,316,716 $1,249,827 $1,037,309 AVERAGE ANNUAL TOTAL RETURN - ---------------------------------- SERVICE SHARES 12/31/07 - ---------------------------------- 1-Year +18.37% - ---------------------------------- Since Inception (9/18/06) +25.78% - ---------------------------------- Annual Report | 7 Performance Summary (CONTINUED) 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 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 Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. 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, 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. 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. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,048.50 $3.98 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.32 $3.92 - ----------------------------------------------------------------------------------------------------------------- SERVICE SHARES - ----------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,048.10 $4.70 - ----------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.62 $4.63 - -----------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (Primary Shares: 0.77% and Service Shares: 0.91%), 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 FOREIGN EQUITY SERIES
------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, PRIMARY SHARES 2007 2006 2005 2004 2003 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 26.67 $ 22.31 $ 20.27 $ 16.95 $ 12.13 ------------------------------------------------------------------------ Income from investment operations a: Net investment income b ............................. 0.72 0.55 0.42 0.33 0.25 Net realized and unrealized gains (losses) .......... 4.08 5.86 2.32 3.25 4.87 ------------------------------------------------------------------------ Total from investment operations ....................... 4.80 6.41 2.74 3.58 5.12 ------------------------------------------------------------------------ Less distributions from: Net investment income ............................... (1.16) (0.74) (0.66) (0.26) (0.30) Net realized gains .................................. (1.71) (1.31) (0.04) -- -- ------------------------------------------------------------------------ Total distributions .................................... (2.87) (2.05) (0.70) (0.26) (0.30) ------------------------------------------------------------------------ Redemption fees ........................................ -- c -- c -- c -- c -- ------------------------------------------------------------------------ Net asset value, end of year ........................... $ 28.60 $ 26.67 $ 22.31 $ 20.27 $ 16.95 ======================================================================== Total return ........................................... 18.45% 29.04% 13.61% 21.25% 42.61% RATIOS TO AVERAGE NET ASSETS Expenses ............................................... 0.78% d 0.80% d 0.81% d 0.82% d 0.83% Net investment income .................................. 2.46% 2.25% 2.01% 1.89% 1.85% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $9,081,511 $7,311,236 $6,245,721 $5,658,170 $4,642,764 Portfolio turnover rate ................................ 16.74% 7.59% 12.97% 18.25% 8.93%
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. FINANCIAL HIGHLIGHTS (CONTINUED) FOREIGN EQUITY SERIES
-------------------------- YEAR ENDED DECEMBER 31, SERVICE SHARES 2007 2006 g -------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................................... $ 26.67 $ 25.15 -------------------------- Income from investment operations a: Net investment income b ............................................ 0.36 0.05 Net realized and unrealized gains (losses) ......................... 4.42 3.31 -------------------------- Total from investment operations ...................................... 4.78 3.36 -------------------------- Less distributions from: Net investment income .............................................. (1.16) (0.66) Net realized gains ................................................. (1.71) (1.18) -------------------------- Total distributions ................................................... (2.87) (1.84) -------------------------- Redemption fees ....................................................... -- e -- e -------------------------- Net asset value, end of year .......................................... $ 28.58 $ 26.67 ========================== Total return c ........................................................ 18.37% 13.31% RATIOS TO AVERAGE NET ASSETS d Expenses .............................................................. 0.92% f 0.80% f Net investment income ................................................. 2.32% 2.25% SUPPLEMENTAL DATA Net assets, end of year (000's) ....................................... $ 173,247 $ 11 Portfolio turnover rate ............................................... 16.74% 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 Ratios are annualized for periods less than one year. e Amount rounds to less than $0.01 per share. f Benefit of expense reduction rounds to less than 0.01%. g For the period September 18, 2006 (effective date) to December 31, 2006. 12 | The accompanying notes are an integral part of these financial statements. | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 93.7% AUSTRALIA 1.1% National Australia Bank Ltd. .................. Commercial Banks 2,971,788 $ 98,395,032 --------------- AUSTRIA 0.9% a Telekom Austria AG ............................ Diversified Telecommunication Services 2,876,013 79,870,992 --------------- BERMUDA 1.3% ACE Ltd. ...................................... Insurance 1,134,940 70,116,593 Invesco Ltd. .................................. Capital Markets 1,656,230 51,972,498 --------------- 122,089,091 --------------- BRAZIL 1.0% Embraer-Empresa Brasileira de Aeronautica SA, ADR .................................... Aerospace & Defense 1,982,810 90,396,308 --------------- CANADA 0.6% George Weston Ltd. ............................ Food & Staples Retailing 136,400 7,432,278 Husky Energy Inc. ............................. Oil, Gas & Consumable Fuels 1,157,180 51,923,176 --------------- 59,355,454 --------------- CHINA 2.1% China Mobile Ltd. ............................. Wireless Telecommunication Services 7,010,500 123,972,243 China Telecom Corp. Ltd., H ................... Diversified Telecommunication Services 91,858,000 73,033,123 --------------- 197,005,366 --------------- DENMARK 1.1% b Vestas Wind Systems AS ........................ Electrical Equipment 964,113 104,157,036 --------------- FINLAND 1.5% Stora Enso OYJ, R (EUR/FIM Traded) ............ Paper & Forest Products 1,712,875 25,596,765 a Stora Enso OYJ, R (SEK Traded) ................ Paper & Forest Products 2,880,646 43,327,532 UPM-Kymmene OYJ ............................... Paper & Forest Products 3,355,090 67,666,181 --------------- 136,590,478 --------------- FRANCE 9.2% Accor SA ...................................... Hotels, Restaurants & Leisure 506,060 40,396,969 AXA SA ........................................ Insurance 2,582,588 103,230,162 Compagnie Generale des Etablissements Michelin, B ................................ Auto Components 961,120 110,104,919 France Telecom SA ............................. Diversified Telecommunication Services 4,203,600 151,031,968 Sanofi-Aventis ................................ Pharmaceuticals 1,577,620 144,998,833 Sanofi-Aventis, ADR ........................... Pharmaceuticals 6,963 317,025 Suez SA ....................................... Multi-Utilities 1,513,050 102,829,794 Suez SA, ADR .................................. Multi-Utilities 7,350 501,638 Thomson SA .................................... Household Durables 3,138,760 44,568,744 Total SA, B ................................... Oil, Gas & Consumable Fuels 1,168,558 96,914,192 Vivendi SA .................................... Media 1,247,090 57,109,740 --------------- 852,003,984 --------------- GERMANY 10.7% BASF AG ....................................... Chemicals 365,690 54,039,392 Bayerische Motoren Werke AG ................... Automobiles 2,117,130 132,020,042 Celesio AG .................................... Health Care Providers & Services 2,412,384 149,480,960 Deutsche Post AG .............................. Air Freight & Logistics 3,910,040 133,009,580
Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) GERMANY (CONTINUED) E.ON AG ....................................... Electric Utilities 752,950 $ 159,998,823 b Infineon Technologies AG ...................... Semiconductors & Semiconductor Equipment 6,883,860 81,573,201 Merck KGaA .................................... Pharmaceuticals 339,516 44,181,297 Muenchener Rueckversicherungs-Gesellschaft AG ......................................... Insurance 328,817 63,749,278 Siemens AG .................................... Industrial Conglomerates 1,068,380 169,041,992 --------------- 987,094,565 --------------- HONG KONG 1.9% Cheung Kong (Holdings) Ltd. ................... Real Estate Management & Development 2,609,000 48,244,803 Cheung Kong (Holdings) Ltd., ADR .............. Real Estate Management & Development 32,235 585,065 Hutchison Whampoa Ltd. ........................ Industrial Conglomerates 4,049,550 45,932,047 Hutchison Whampoa Ltd., ADR ................... Industrial Conglomerates 4,895 275,344 Swire Pacific Ltd., A ......................... Real Estate Management & Development 5,568,000 76,757,159 Swire Pacific Ltd., B ......................... Real Estate Management & Development 157,000 416,756 --------------- 172,211,174 --------------- INDIA 5.0% Bharat Petroleum Corp. Ltd. ................... Oil, Gas & Consumable Fuels 3,541,756 47,057,134 Housing Development Finance Corp. ............. Thrifts & Mortgage Finance 2,433,846 177,416,595 ICICI Bank Ltd. ............................... Commercial Banks 5,051,622 157,990,584 Satyam Computer Services Ltd. ................. IT Services 6,695,072 76,312,437 Satyam Computer Services Ltd., ADR ............ IT Services 95,400 2,549,088 --------------- 461,325,838 --------------- ISRAEL 0.6% b Check Point Software Technologies Ltd. ........ Software 2,499,810 54,895,828 --------------- ITALY 3.4% a Eni SpA ....................................... Oil, Gas & Consumable Fuels 2,490,109 91,030,208 a Intesa Sanpaolo SpA ........................... Commercial Banks 9,280,780 73,272,531 a Mediaset SpA .................................. Media 7,358,493 74,150,146 a UniCredito Italiano SpA ....................... Commercial Banks 9,510,841 78,836,386 --------------- 317,289,271 --------------- JAPAN 4.3% FUJIFILM Holdings Corp. ....................... Electronic Equipment & Instruments 1,078,600 45,749,702 Hitachi Ltd. .................................. Electronic Equipment & Instruments 6,668,000 49,808,941 Hitachi Ltd., ADR ............................. Electronic Equipment & Instruments 2,325 170,051 Mitsubishi UFJ Financial Group Inc. ........... Commercial Banks 3,522,700 33,074,177 NEC Corp. ..................................... Computers & Peripherals 3,963,000 18,301,977 NEC Corp., ADR ................................ Computers & Peripherals 14,925 66,789 NGK Spark Plug Co. Ltd. ....................... Auto Components 2,402,000 42,131,659 Nintendo Co. Ltd. ............................. Software 175,900 105,525,804 Sompo Japan Insurance Inc. .................... Insurance 900 8,159 Sony Corp. .................................... Household Durables 1,047,000 58,211,003 Sony Corp., ADR ............................... Household Durables 4,505 244,622 Takeda Pharmaceutical Co. Ltd. ................ Pharmaceuticals 781,400 46,036,838 --------------- 399,329,722 ---------------
14 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) MEXICO 0.9% Telefonos de Mexico SAB de CV (Telmex), L, ADR ..................................... Diversified Telecommunication Services 2,220,074 $ 81,787,526 --------------- NETHERLANDS 6.0% ING Groep NV .................................. Diversified Financial Services 2,608,180 101,817,117 ING Groep NV, ADR ............................. Diversified Financial Services 13,265 516,141 Koninklijke Philips Electronics NV ............ Industrial Conglomerates 3,023,351 130,245,993 Koninklijke Philips Electronics NV, N.Y. shs. .................................. Industrial Conglomerates 12,205 521,764 SBM Offshore NV ............................... Energy Equipment & Services 2,362,240 74,462,432 Unilever NV ................................... Food Products 3,886,570 142,647,424 Unilever NV, N.Y. shs. ........................ Food Products 7,790 284,023 Vedior NV ..................................... Commercial Services & Supplies 1,977,990 49,706,901 Wolters Kluwer NV ............................. Media 1,534,535 50,342,242 --------------- 550,544,037 --------------- NORWAY 1.6% a Telenor ASA ................................... Diversified Telecommunication Services 6,346,300 151,519,445 --------------- PORTUGAL 1.0% Portugal Telecom SGPS SA ...................... Diversified Telecommunication Services 6,567,060 85,581,894 b PT Multimedia Servicos de Telecomunicacoes e Multimedia ............................... Media 808,847 11,272,732 --------------- 96,854,626 --------------- SINGAPORE 2.4% DBS Group Holdings Ltd. ....................... Commercial Banks 7,062,185 101,416,788 DBS Group Holdings Ltd., ADR .................. Commercial Banks 7,705 439,378 b Flextronics International Ltd. ................ Electronic Equipment & Instruments 5,052,950 60,938,577 Singapore Telecommunications Ltd. ............. Diversified Telecommunication Services 20,522,000 56,948,212 --------------- 219,742,955 --------------- SOUTH KOREA 3.8% Kookmin Bank .................................. Commercial Banks 921,696 67,941,909 Kookmin Bank, ADR ............................. Commercial Banks 221,568 16,245,366 Korea Electric Power Corp. .................... Electric Utilities 1,173,430 49,705,143 Korea Electric Power Corp., ADR ............... Electric Utilities 12,195 254,266 LG Electronics Inc. ........................... Household Durables 810,880 86,627,851 Samsung Electronics Co. Ltd. .................. Semiconductors & Semiconductor Equipment 220,275 130,840,126 --------------- 351,614,661 --------------- SPAIN 4.1% a Banco Santander SA ............................ Commercial Banks 4,727,230 102,031,520 a Repsol YPF SA ................................. Oil, Gas & Consumable Fuels 2,579,733 91,784,196 a Telefonica SA ................................. Diversified Telecommunication Services 5,560,578 180,311,506 Telefonica SA, ADR ............................ Diversified Telecommunication Services 9,092 887,288 --------------- 375,014,510 --------------- SWEDEN 2.8% a Atlas Copco AB, A ............................. Machinery 6,400,790 95,531,224 Nordea Bank AB, FDR ........................... Commercial Banks 7,448,068 124,019,143 a Securitas AB, B ............................... Commercial Services & Supplies 1,971,720 27,445,567
Annual Report | 15 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) SWEDEN (CONTINUED) a,b Securitas Direct AB, B ........................ Diversified Consumer Services 1,971,720 $ 7,898,224 a Securitas Systems AB, B ....................... Commercial Services & Supplies 1,971,720 7,013,867 --------------- 261,908,025 --------------- SWITZERLAND 5.7% Adecco SA ..................................... Commercial Services & Supplies 1,055,220 57,035,144 Lonza Group AG ................................ Chemicals 698,230 84,660,080 Nestle SA ..................................... Food Products 273,590 125,544,299 Nestle SA, ADR ................................ Food Products 2,310 265,592 Novartis AG ................................... Pharmaceuticals 2,338,110 128,129,749 Swiss Reinsurance Co. ......................... Insurance 1,074,322 76,270,036 Swiss Reinsurance Co., ADR .................... Insurance 3,295 233,121 UBS AG ........................................ Capital Markets 1,141,790 52,522,340 --------------- 524,660,361 --------------- TAIWAN 1.2% b Chinatrust Financial Holding Co. Ltd. ......... Commercial Banks 81,127,000 57,661,959 Chunghwa Telecom Co. Ltd., ADR ................ Diversified Telecommunication Services 1,280,118 27,023,295 Compal Electronics Inc., GDR .................. Computers & Peripherals 1,141,266 6,276,963 c Compal Electronics Inc., GDR, 144A ............ Computers & Peripherals 4,407,044 24,238,742 --------------- 115,200,959 --------------- UNITED KINGDOM 19.3% Aviva PLC ..................................... Insurance 7,456,150 99,704,937 BAE Systems PLC ............................... Aerospace & Defense 11,572,338 114,508,418 BP PLC ........................................ Oil, Gas & Consumable Fuels 9,455,990 115,549,769 British Sky Broadcasting Group PLC ............ Media 6,294,200 77,413,758 Cadbury Schweppes PLC ......................... Food Products 7,687,260 94,852,795 Compass Group PLC ............................. Hotels, Restaurants & Leisure 15,208,930 93,226,803 G4S PLC ....................................... Commercial Services & Supplies 6,467,443 31,451,566 GlaxoSmithKline PLC ........................... Pharmaceuticals 5,215,010 132,529,528 HSBC Holdings PLC ............................. Commercial Banks 5,006,821 84,558,845 HSBC Holdings PLC, ADR ........................ Commercial Banks 3,870 323,958 Kingfisher PLC ................................ Specialty Retail 6,031,910 17,450,312 National Grid PLC ............................. Multi-Utilities 4,104,459 68,056,440 Old Mutual PLC ................................ Insurance 19,897,660 66,261,762 Pearson PLC ................................... Media 4,834,640 70,317,300 Rolls-Royce Group PLC ......................... Aerospace & Defense 13,873,664 150,511,879 b Rolls-Royce Group PLC, B ...................... Aerospace & Defense 547,650,441 1,196,972 Royal Bank of Scotland Group PLC .............. Commercial Banks 14,093,290 124,331,828 Royal Dutch Shell PLC, B, ADR ................. Oil, Gas & Consumable Fuels 1,465,457 121,632,931 Smiths Group PLC .............................. Industrial Conglomerates 2,033,823 40,936,392 Standard Chartered PLC ........................ Commercial Banks 2,779,300 101,831,773 Vodafone Group PLC ............................ Wireless Telecommunication Services 35,386,763 132,045,434 Yell Group PLC ................................ Media 6,173,390 49,187,534 --------------- 1,787,880,934 --------------- UNITED STATES 0.2% News Corp., A ................................. Media 1,115,479 22,856,165 --------------- TOTAL COMMON STOCKS (COST $4,812,757,122) ...................... 8,671,594,343 ---------------
16 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN EQUITY SERIES PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS 6.4% U.S. GOVERNMENT AND AGENCY SECURITIES 6.1% d FHLB, 2/22/08 - 9/04/08 ....................... $ 368,300,000 $ 362,538,184 FHLB, 4.25%, 6/17/08 .......................... 100,000,000 99,901,200 d FNMA, 1/24/08 - 8/01/08 ....................... 105,000,000 103,415,310 --------------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $565,561,009) ........................ 565,854,694 --------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUND (COST $5,378,318,131) ...................... 9,237,449,037 --------------- ----------- SHARES ----------- MONEY MARKET FUND (COST $28,756,842) 0.3% e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% .............. 28,756,842 28,756,842 --------------- TOTAL INVESTMENTS (COST $5,407,074,973) 100.1% ............... 9,266,205,879 OTHER ASSETS, LESS LIABILITIES (0.1)% ......... (11,448,218) --------------- NET ASSETS 100.0% ............................. $9,254,757,661 ===============
CURRENCY ABBREVIATIONS EUR - Euro FIM - Finnish Markka SEK - Swedish Krona SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FDR - Foreign Depository Receipt FHLB - Federal Home Loan Bank FNMA - Federal National Mortgage Association GDR - Global Depository Receipt a A portion or all of the securities purchased on a when-issued or delayed delivery basis. See Note 1(c). b Non-income producing for the twelve months ended December 31, 2007. c 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, 2007 the value of this security was $24,238,742, representing 0.26% of net assets. 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. Annual Report | The accompanying notes are an integral part of these financial statements. | 17 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2007 ---------------- FOREIGN EQUITY SERIES ---------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........................... $ 5,378,318,131 Cost - Sweep Money Fund (Note 7) ...................... 28,756,842 ---------------- Total cost of investments ............................. $ 5,407,074,973 ================ Value - Unaffiliated issuers .......................... $ 9,237,449,037 Value - Sweep Money Fund (Note 7) ..................... 28,756,842 ---------------- Total value of investments ............................ 9,266,205,879 Foreign currency, at value (Cost $530,736) ............... 534,290 Receivables: Capital shares sold ................................... 23,316,786 Dividends and interest ................................ 9,877,919 ---------------- Total assets ....................................... 9,299,934,874 ---------------- Liabilities: Payables: Investment securities purchased ....................... 34,145,543 Capital shares redeemed ............................... 2,249,199 Affiliates ............................................ 5,794,931 Deferred tax ............................................. 2,104,690 Accrued expenses and other liabilities ................... 882,850 ---------------- Total liabilities .................................. 45,177,213 ---------------- Net assets, at value ............................ $ 9,254,757,661 ---------------- Net assets consist of: Paid-in capital .......................................... $ 5,353,322,295 Distributions in excess of net investment income ......... (158,223,078) Net unrealized appreciation (depreciation) ............... 3,856,425,448 Accumulated net realized gain (loss) ..................... 203,232,996 ---------------- Net assets, at value ............................... $ 9,254,757,661 ---------------- PRIMARY SHARES: Net assets, at value ..................................... $ 9,081,510,857 ================ Shares outstanding ....................................... 317,539,548 ================ Net asset value per share a .............................. $ 28.60 ================ SERVICE SHARES: Net assets, at value ..................................... $ 173,246,804 ================ Shares outstanding ....................................... 6,061,104 ================ Net asset value and maximum offering price per share a ... $ 28.58 ================ a Redemption price is equal to net asset value less redemption fees retained by the Fund. 18 | 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, 2007 ---------------- FOREIGN EQUITY SERIES ---------------- Investment income: Dividends (net of foreign taxes of $18,076,938) Unaffiliated issuers .................................. $ 236,916,797 Sweep Money Fund (Note 7) ............................. 15,373,173 Interest (net of foreign taxes of $272) .................. 19,653,584 ---------------- Total investment income ......................... 271,943,554 ---------------- Expenses: Management fees (Note 3a) ................................ 55,517,308 Administrative fees (Note 3b) ............................ 6,729,867 Transfer agent fees (Note 3c) ............................ 135,237 Sub-transfer agent fees (Note 3c) Service Shares ........................................ 102,300 Custodian fees (Note 4) .................................. 2,242,765 Reports to shareholders .................................. 101,358 Registration and filing fees ............................. 111,957 Professional fees ........................................ 272,928 Directors' fees and expenses ............................. 123,889 Other .................................................... 158,077 ---------------- Total expenses ........................................ 65,495,686 Expense reductions (Note 4) ........................... (178,573) ---------------- Net expenses ....................................... 65,317,113 ---------------- Net investment income ........................... 206,626,441 ---------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................... 750,262,749 Foreign currency transactions ......................... 2,590,995 ---------------- Net realized gain (loss) ........................ 752,853,744 ---------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................... 446,492,687 Translation of assets and liabilities denominated in foreign currencies ................................. (737,421) Change in deferred taxes on unrealized appreciation (depreciation) ........................................ 1,720,837 ---------------- Net change in unrealized appreciation (depreciation) ............................... 447,476,103 ---------------- Net realized and unrealized gain (loss) ..................... 1,200,329,847 ---------------- Net increase (decrease) in net assets resulting from operations ............................................... $ 1,406,956,288 ================ Annual Report | The accompanying notes are an integral part of these financial statements. | 19 Templeton Institutional Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------- FOREIGN EQUITY SERIES YEAR ENDED DECEMBER 31, --------------------------------- 2007 2006 --------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................... $ 206,626,441 $ 150,009,730 Net realized gain (loss) from investments and foreign currency transactions .............. 752,853,744 341,264,841 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes .......... 447,476,103 1,213,490,634 --------------------------------- Net increase (decrease) in net assets resulting from operations ....................... 1,406,956,288 1,704,765,205 --------------------------------- Distributions to shareholders from: Net investment income: Primary Shares ........................................................................... (337,298,627) (191,899,440) Service Shares ........................................................................... (6,047,617) (262) Net realized gains: Primary Shares ........................................................................... (495,682,366) (343,352,663) Service Shares ........................................................................... (8,697,904) (469) --------------------------------- Total distributions to shareholders ............................................................ (847,726,514) (535,252,834) --------------------------------- Capital share transactions: (Note 2) Primary Shares ........................................................................... 1,208,441,383 (104,014,174) Service Shares ........................................................................... 175,811,194 10,000 --------------------------------- Total capital share transactions ............................................................... 1,384,252,577 (104,004,174) --------------------------------- Redemption fees ................................................................................ 28,313 18,250 --------------------------------- Net increase (decrease) in net assets ................................................. 1,943,510,664 1,065,526,447 Net assets: Beginning of year ........................................................................... 7,311,246,997 6,245,720,550 --------------------------------- End of year ................................................................................. $9,254,757,661 $ 7,311,246,997 ================================= Distributions in excess of net investment income included in net assets: End of year ................................................................................. $ (158,223,078) $ (102,604,468) =================================
20 | The accompanying notes are an integral part of these financial statements. | Annual Report 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, (1940 Act) as an open-end investment company, consisting of three separate funds. The Foreign Equity Series (Fund) included in this report is diversified. The financial statements of the remaining funds in TIFI are presented separately. The Fund offers two classes of shares: Primary and Service shares. Each class of shares differs by its voting rights on matters affecting a single class. 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 such securities, Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) 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. 22 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Fund may purchase securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. 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 at a future 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. E. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because it is the Fund's policy 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. Annual Report | 23 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. 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 of America. 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. 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 per share distributions, by class, are generally due to differences in class specific expenses. 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. G. 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. H. 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. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. 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 Funds'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, 2007, there were 1.2 billion shares of TIFI authorized ($0.01 par value) of which 755 million shares were allocated to the Fund. Transactions in the Fund's shares were as follows:
----------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2007 2006 a ----------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------- PRIMARY SHARES: Shares sold ............................. 62,169,907 $ 1,790,944,002 43,115,685 $ 1,054,636,410 Shares issued in reinvestment of distributions ..................... 26,528,242 733,703,547 18,348,681 477,022,238 Shares redeemed ......................... (45,282,230) (1,316,206,166) (67,262,525) (1,635,672,822) ----------------------------------------------------------------- Net increase (decrease) ................. 43,415,919 $ 1,208,441,383 (5,798,159) $ (104,014,174) ================================================================= SERVICE SHARES: Shares sold ............................. 5,842,118 $ 170,491,561 397 $ 10,000 Shares issued in reinvestment of distributions ..................... 531,207 14,745,444 -- -- Shares redeemed ......................... (312,618) (9,425,811) -- -- ----------------------------------------------------------------- Net increase (decrease) ................. 6,060,707 $ 175,811,194 397 $ 10,000 =================================================================
a For the period September 18, 2006 (effective date) to December 31, 2006, for the Service Shares. 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
Annual Report | 25 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY 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 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 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 For the year ended December 31, 2007, the Fund paid transfer agent fees, including sub-transfer agency fees, of $237,537, of which $63,353 was retained by Investor Services. Service Shares may pay up to 0.15% of average daily net assets for sub-transfer agency fees. For the year ended December 31, 2007, the Fund paid $102,300 for 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, 2007, the custodian fees were reduced as noted in the Statement of Operations. 26 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 5. INCOME TAXES The Fund has reviewed the tax positions taken on federal income tax returns, for each of the three open tax years and as of December 31, 2007 and has determined that no provision for income tax is required in the Fund's financial statements. The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows: --------------------------- 2007 2006 --------------------------- Distributions paid from: Ordinary income ............................. $362,163,529 $225,949,128 Long term capital gain ...................... 485,562,985 309,303,706 --------------------------- $847,726,514 $535,252,834 =========================== At December 31, 2007, 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 ......................................... $ 5,573,553,931 ================ Unrealized appreciation ..................................... 3,795,830,745 Unrealized depreciation ..................................... (103,178,797) ---------------- Net unrealized appreciation (depreciation) .................. $ 3,692,651,948 ================ Undistributed ordinary income ............................... $ 8,314,911 Undistributed long term capital gains ....................... 203,208,431 ---------------- Distributable earnings ...................................... $ 211,523,342 ================ 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. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and passive foreign investment company shares. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2007, aggregated $1,752,819,113 and $1,317,019,765, respectively. Annual Report | 27 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (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. 9. REGULATORY AND LITIGATION 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 and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, 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. 28 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 9. REGULATORY AND LITIGATION MATTERS (CONTINUED) 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. 10. NEW ACCOUNTING PRONOUNCEMENT In September 2006, Financial Accounting Standards Board (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 | 29 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 Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2007, 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, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2008 30 | Annual Report 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 $652,595,294 as a long term capital gain dividend for the fiscal year ended December 31, 2007. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $19,139,774 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, 2007. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $232,241,153 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2007. 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 $34,222,109 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, 2007. At December 31, 2007, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income 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, 2007, 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, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Funds, to Primary Class, and Service Class shareholders of record. Record Date: 12/14/2007
- ------------------------------------------------------------------------------------------------------ FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED DIVIDENDS CLASS PER SHARE PER SHARE PER SHARE - ------------------------------------------------------------------------------------------------------ Primary Class .............. $0.0609 $0.6814 $0.6185 Service Class .............. $0.0609 $0.6814 $0.6185
Annual Report | 31 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES 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 In January 2008, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2007. 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 2007 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 bracket). 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 serves 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 141 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 Fortis, Inc. (utility holding 500 East Broward Blvd. company), Nuinsco Resources Suite 2100 Limited (mineral exploration), Fort Lauderdale, FL 33394-3091 Royal Fidelity Merchant Bank & Trust Limited (financial services), C.A. Bancorp Inc. (financial services), Victory Nickel Inc. (mineral exploration), ABACO Markets Limited (retail distributors) and Belize Electricity Limited (electric utility). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Company 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) Lead Director since 141 Hess Corporation (exploration and 500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Suite 2100 Director Independent Heinz Company (processed foods Fort Lauderdale, FL 33394-3091 Director since and allied products), RTI December 2007 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 Emeritus Corporation (assisted 500 East Broward Blvd. living) and OSI Pharmaceuticals, Suite 2100 Inc. (pharmaceutical products). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and Managing Director, Saratoga Partners FORMERLY, (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 141 Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas) and Suite 2100 Sentient Jet (private jet Fort Lauderdale, FL 33394-3091 service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (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 (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since 2005 141 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. (credit card provider) (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). - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT E. WADE (1946) Director Since April 2007 34 El Oro and Exploration Co., 500 East Broward Blvd. p.l.c. (investments) and ARC Suite 2100 Wireless Solutions, Inc. Fort Lauderdale, FL 33394-3091 (wireless components and network products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Practicing attorney. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Director and 141 None One Franklin Parkway Chairman of Vice President San Mateo, CA 94403-1906 the Board and since 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 42 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ **GREGORY E. JOHNSON (1961) Director Since April 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 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 2004 San Mateo, CA 94403-1906 Officer and and Vice President Vice President - AML Compliance - AML since 2006 Compliance 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). - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President Suite 2100 and 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. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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. - ------------------------------------------------------------------------------------------------------------------------------------ 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 and 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. and of six of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ 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 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. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 18 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). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. 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 some of the other subsidiaries of Franklin Resources, Inc. and 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, director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. Note 3: Prior to December 31, 2007, Nicholas F. Brady 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 HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. NIEMIEC QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. 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 BELIEVES THAT MR. NIEMIEC HAS 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. MR. NIEMIEC IS AN INDEPENDENT BOARD MEMBER 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 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. 38 | Annual Report This page intentionally left blank. This page intentionally left blank. [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN TEMPLETON INSTITUTIONAL 600 Fifth Avenue 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 ftinstitutional.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 A2007 02/08 [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- ANNUAL REPORT 12 31 2007 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. - -------------------------------------------------------------------------------- Emerging Markets Series [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL Contents ANNUAL REPORT TIFI Emerging Markets 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 ................... 28 Tax Designation ........................................................... 29 Board Members and Officers ................................................ 31 Shareholder Information ................................................... 36 - -------------------------------------------------------------------------------- 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 FTINSTITUTIONAL.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 (Fund) covers the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW TIFI Emerging Markets Series posted a +30.10% cumulative total return for the 12 months ended December 31, 2007. 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 +40.28% and +39.78% during the same period. 1 Please note that index performance is purely for reference and that we do not attempt to tract any 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. 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 11. - -------------------------------------------------------------------------------- - ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE - ----------------------------------------------------- Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Asia 43.2% Europe 30.0% Latin America 21.0% Middle East & Africa 4.9% Short-Term Investments & Other Net Assets 0.9% ECONOMIC AND MARKET OVERVIEW In 2007, emerging markets equities had another positive year. Despite problems brought on by the U.S. subprime lending crisis, emerging markets registered a +39.78% gain for the year, bringing cumulative return for the past five years to +390.79% in U.S. dollar terms, as measured by the MSCI EM Index. 2 Most stock markets were supported by a robust macroeconomic environment, surging money supply, rising commodity prices, stronger emerging market currencies, improved corporate earnings and significant investment inflows. Periods of increased volatility, however, occurred during the year as nervous investors reacted to subprime concerns and their impact on the global economy as well as overheating concerns in China. In Asia, India and China were among the top performing markets as both economies continued to benefit from strong economic growth, a large consumer base and vast foreign reserves. Moreover, Chinese stocks listed in Hong Kong were key beneficiaries of the expansion of China's Qualified Domestic Institutional Investor (QDII) program, which allowed domestic fund managers and brokerages to invest in foreign securities. Neighboring markets in Indonesia, Thailand and South Korea also recorded respectable gains. Market returns in Latin America benefited from high commodity prices and stronger regional currencies. Accelerating economic growth, high foreign investment flows and lower interest rates pushed the Brazilian stock market to end the year at record high levels. However, Mexico underperformed its regional peers as concerns of slowing growth in the U.S. led investors to stay on the sidelines. Despite recording double-digit returns, European and African markets underperformed their emerging market counterparts during the year. Turkey, however, significantly outperformed global markets as investors responded favorably to the central bank's adoption of a loosening monetary policy, improvement in the country's public finances, as well as the completion of parliamentary and presidential elections. A stronger lira also boosted stock returns in U.S. dollar terms. 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 2. Source: Standard & Poor's Micropal. See footnote 1 for a description of the MSCI EM Index. 2 | Annual Report 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 For the 12 months under review, the Fund's exposure to the materials, energy, telecommunication services and bank sectors contributed significantly to absolute performance. 3 Within the materials and energy sectors, holdings in Chalco (Aluminum Corp. of China), CVRD (Companhia Vale do Rio Doce), Petrobras (Petroleo Brasileiro) and Tupras (Tupras-Turkiye Petrol Rafinerileri) were among the largest contributors to performance. Rising oil and commodity prices coupled with growing demand for oil, coal and metals in China as well as other emerging markets benefited these companies. Additional key contributors included Turkcell (Turkcell Iletisim Hizmetleri) and America Movil in the telecommunication services sector. Turkish and Brazilian banks, Akbank, Vakifbank (Turkiye Vakiflar Bankasi), Unibanco (Unibanco-Uniao de Bancos Brasileiros) and Banco Bradesco, also boosted Fund performance during the period. Sectors that detracted from Fund performance included retail and real estate. 4 South African stocks Foschini and JD Group declined in value and were the largest detractors in the retail sector during the period. Over the longer term, however, we believed that both stocks were well positioned in their respective markets to benefit from growing demand for their products and services. In the real estate sector, Beijing Capital Land and Hopson Development Holdings were detractors during the period. Geographically, investments in Brazil, Turkey and China made noteworthy contributions to Fund performance. In addition to stocks discussed earlier, THY (Turk Hava Yollari Anonim Ortakligi), Turkey's national airline; Souza Cruz, Brazil's leading major tobacco company; Sinopec (China Petroleum and Chemical), the largest integrated energy company in China; and PetroChina, a dominant player in the upstream oil and gas sector, also supported performance. 3. The materials sector comprises chemicals, construction materials, metals and mining, and paper and forest products in the SOI. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. The bank sector comprises commercial banks in the SOI. 4. The retail sector comprises specialty retail in the SOI. The real estate sector comprises real estate management and development in the SOI. TOP 10 COUNTRIES 12/31/07 - -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS - -------------------------------------------------------------------------------- China 20.2% - -------------------------------------------------------------------------------- Brazil 15.6% - -------------------------------------------------------------------------------- Russia 13.2% - -------------------------------------------------------------------------------- Turkey 10.1% - -------------------------------------------------------------------------------- South Korea 8.0% - -------------------------------------------------------------------------------- India 5.5% - -------------------------------------------------------------------------------- Mexico 4.8% - -------------------------------------------------------------------------------- South Africa 4.5% - -------------------------------------------------------------------------------- Taiwan 3.2% - -------------------------------------------------------------------------------- U.K. 2.2% - -------------------------------------------------------------------------------- Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- CVRD (Companhia Vale do Rio Doce), ADR, pfd., A 5.4% METALS & MINING, BRAZIL - -------------------------------------------------------------------------------- Petrobras (Petroleo Brasileiro SA), ADR, pfd. 4.6% OIL, GAS & CONSUMABLE FUELS, BRAZIL - -------------------------------------------------------------------------------- Akbank TAS 3.8% COMMERCIAL BANKS, TURKEY - -------------------------------------------------------------------------------- Chalco (Aluminum Corp. of China Ltd.), H & 144A 3.8% METALS & MINING, CHINA - -------------------------------------------------------------------------------- Gazprom OAO, ord. & ADR 3.5% OIL, GAS & CONSUMABLE FUELS, RUSSIA - -------------------------------------------------------------------------------- SK Energy Co. Ltd. 3.2% OIL, GAS & CONSUMABLE FUELS, SOUTH KOREA - -------------------------------------------------------------------------------- UES (Unified Energy Systems) 3.2% ELECTRIC UTILITIES, RUSSIA - -------------------------------------------------------------------------------- Norilsk Nickel (Mining and Metallurgical Co. Norilsk Nickel) 3.1% METALS & MINING, RUSSIA - -------------------------------------------------------------------------------- PetroChina Co. Ltd., H 2.8% OIL, GAS & CONSUMABLE FUELS, CHINA - -------------------------------------------------------------------------------- America Movil SAB de CV, L, ADR 2.7% WIRELESS TELECOMMUNICATION SERVICES, MEXICO - -------------------------------------------------------------------------------- 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, 2007, 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 investments predominantly in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods. During the reporting period, we made significant purchases in Russia, India, Mexico and China (via Hong Kong-listed China H shares). 5 Major investments included shares of America Movil, UES (Unified Energy Systems), China Telecom and Sberbank (Savings Bank of Russia). We also made select additions in Pakistan, Peru and Chile as we continued to search for undervalued stocks trading at attractive valuations. From a sector perspective, we increased the Fund's allocations to several sectors based on what we considered favorable market trends. With commodity prices expected to stay at relatively high levels amid growing global energy demand, we increased our investments in coal and diversified metals and mining companies. 6 Greater global demand for consumer products and services also led us to increase our allocation to integrated telecommunication services, home furnishing retail and automobile manufacturing companies. 7 We also increased the Fund's exposure to the information technology (IT) consulting industry because of strong demand for outsourcing services. 8 We initiated a position in Tata Consultancy Services, India's leading IT consulting and outsourcing services provider. 5. "China H" denotes shares of China-incorporated, Hong Kong-listed companies with most businesses in China. 6. The coal industry is part of oil, gas and consumable fuels in the SOI. The diversified metals and mining industry is part of metals and mining in the SOI. 7. The integrated telecommunication services industry is part of diversified telecommunication services in the SOI. The home furnishing retail industry is part of household durables in the SOI. The automobile manufacturing industry is part of automobiles in the SOI. 8. The IT consulting industry is part of IT services in the SOI. 4 | Annual Report To raise funds for redemptions during the reporting period, we sold a number of holdings. These sales also allowed the Fund to focus on stocks we considered relatively more attractively valued within our investment universe. We sold select positions as stocks reached sale price targets. As a result, the Fund's exposure to the tobacco, semiconductors, diversified banking, and life and health insurance industries fell. 9 Major sales included all or part of Remgro, Old Mutual, Samsung Electronics and Hana Financial Group. 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 Executive Chairman Templeton Asset Management Ltd. 9. The semiconductors industry is part of semiconductors and semiconductor equipment in the SOI. The diversified banking industry is part of commercial banks in the SOI. The life and health insurance industry is part of insurance in the SOI. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2007, 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 12/31/07 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 12/31/07 12/31/06 - -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.37 $21.23 $20.86 - -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) - -------------------------------------------------------------------------------------- Dividend Income $0.7856 - -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.5063 - -------------------------------------------------------------------------------------- Long-Term Capital Gain $4.1449 - -------------------------------------------------------------------------------------- TOTAL $5.4368 - --------------------------------------------------------------------------------------
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 +30.10% +318.29% +253.54% - ----------------------------------------------------------------------------------------------- Average Annual Total Return 3 +30.10% +33.14% +13.46% - ----------------------------------------------------------------------------------------------- Value of $1,000,000 Investment 4 $1,301,036 $4,182,900 $3,535,462 - ----------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 1.42% - -----------------------------------------------------------------------------------------------
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 VISIT FTINSTITUTIONAL.COM OR 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. 1/1/98-12/31/07 $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] TIFI Emerging S&P/IFCI Date Markets Series Composite Index 6 MSCI EM Index 6 Dec-97 $ 1,000,000 $ 1,000,000 $ 1,000,000 Jan-98 $ 918,997 $ 934,429 $ 921,570 Feb-98 $ 1,009,644 $ 1,029,841 $ 1,017,759 Mar-98 $ 1,049,279 $ 1,070,225 $ 1,061,926 Apr-98 $ 1,051,215 $ 1,073,121 $ 1,050,358 May-98 $ 903,116 $ 939,245 $ 906,416 Jun-98 $ 815,999 $ 842,987 $ 811,337 Jul-98 $ 821,807 $ 876,603 $ 837,061 Aug-98 $ 631,117 $ 630,166 $ 595,033 Sep-98 $ 663,060 $ 660,495 $ 632,779 Oct-98 $ 762,760 $ 736,349 $ 699,412 Nov-98 $ 845,038 $ 791,734 $ 757,581 Dec-98 $ 819,691 $ 779,922 $ 746,602 Jan-99 $ 780,235 $ 761,894 $ 734,556 Feb-99 $ 780,235 $ 775,464 $ 741,701 Mar-99 $ 889,301 $ 865,083 $ 839,450 Apr-99 $ 1,063,015 $ 983,046 $ 943,308 May-99 $ 1,034,392 $ 965,473 $ 937,820 Jun-99 $ 1,135,068 $ 1,070,745 $ 1,044,255 Jul-99 $ 1,084,730 $ 1,055,190 $ 1,015,887 Aug-99 $ 1,046,236 $ 1,066,580 $ 1,025,130 Sep-99 $ 999,847 $ 1,036,870 $ 990,437 Oct-99 $ 1,028,470 $ 1,054,507 $ 1,011,527 Nov-99 $ 1,115,327 $ 1,149,300 $ 1,102,225 Dec-99 $ 1,283,502 $ 1,303,352 $ 1,242,406 Jan-00 $ 1,225,794 $ 1,305,207 $ 1,249,810 Feb-00 $ 1,182,016 $ 1,303,938 $ 1,266,317 Mar-00 $ 1,197,498 $ 1,323,007 $ 1,272,497 Apr-00 $ 1,093,973 $ 1,186,137 $ 1,151,873 May-00 $ 1,006,376 $ 1,153,108 $ 1,104,253 Jun-00 $ 1,081,033 $ 1,185,747 $ 1,143,150 Jul-00 $ 1,035,243 $ 1,128,734 $ 1,084,358 Aug-00 $ 1,055,151 $ 1,132,997 $ 1,089,690 Sep-00 $ 951,627 $ 1,031,663 $ 994,542 Oct-00 $ 871,993 $ 948,129 $ 922,435 Nov-00 $ 826,203 $ 864,367 $ 841,783 Dec-00 $ 872,605 $ 889,391 $ 862,106 Jan-01 $ 971,353 $ 1,003,612 $ 980,819 Feb-01 $ 894,773 $ 926,294 $ 904,019 Mar-01 $ 811,140 $ 846,502 $ 815,227 Apr-01 $ 853,461 $ 896,616 $ 855,509 May-01 $ 883,690 $ 923,755 $ 865,720 Jun-01 $ 879,659 $ 907,029 $ 847,950 Jul-01 $ 828,270 $ 845,037 $ 794,367 Aug-01 $ 831,293 $ 833,550 $ 786,532 Sep-01 $ 727,507 $ 704,328 $ 664,793 Oct-01 $ 749,675 $ 747,999 $ 706,049 Nov-01 $ 795,018 $ 835,633 $ 779,763 Dec-01 $ 829,010 $ 905,142 $ 841,657 Jan-02 $ 872,102 $ 937,455 $ 870,179 Feb-02 $ 871,076 $ 955,548 $ 884,475 Mar-02 $ 923,301 $ 1,022,128 $ 937,677 Apr-02 $ 954,146 $ 1,031,598 $ 943,763 May-02 $ 947,977 $ 1,014,709 $ 928,726 Jun-02 $ 888,343 $ 941,490 $ 859,051 Jul-02 $ 841,047 $ 881,874 $ 793,715 Aug-02 $ 838,991 $ 893,296 $ 805,945 Sep-02 $ 777,300 $ 794,045 $ 718,991 Oct-02 $ 797,864 $ 845,037 $ 765,644 Nov-02 $ 862,639 $ 903,710 $ 818,346 Dec-02 $ 845,218 $ 869,509 $ 791,156 Jan-03 $ 835,827 $ 870,290 $ 787,712 Feb-03 $ 834,783 $ 844,517 $ 766,451 Mar-03 $ 804,571 $ 813,505 $ 744,719 Apr-03 $ 888,380 $ 896,551 $ 811,052 May-03 $ 940,761 $ 958,933 $ 869,263 Jun-03 $ 972,190 $ 1,018,288 $ 918,806 Jul-03 $ 1,014,095 $ 1,073,023 $ 976,349 Aug-03 $ 1,062,285 $ 1,150,439 $ 1,041,881 Sep-03 $ 1,093,714 $ 1,163,000 $ 1,049,519 Oct-03 $ 1,178,571 $ 1,257,468 $ 1,138,830 Nov-03 $ 1,202,666 $ 1,273,609 $ 1,152,827 Dec-03 $ 1,300,309 $ 1,366,482 $ 1,236,401 Jan-04 $ 1,341,979 $ 1,413,179 $ 1,280,312 Feb-04 $ 1,391,128 $ 1,481,289 $ 1,339,372 Mar-04 $ 1,389,703 $ 1,508,916 $ 1,356,582 Apr-04 $ 1,311,425 $ 1,394,826 $ 1,245,672 May-04 $ 1,295,340 $ 1,375,854 $ 1,221,138 Jun-04 $ 1,322,148 $ 1,375,919 $ 1,226,716 Jul-04 $ 1,301,774 $ 1,347,608 $ 1,205,025 Aug-04 $ 1,345,738 $ 1,407,843 $ 1,255,467 Sep-04 $ 1,415,438 $ 1,489,131 $ 1,327,979 Oct-04 $ 1,457,258 $ 1,532,184 $ 1,359,793 Nov-04 $ 1,568,777 $ 1,665,311 $ 1,485,745 Dec-04 $ 1,643,613 $ 1,750,667 $ 1,557,271 Jan-05 $ 1,631,632 $ 1,754,897 $ 1,562,200 Feb-05 $ 1,757,980 $ 1,902,213 $ 1,699,374 Mar-05 $ 1,673,517 $ 1,783,436 $ 1,587,418 Apr-05 $ 1,622,072 $ 1,743,475 $ 1,545,108 May-05 $ 1,686,657 $ 1,808,819 $ 1,599,509 Jun-05 $ 1,741,384 $ 1,869,802 $ 1,654,722 Jul-05 $ 1,839,906 $ 1,999,219 $ 1,771,807 Aug-05 $ 1,831,162 $ 2,016,043 $ 1,787,757 Sep-05 $ 1,978,928 $ 2,204,295 $ 1,954,460 Oct-05 $ 1,868,374 $ 2,060,690 $ 1,826,763 Nov-05 $ 2,012,848 $ 2,227,888 $ 1,978,014 Dec-05 $ 2,105,378 $ 2,366,775 $ 2,095,189 Jan-06 $ 2,317,805 $ 2,620,761 $ 2,330,476 Feb-06 $ 2,323,360 $ 2,622,486 $ 2,328,256 Mar-06 $ 2,341,171 $ 2,653,433 $ 2,349,127 Apr-06 $ 2,499,546 $ 2,878,588 $ 2,516,750 May-06 $ 2,260,859 $ 2,593,622 $ 2,253,635 Jun-06 $ 2,236,324 $ 2,582,655 $ 2,248,860 Jul-06 $ 2,293,212 $ 2,615,718 $ 2,282,494 Aug-06 $ 2,335,581 $ 2,692,971 $ 2,341,790 Sep-06 $ 2,335,581 $ 2,716,531 $ 2,361,473 Oct-06 $ 2,447,106 $ 2,838,204 $ 2,473,729 Nov-06 $ 2,584,296 $ 3,058,379 $ 2,658,003 Dec-06 $ 2,717,421 $ 3,197,852 $ 2,777,935 Jan-07 $ 2,682,249 $ 3,161,145 $ 2,749,157 Feb-07 $ 2,656,190 $ 3,154,474 $ 2,733,234 Mar-07 $ 2,760,990 $ 3,285,031 $ 2,843,123 Apr-07 $ 2,902,259 $ 3,450,277 $ 2,975,152 May-07 $ 3,030,078 $ 3,627,432 $ 3,123,284 Jun-07 $ 3,125,625 $ 3,800,163 $ 3,271,014 Jul-07 $ 3,200,966 $ 3,992,873 $ 3,445,297 Aug-07 $ 3,098,723 $ 3,904,230 $ 3,373,209 Sep-07 $ 3,475,464 $ 4,292,353 $ 3,745,987 Oct-07 $ 3,852,219 $ 4,788,122 $ 4,164,034 Nov-07 $ 3,534,682 $ 4,459,128 $ 3,869,118 Dec-07 $ 3,535,462 $ 4,485,844 $ 3,882,940 AVERAGE ANNUAL TOTAL RETURN - ------------------------------------- 12/31/07 - ------------------------------------- 1-Year +30.10% - ------------------------------------- 5-Year +33.14% - ------------------------------------- 10-Year +13.46% - ------------------------------------- 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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. 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 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. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,131.10 $7.63 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.05 $7.22 - -------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month annualized expense ratio of 1.42%, 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 EMERGING MARKETS SERIES
------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2007 2006 2005 2004 2003 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 20.86 $ 18.93 $ 15.09 $ 12.18 $ 8.10 ------------------------------------------------------------------------ Income from investment operations a: Net investment income b ....................... 0.50 0.44 0.33 0.21 0.24 Net realized and unrealized gains (losses) .... 5.31 4.96 3.89 2.97 4.10 ------------------------------------------------------------------------ Total from investment operations ................. 5.81 5.40 4.22 3.18 4.34 ------------------------------------------------------------------------ Less distributions from: Net investment income ......................... (0.79) (0.54) (0.38) (0.27) (0.26) Net realized gains ............................ (4.65) (2.93) -- -- -- ------------------------------------------------------------------------ Total distributions .............................. (5.44) (3.47) (0.38) (0.27) (0.26) ------------------------------------------------------------------------ Redemption fees .................................. -- c -- c -- c -- c -- ------------------------------------------------------------------------ Net asset value, end of year ..................... $ 21.23 $ 20.86 $ 18.93 $ 15.09 $ 12.18 ======================================================================== Total return ..................................... 30.10% 29.07% 28.09% 26.40% 53.84% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 1.41% d 1.42% d 1.42% d 1.45% d 1.46% Net investment income ............................ 2.18% 2.09% 1.98% 1.62% 2.52% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $ 3,184,512 $3,209,602 $2,841,536 $2,063,532 $2,092,229 Portfolio turnover rate .......................... 87.26% 40.84% 36.42% 52.07% 46.83%
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. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 99.1% COMMON STOCKS AND RIGHTS 85.1% AUSTRIA 1.1% Erste Bank der oesterreichischen Sparkassen AG ......................................... Commercial Banks 68,890 $ 4,875,929 a IMMOEAST AG ................................... Real Estate Management & Development 155,420 1,671,605 a Meinl European Land Ltd. ...................... Real Estate Management & Development 152,965 2,105,054 OMV AG ........................................ Oil, Gas & Consumable Fuels 230,099 18,609,757 Wienerberger AG ............................... Building Products 108,400 6,000,281 --------------- 33,262,626 --------------- BRAZIL 1.8% AES Tiete SA .................................. Independent Power Producers & Energy Traders 259,127,491 11,500,602 Companhia de Bebidas das Americas (AmBev) .................................... Beverages 48,607 3,413,413 b Companhia Energetica de Minas Gerais .......... Electric Utilities 60,672 1,151,745 Energias do Brasil SA ......................... Electrical Equipment 222,712 3,615,942 c Marfrig Frigorificos e Comercio De Alimentos SA, 144A ................................... Food Products 106,409 911,650 Natura Cosmeticos SA .......................... Personal Products 422,194 4,032,190 Porto Seguro SA ............................... Insurance 138,700 5,142,809 Souza Cruz SA ................................. Tobacco 981,619 26,580,919 --------------- 56,349,270 --------------- CHINA 20.2% Air China Ltd., H ............................. Airlines 8,510,000 12,680,807 Aluminum Corp. of China Ltd., H ............... Metals & Mining 57,380,000 118,467,063 c Aluminum Corp. of China Ltd., H, 144A ......... Metals & Mining 1,114,000 2,299,971 Beijing Capital Land Ltd., H .................. Real Estate Management & Development 5,166,000 3,140,103 China Construction Bank Corp., H .............. Commercial Banks 12,236,000 10,371,752 China International Marine Containers (Group) Co. Ltd., B ........................ Machinery 2,967,300 5,506,063 China Mobile Ltd. ............................. Wireless Telecommunication Services 3,789,000 67,003,898 China Netcom Group Corp. (Hong Kong) Ltd. ..... Diversified Telecommunication Services 6,412,000 19,281,799 China Petroleum and Chemical Corp., H ......... Oil, Gas & Consumable Fuels 51,590,000 77,933,112 China Shenhua Energy Co. Ltd., H .............. Oil, Gas & Consumable Fuels 2,121,000 12,674,703 China Telecom Corp. Ltd., H ................... Diversified Telecommunication Services 79,252,000 63,010,528 CNOOC Ltd. .................................... Oil, Gas & Consumable Fuels 27,665,000 47,112,912 Denway Motors Ltd. ............................ Automobiles 48,553,000 31,193,564 Dongfeng Motor Corp., H ....................... Automobiles 23,106,000 16,296,662 a Hidili Industry International Development ..... Metals & Mining 8,823,000 13,554,525 a,c Hidili Industry International Development, 144A ....................................... Metals & Mining 620,000 952,488 Huaneng Power International Inc., H ........... Independent Power Producers & Energy Traders 2,960,000 3,116,349 Industrial and Commercial Bank of China, H .... Commercial Banks 2,232,000 1,602,852 Jiangxi Copper Co. Ltd., H .................... Metals & Mining 5,396,000 13,244,180 Nine Dragons Paper Holdings Ltd. .............. Paper & Forest Products 1,213,000 3,067,460 PetroChina Co. Ltd., H ........................ Oil, Gas & Consumable Fuels 49,676,000 88,546,749 Shanghai Industrial Holdings Ltd. ............. Industrial Conglomerates 5,303,000 23,121,273
Annual Report | 11 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND RIGHTS (CONTINUED) CHINA (CONTINUED) a Soho China Ltd. ............................... Real Estate Management & Development 5,365,000 $ 5,538,304 a,c Soho China Ltd., 144A ......................... Real Estate Management & Development 1,886,500 1,947,439 Travelsky Technology Ltd., H .................. IT Services 1,594,000 1,694,549 --------------- 643,359,105 --------------- EGYPT 0.2% Orascom Construction Industries ............... Construction & Engineering 49,689 5,170,358 Telecom Egypt ................................. Diversified Telecommunication Services 647,935 2,458,424 --------------- 7,628,782 --------------- HONG KONG 1.5% Citic Pacific Ltd. ............................ Industrial Conglomerates 1,589,000 8,874,078 Dairy Farm International Holdings Ltd. ........ Food & Staples Retailing 1,864,719 8,130,175 GOME Electrical Appliances Holdings Ltd. ...... Specialty Retail 6,674,000 16,945,820 Hopson Development Holdings Ltd. .............. Real Estate Management & Development 1,338,000 3,697,554 Hutchison Whampoa Ltd. ........................ Industrial Conglomerates 635,000 7,202,492 VTech Holdings Ltd. ........................... Communications Equipment 367,000 2,635,514 --------------- 47,485,633 --------------- HUNGARY 1.5% Magyar Telekom PLC ............................ Diversified Telecommunication Services 1,338,679 6,949,764 MOL Hungarian Oil and Gas Nyrt. ............... Oil, Gas & Consumable Fuels 268,120 37,884,168 OTP Bank Ltd. ................................. Commercial Banks 78,063 3,958,086 --------------- 48,792,018 --------------- INDIA 5.5% Ashok Leyland Ltd. ............................ Machinery 4,456,061 5,880,350 a Bharti Airtel Ltd. ............................ Wireless Telecommunication Services 291,948 7,368,529 Dr. Reddy's Laboratories Ltd. ................. Pharmaceuticals 170,635 3,184,277 Gail India Ltd. ............................... Gas Utilities 1,654,039 22,752,743 Grasim Industries Ltd. ........................ Construction Materials 1,513 140,207 Hindalco Industries Ltd. ...................... Metals & Mining 2,375,134 12,950,071 Hindustan Unilever Ltd. ....................... Household Products 1,483,200 8,051,173 Maruti Suzuki India Ltd. ...................... Automobiles 116,216 2,919,925 National Aluminium Co. Ltd. ................... Metals & Mining 912,053 11,391,115 Oil & Natural Gas Corp. Ltd. .................. Oil, Gas & Consumable Fuels 1,301,753 40,848,054 Reliance Industries Ltd. ...................... Oil, Gas & Consumable Fuels 176,100 12,875,343 Satyam Computer Services Ltd. ................. IT Services 301,300 3,434,308 Tata Chemicals Ltd. ........................... Chemicals 488,636 5,116,387 Tata Consultancy Services Ltd. ................ IT Services 876,683 24,102,386 Tata Motors Ltd. .............................. Machinery 125,900 2,371,029 Tata Steel Ltd. ............................... Metals & Mining 545,200 12,933,713 --------------- 176,319,610 --------------- INDONESIA 0.4% PT Bank Central Asia Tbk ...................... Commercial Banks 6,119,500 4,756,173 PT Telekomunikasi Indonesia, B ................ Diversified Telecommunication Services 8,549,000 9,238,472 --------------- 13,994,645 ---------------
12 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND RIGHTS (CONTINUED) ISRAEL 0.2% a,b Taro Pharmaceutical Industries Ltd. ........... Pharmaceuticals 704,120 $ 5,421,724 --------------- MEXICO 4.8% Alfa SAB de CV ................................ Industrial Conglomerates 523,600 3,381,313 America Movil SAB de CV, L, ADR ............... Wireless Telecommunication Services 1,378,478 84,624,764 Cemex SAB de CV, CPO, ADR ..................... Construction Materials 121,160 3,131,986 Consorcio ARA SAB de CV ....................... Household Durables 1,002,937 1,120,805 Fomento Economico Mexicano SAB de CV, ADR ..... Beverages 100,100 3,820,817 Grupo Televisa SA ............................. Media 2,925,981 13,961,194 Kimberly Clark de Mexico SAB de CV, A ......... Household Products 6,675,130 29,141,403 Telefonos de Mexico SAB de CV (Telmex), L, ADR ........................................ Diversified Telecommunication Services 378,858 13,957,129 --------------- 153,139,411 --------------- PAKISTAN 1.0% MCB Bank Ltd. ................................. Commercial Banks 2,268,043 14,713,768 Oil & Gas Development Co. Ltd. ................ Oil, Gas & Consumable Fuels 2,457,000 4,760,562 Pakistan Telecommunications Corp., A .......... Diversified Telecommunication Services 19,384,833 13,221,934 --------------- 32,696,264 --------------- PERU 0.4% Compania de Minas Buenaventura SA, ADR ........ Metals & Mining 219,360 12,415,776 --------------- PHILIPPINES 0.5% San Miguel Corp., B ........................... Beverages 11,239,883 16,220,544 --------------- POLAND 0.7% a Polski Koncern Naftowy Orlen SA ............... Oil, Gas & Consumable Fuels 1,107,756 23,286,701 --------------- RUSSIA 13.2% Bank Of Moscow ................................ Commercial Banks 32,028 1,673,463 Fifth Power Generation Co. .................... Electric Utilities 2,210,371 387,257 Gazprom OAO ................................... Oil, Gas & Consumable Fuels 1,727,000 24,333,430 Gazprom OAO, ADR .............................. Oil, Gas & Consumable Fuels 590,600 33,487,020 Gazprom, ADR .................................. Oil, Gas & Consumable Fuels 949,300 53,303,195 LUKOIL, ADR ................................... Oil, Gas & Consumable Fuels 367,520 31,625,096 LUKOIL, ADR (London Exchange) ................. Oil, Gas & Consumable Fuels 124,000 10,713,600 Mining and Metallurgical Co. Norilsk Nickel ... Metals & Mining 369,810 97,999,650 OAO TMK, GDR .................................. Energy Equipment & Services 78,000 3,471,000 Sberbank RF ................................... Commercial Banks 8,165,740 34,459,423 TGC-5 JSC ..................................... Independent Power Producers & Energy Traders 72,962,927 66,031 TNK-BP ........................................ Oil, Gas & Consumable Fuels 12,037,973 26,844,680 a Unified Energy Systems ........................ Electric Utilities 77,590,500 101,953,917 --------------- 420,317,762 --------------- SINGAPORE 0.8% ComfortDelGro Corp. Ltd. ...................... Road & Rail 5,257,997 6,675,316 Fraser and Neave Ltd. ......................... Industrial Conglomerates 4,097,290 16,770,621 Keppel Corp. Ltd. ............................. Industrial Conglomerates 239,000 2,155,468 --------------- 25,601,405 ---------------
Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND RIGHTS (CONTINUED) SOUTH AFRICA 4.5% Barloworld Ltd. ............................... Industrial Conglomerates 189,750 $ 2,976,850 Foschini Ltd. ................................. Specialty Retail 2,248,671 15,820,948 a Freeworld Coatings Ltd. ....................... Specialty Retail 189,750 291,604 Imperial Holdings Ltd. ........................ Air Freight & Logistics 662,219 10,068,815 JD Group Ltd. ................................. Specialty Retail 1,456,846 10,822,891 Lewis Group Ltd. .............................. Specialty Retail 1,881,725 12,595,086 MTN Group Ltd. ................................ Wireless Telecommunication Services 2,013,336 37,556,855 Remgro Ltd. ................................... Diversified Financial Services 1,208,501 34,955,869 Standard Bank Group Ltd. ...................... Commercial Banks 726,182 10,586,496 Tiger Brands Ltd. ............................. Food Products 307,600 7,527,575 --------------- 143,202,989 --------------- SOUTH KOREA 8.0% Daewoo Shipbuilding & Marine Engineering Co. Ltd. ................................... Machinery 162,290 8,946,278 GS Holdings Corp. ............................. Oil, Gas & Consumable Fuels 234,040 14,526,707 Kangwon Land Inc. ............................. Hotels, Restaurants & Leisure 889,318 23,371,853 b POSCO ......................................... Metals & Mining 25,850 15,879,227 Samsung Electronics Co. Ltd. .................. Semiconductors & Semiconductor Equipment 33,771 20,059,480 b Samsung Heavy Industries Co. Ltd. ............. Machinery 315,390 13,544,873 SK Energy Co. Ltd. ............................ Oil, Gas & Consumable Fuels 528,834 102,258,377 SK Holdings Co. Ltd. .......................... Industrial Conglomerates 187,565 39,675,092 SKC Co. Ltd. .................................. Household Durables 48,970 1,464,836 b Woori Finance Holdings Co. Ltd. ............... Commercial Banks 701,000 14,116,607 --------------- 253,843,330 --------------- SWEDEN 1.2% Oriflame Cosmetics SA, SDR .................... Personal Products 592,364 37,837,563 --------------- TAIWAN 3.2% Compal Communications Inc. .................... Communications Equipment 2,044,000 5,073,759 MediaTek Inc. ................................. Semiconductors & Semiconductor Equipment 581,000 7,542,430 Novatek Microelectronics Corp. Ltd. ........... Semiconductors & Semiconductor Equipment 3,708,428 14,179,620 President Chain Store Corp. ................... Food & Staples Retailing 12,858,010 33,780,526 Siliconware Precision Industries Co. .......... Semiconductors & Semiconductor Equipment 11,653,497 20,949,703 Sunplus Technology Co. Ltd. ................... Semiconductors & Semiconductor Equipment 4,632,173 6,941,832 Taiwan Semiconductor Manufacturing Co. Ltd. ... Semiconductors & Semiconductor Equipment 6,418,640 12,271,220 --------------- 100,739,090 --------------- THAILAND 2.1% Kasikornbank Public Co. Ltd., fgn. ............ Commercial Banks 7,206,700 18,720,090 a PTT Aromatics & Refining Public Co. Ltd., fgn. ....................................... Oil, Gas & Consumable Fuels 2,791,685 3,563,677 PTT Public Co. Ltd., fgn. ..................... Oil, Gas & Consumable Fuels 588,000 6,563,396 Siam Cement Public Co. Ltd., fgn. ............. Construction Materials 3,543,536 24,615,925 Siam Commercial Bank Public Co. Ltd., fgn. ....................................... Commercial Banks 1,271,400 3,283,711
14 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND RIGHTS (CONTINUED) THAILAND (CONTINUED) Thai Beverages Co. Ltd., fgn. ................. Beverages 62,470,000 $ 11,051,268 a True Corp. Public Co. Ltd., fgn., rts., 3/28/08 .................................... Diversified Telecommunication Services 2,088,420 -- --------------- 67,798,067 --------------- TURKEY 10.1% Akbank TAS .................................... Commercial Banks 16,295,087 121,402,061 Anadolu Efes Biracilik Ve Malt Sanayii AS ..... Beverages 1,056,222 12,572,456 Arcelik AS, Br. ............................... Household Durables 4,327,920 30,205,565 Tupras-Turkiye Petrol Rafineleri AS ........... Oil, Gas & Consumable Fuels 1,922,384 56,383,346 a Turk Hava Yollari Anonim Ortakligi ............ Airlines 607,000 4,470,306 a,c Turk Hava Yollari Anonim Ortakligi, 144A ...... Airlines 2,523,000 18,580,861 Turkcell Iletisim Hizmetleri AS ............... Wireless Telecommunication Services 4,038,549 44,267,546 Turkiye Vakiflar Bankasi T.A.O., D ............ Commercial Banks 9,014,815 31,960,038 --------------- 319,842,179 --------------- UNITED KINGDOM 2.2% Anglo American PLC ............................ Metals & Mining 1,061,183 64,153,266 HSBC Holdings PLC ............................. Commercial Banks 366,800 6,194,786 --------------- 70,348,052 --------------- TOTAL COMMON STOCKS AND RIGHTS (COST $1,760,013,395) 2,709,902,546 --------------- PREFERRED STOCKS 14.0% BRAZIL 13.8% Banco Bradesco SA, ADR, pfd. .................. Commercial Banks 1,407,804 45,049,728 Companhia Vale do Rio Doce, ADR, pfd., A ...... Metals & Mining 6,185,130 173,059,938 Itausa - Investimentos Itau SA, pfd. .......... Commercial Banks 562,100 3,710,492 Metalurgica Gerdau SA, pfd. ................... Metals & Mining 302,054 12,048,221 Petroleo Brasileiro SA, ADR, pfd. ............. Oil, Gas & Consumable Fuels 1,511,770 145,462,509 Unibanco - Uniao de Bancos Brasileiros SA, GDR, pfd. .................................. Commercial Banks 301,500 42,101,460 Usinas Siderurgicas de Minas Gerais SA, pfd., A .................................... Metals & Mining 424,239 19,424,426 --------------- 440,856,774 --------------- CHILE 0.2% Embotelladora Andina SA, pfd., A .............. Beverages 2,369,708 6,376,963 --------------- TOTAL PREFERRED STOCKS (COST $155,016,157) ........................ 447,233,737 --------------- TOTAL LONG TERM INVESTMENTS (COST $1,915,029,552) ...................... 3,157,136,283 ---------------
Annual Report | 15 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS 0.8% U.S. GOVERNMENT AND AGENCY SECURITIES 0.8% d FHLB, 1/02/08 - 2/13/08 .................................................................... $ 19,135,000 $ 19,130,365 d FHLMC, 2/19/08 - 4/25/08 ................................................................... 1,890,000 1,868,589 d FNMA, 3/27/08 .............................................................................. 2,751,000 2,724,467 --------------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $23,716,168) ........................................................... 23,723,421 --------------- TOTAL INVESTMENTS (COST $1,938,745,720) 99.9% ............................................................. 3,180,859,704 OTHER ASSETS, LESS LIABILITIES 0.1% ........................................................ 3,652,287 --------------- NET ASSETS 100.0% .......................................................................... $3,184,511,991 ===============
SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt CPO - Certificates of Ordinary Participation FHLB - Federal Home Loan Bank FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association GDR - Global Depository Receipt SDR - Swedish Depository Receipt a Non-income producing for the twelve months ended December 31, 2007. b A portion or all of the securities purchased on a when-issued or delayed delivery basis. See Note 1(c). c 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, 2007, the aggregate value of these securities was $24,692,409 representing 0.78% 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, 2007 ---------------- EMERGING MARKETS SERIES ---------------- Assets: Investments in securities: Cost ................................................. $ 1,938,745,720 ---------------- Value ................................................ $ 3,180,859,704 Cash .................................................... 11,705 Foreign currency, at value (cost $6,371,301) ............ 6,787,011 Receivables: Investment securities sold ........................... 15,796,334 Capital shares sold .................................. 3,882,115 Dividends ............................................ 6,409,582 Foreign tax .......................................... 118,079 ---------------- Total assets ...................................... 3,213,864,530 ---------------- Liabilities: Payables: Investment securities purchased ...................... 16,739,740 Capital shares redeemed .............................. 6,285,946 Affiliates ........................................... 3,522,702 Deferred tax ............................................ 1,661,836 Accrued expenses and other liabilities .................. 1,142,315 ---------------- Total liabilities ................................. 29,352,539 ---------------- Net assets, at value ........................... $ 3,184,511,991 ================ Net assets consist of: Paid-in capital ......................................... $ 1,877,940,754 Distributions in excess of net investment income ........ (25,601,137) Net unrealized appreciation (depreciation) .............. 1,240,834,549 Accumulated net realized gain (loss) .................... 91,337,825 ---------------- Net assets, at value ........................... $ 3,184,511,991 ================ Shares outstanding ......................................... 150,008,187 ================ Net asset value per share a ................................ $ 21.23 ================ 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, 2007 ---------------- EMERGING MARKETS SERIES ---------------- Investment income: Dividends (net of foreign taxes of $7,644,450) .......... $ 111,846,960 Interest (net of foreign taxes of $29,334) .............. 6,209,240 ---------------- Total investment income .............................. 118,056,200 ---------------- Expenses: Management fees (Note 3a) ............................... 39,961,050 Administrative fees (Note 3b) ........................... 2,639,151 Transfer agent fees (Note 3c) ........................... 28,739 Custodian fees (Note 4) ................................. 3,280,515 Reports to shareholders ................................. 54,880 Registration and filing fees ............................ 241,427 Professional fees ....................................... 242,893 Directors' fees and expenses ............................ 48,312 Other ................................................... 71,088 ---------------- Total expenses ....................................... 46,568,055 Expense reductions (Note 4) .......................... (48,006) ---------------- Net expenses ...................................... 46,520,049 ---------------- Net investment income .......................... 71,536,151 ---------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .......................................... 664,321,797 Foreign currency transactions ........................ 293,648 Swap agreements ...................................... (223,080) ---------------- Net realized gain (loss) .......................... 664,392,365 Net change in unrealized appreciation (depreciation) on: Investments .......................................... 106,602,202 Translation of assets and liabilities denominated in foreign currencies ............................. 387,850 Change in deferred taxes on unrealized appreciation (depreciation) ....................................... (1,486,638) ---------------- Net change in unrealized appreciation (depreciation) .................................. 105,503,414 ---------------- Net realized and unrealized gain (loss) .................... 769,895,779 ---------------- Net increase (decrease) in net assets resulting from operations .............................................. $ 841,431,930 ================ 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, ----------------------------------- 2007 2006 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................................................... $ 71,536,151 $ 62,498,611 Net realized gain (loss) from investments, foreign currency transactions, and swap agreements ..................................................... 664,392,365 488,959,958 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes .......................................... 105,503,414 219,700,509 ----------------------------------- Net increase (decrease) in net assets resulting from operations ....... 841,431,930 771,159,078 ----------------------------------- Distributions to shareholders from: Net investment income ...................................................... (101,637,203) (74,010,838) Net realized gain .......................................................... (587,388,696) (394,234,085) ----------------------------------- Total distributions to shareholders .............................................. (689,025,899) (468,244,923) ----------------------------------- Capital share transactions: (Note 2) ............................................. (177,501,570) 65,143,777 ----------------------------------- Redemption fees .................................................................. 5,283 7,862 ----------------------------------- Net increase (decrease) in net assets ................................. (25,090,256) 368,065,794 Net assets: Beginning of year ............................................................. 3,209,602,247 2,841,536,453 ----------------------------------- End of year ................................................................... $ 3,184,511,991 $ 3,209,602,247 =================================== Distributions in excess of net investment income included in net assets: End of year ................................................................... $ (25,601,137) $ (47,974,409) ===================================
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, (1940 Act) as an open-end investment company, consisting of three separate funds. The Emerging Markets Series (Fund) included in this report is diversified. The financial statements of the remaining funds in the Company 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. 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 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. 20 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Fund may purchase securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. TOTAL RETURN SWAPS The Fund may enter into total return swaps. A total return swap is an agreement between the Fund and a counterparty to exchange a market linked return for a floating rate payment, both based on a notional principal amount. Total return swaps are marked to market daily based upon quotations from the market makers and the change in value, if any, is recorded as an unrealized gain or loss in the Statement of Operations. Payments received or paid are recorded as a realized gain or loss. The risks of entering into a total return swap include the unfavorable fluctuation of interest rates or the price of the underlying security or index, as well as the potential inability of the counterparty to fulfill their obligations under the swap agreement. Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. 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 at a future 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. F. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because it is the Fund's policy 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. G. 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 of America. 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) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) 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. H. 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. I. 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. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. J. 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) EMERGING MARKETS SERIES 2. CAPITAL STOCK At December 31, 2007, there were 1.2 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, 2007 2006 --------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------- Shares sold ..................... 11,076,340 $ 251,491,312 21,134,826 $ 441,896,309 Shares issued in reinvestment of distributions ............. 32,231,074 647,171,797 21,751,689 442,666,138 Shares redeemed ................. (47,192,244) (1,076,164,679) (39,129,699) (819,418,670) --------------------------------------------------------------- Net increase (decrease) ......... (3,884,830) $ (177,501,570) 3,756,816 $ 65,143,777 ===============================================================
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 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS 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 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 For the year ended December 31, 2007, the Fund paid transfer agent fees of $28,739, of which $3,926 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, 2007, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES The Fund has reviewed the tax positions taken on federal income tax returns, for each of the three open tax years and as of December 31, 2007 and has determined that no provision for income tax is required in the Fund's financial statements. 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, 2007, the Fund deferred realized currency losses of $1,680,746. The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows: ----------------------------- 2007 2006 ----------------------------- Distributions paid from: Ordinary income ............................. $ 171,493,747 $ 74,010,838 Long term capital gain ...................... 517,532,152 394,234,085 ----------------------------- $ 689,025,899 $ 468,244,923 ============================= Annual Report | 25 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 5. INCOME TAXES (CONTINUED) At December 31, 2007, 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 ........................................ $ 1,978,328,416 ================= Unrealized appreciation .................................... $ 1,255,459,149 Unrealized depreciation .................................... (52,927,861) ----------------- Net unrealized appreciation (depreciation) ................. $ 1,202,531,288 ================= Undistributed ordinary income .............................. $ 26,455,512 Undistributed long term capital gains ...................... 80,544,618 ----------------- Distributable earnings ..................................... $ 107,000,130 ================= Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, 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. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2007, aggregated $2,774,110,040 and $3,588,567,336, respectively. 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. 26 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 8. REGULATORY AND LITIGATION 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 and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, 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. 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. 9. NEW ACCOUNTING PRONOUNCEMENT In September 2006, Financial Accounting Standards Board (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 Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2007, 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 and 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, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2008 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 $570,193,985 as long term capital gain dividends for the fiscal year ended December 31, 2007. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $49,423,793 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, 2007. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $73,313,625 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2007. 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 $6,042,520 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, 2007. At December 31, 2007, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income 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, 2007, 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, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund, to shareholders of record. Record Date: 12/14/2007
- ------------------------------------------------------------------------------------------------------------ FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED DIVIDENDS PER SHARE PER SHARE PER SHARE - ------------------------------------------------------------------------------------------------------------ Fund shares ....................... $0.0599 $0.6732 $0.4138
Annual Report | 29 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) EMERGING MARKETS SERIES 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 In January 2008, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2007. 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 2007 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 bracket). 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 serves 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 141 Bar-S Foods (meat packing company). 500 East Broward Blvd. 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 Fortis, Inc. (utility holding company), 500 East Broward Blvd. Nuinsco Resources Limited (mineral Suite 2100 exploration), Royal Fidelity Merchant Fort Lauderdale, FL 33394-3091 Bank & Trust Limited (financial services), C.A. Bancorp Inc. (financial services), Victory Nickel Inc. (mineral exploration), ABACO Markets Limited (retail distributors) and Belize Electricity Limited (electric utility). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Company 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) Lead Director since 141 Hess Corporation (exploration and 500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Heinz Suite 2100 Director Independent Company (processed foods and allied Fort Lauderdale, FL 33394-3091 Director since products), RTI International Metals, December 2007 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 Emeritus Corporation (assisted living) 500 East Broward Blvd. and OSI Pharmaceuticals, Inc. Suite 2100 (pharmaceutical products). Fort Lauderdale, FL 33394-3091 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 141 Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas) and Sentient Suite 2100 Jet (private jet service). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (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 (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since 2005 141 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. (credit card provider) (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). - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT E. WADE (1946) Director Since April 34 El Oro and Exploration Co., p.l.c. 500 East Broward Blvd. 2007 (investments) and ARC Wireless Suite 2100 Solutions, Inc. (wireless components and Fort Lauderdale, FL 33394-3091 network products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Practicing attorney. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Director and 141 None One Franklin Parkway Chairman of Vice President San Mateo, CA 94403-1906 the Board and since 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 42 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ **GREGORY E. JOHNSON (1961) Director Since April 92 None One Franklin Parkway 2007 San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable One Franklin Parkway Compliance Compliance San Mateo, CA 94403-1906 Officer and Officer since Vice President 2004 and Vice - AML President - Compliance AML Compliance since 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). - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President Suite 2100 and 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. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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. - ------------------------------------------------------------------------------------------------------------------------------------ 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. and of six of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ 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 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. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 18 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). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. 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 some of the other subsidiaries of Franklin Resources, Inc. and 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, director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. Note 3: Prior to December 31, 2007, Nicholas F. Brady 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 HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. NIEMIEC QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. 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 BELIEVES THAT MR. NIEMIEC HAS 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. MR. NIEMIEC IS AN INDEPENDENT BOARD MEMBER 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 | 35 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. 36 | Annual Report [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN TEMPLETON 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 ftinstitutional.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 A2007 02/08 [GRAPHIC OMITTED] ANNUAL REPORT - -------------------------------------------------------------------------------- 12 31 2007 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. - -------------------------------------------------------------------------------- Foreign Smaller Companies Series [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL Contents ANNUAL REPORT TIFI Foreign Smaller Companies 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 ................................................ 31 Shareholder Information ................................................... 36 - -------------------------------------------------------------------------------- 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 CALL A FRANKLIN TEMPLETON INSTITUTIONAL SERVICES REPRESENTATIVE AT 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' (Fund's) annual report for the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW The Fund posted a +15.09% cumulative total return for the 12-month period ended December 31, 2007. The Fund performed comparably to its benchmark, the S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index, which returned +14.84% 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 7. 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 12. - -------------------------------------------------------------------------------- - ----------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE - ----------------------------------------------------- Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Asia 39.7% Europe 37.4% North America 11.1% Latin America 4.7% Australia & New Zealand 3.4% Middle East & Africa 1.4% Short-Term Investments & Other Net Assets 2.3% ECONOMIC AND MARKET OVERVIEW In spite of elevated energy prices and widespread fears of contagion from the deteriorating U.S. housing situation, the global economy remained resilient in 2007. Consumer and corporate demand strength, particularly in China and other developing economies, generally favorable employment and accommodative monetary policies continued to underpin the current expansionary period that began in 2002. These factors also contributed to the strength of global equity markets during 2007. However, concerns about slower growth and declining asset quality surfaced in the first quarter. These were initially centered on the U.S. subprime mortgage market but spread in August to global capital markets. Difficulties in assessing risk and the value of collateral in the structured finance industry contributed to declining risk appetite among lenders and investors. The private equity industry, which relies on the availability of cheap credit, played a pivotal role in several large and high-profile acquisitions and helped boost merger and acquisition activity in the first half of the year. This was an important driver of equity performance, but as liquidity dried up in the second half of the year, significantly slower money flows from private equity weighed on market performance. However, global merger and acquisition activity still reached record levels. The staggering $4.5 trillion of deals announced in 2007 eclipsed the previous record from 2006 by 24%. 2 To alleviate the credit crunch and restore investor confidence, the world's major central banks infused capital into the system, and the U.S. Federal Reserve Board reduced its target interest rate by a full percentage point. However, credit and equity markets continued to face headwinds as write-downs and losses from subprime mortgage financing prevailed among large financial institutions toward the end of the year, and equity prices remained volatile. For the year, however, global and non-U.S. equity markets registered the fifth consecutive year of double-digit total returns, making this an exceptionally strong period for investors in global equities. Broad-based stock performance by European and Asian shares at least doubled that of U.S. stocks, while emerging market equity returns more than tripled those in developed markets. Led by the BRIC countries, Brazil, Russia, India and China, emerging market economies continued to grow at accelerated rates, supporting elevated prices for oil and other commodities. At the same time, investment inflows from 2. Source: "For Deal Makers, Tale of Two Halves," THE WALL STREET JOURNAL, 1/2/08. 2 | Annual Report developed economies continued to underpin equity prices in emerging markets. In addition, U.S. dollar weakness versus the currencies of many major trading partners enhanced equity returns for U.S.-based investors holding stocks denominated in these currencies. 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, liquidation value and other factors. MANAGER'S DISCUSSION Several holdings performed well during the year under review. U.K.-based GAME Group, a major European retailer of computer software, video games, consoles and related products, was among the most significant contributors to Fund performance. GAME Group's shares performed well as the company acquired GameStation, the U.K.'s second-largest specialty video game retailer. The deal, in our view, made financial and strategic sense. It removed the takeover risk of GameStation by Gamestop, GAME Group's competitor, and effectively blocked what could have been Gamestop's entry point to the U.K. market. The transaction also gives GAME Group access to a large, higher margin, existing sales base, and we believe it offered synergies, and magnified the positive impact of the current game console cycle. Consistent with our investment strategy, we believed GAME Group was fundamentally strong with a solid balance sheet. The Fund also benefited from Denmark-based Vestas Wind Systems, the world's leading wind turbine manufacturer. In our assessment, the company's success stemmed from its ability to develop durable, reliable and cost effective wind turbines. Wind power is the cheapest source of renewable energy when costs of environmental degradation from traditional power sources are factored in. Vestas benefited from rising energy prices and increasing global attention on renewable energy and environmentally friendly power sources. Another contributor for the period was Taiwan-based D-Link, a global data networking vendor that sells branded wireless local area network (WLAN) products, broadband access equipment, LAN switches and other networking equipment. Rising notebook personal computer penetration rates and increasing broadband adoption rates bolstered demand from home users and small businesses for D-Link's products. The company continued to gain market share along with larger companies such as Linksys and NetGear, while smaller PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Textiles, Apparel & Luxury Goods 8.8% Specialty Retail 8.1% Commercial Services & Supplies 7.4% Machinery 7.3% Commercial Banks 5.6% Electronic Equipment & Instruments 4.9% Energy Equipment & Services 3.5% Leisure Equipment & Products 3.3% Capital Markets 3.3% Communications Equipment 3.2% Food Products 2.8% Health Care Providers & Services 2.7% Computers & Peripherals 2.3% Electrical Equipment 2.0% Other 32.5% Short-Term Investments & Other Net Assets 2.3% Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- GAME Group PLC 5.0% SPECIALTY RETAIL, U.K. - -------------------------------------------------------------------------------- Vedior NV 2.3% COMMERCIAL SERVICES & SUPPLIES, NETHERLANDS - -------------------------------------------------------------------------------- North West Co. Fund 1.9% DIVERSIFIED FINANCIAL SERVICES, CANADA - -------------------------------------------------------------------------------- Amer Sports OYJ 1.8% LEISURE EQUIPMENT & PRODUCTS, FINLAND - -------------------------------------------------------------------------------- Lojas Renner SA 1.8% MULTI-LINE RETAIL, BRAZIL - -------------------------------------------------------------------------------- Bank of Pusan 1.7% COMMERCIAL BANKS, SOUTH KOREA - -------------------------------------------------------------------------------- Vossloh AG 1.6% MACHINERY, GERMANY - -------------------------------------------------------------------------------- Open Text Corp. 1.5% INTERNET SOFTWARE & SERVICES, CANADA - -------------------------------------------------------------------------------- Youngone Corp. 1.5% TEXTILES, APPAREL & LUXURY GOODS, SOUTH KOREA - -------------------------------------------------------------------------------- OPG Groep NV 1.5% HEALTH CARE PROVIDERS & SERVICES, NETHERLANDS - -------------------------------------------------------------------------------- competitors lost market share. Recent sales figures indicate to us that the company was competing well and had the potential to benefit from a pending upgrade cycle in wireless access equipment. 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, 2007, 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 predominant investment in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods. The Fund also had some underperformers during the year under review. Osim International is a dominant player in Asia's healthy lifestyle products segment with franchise outlets in Hong Kong, China, Taiwan, Singapore and Malaysia. Osim's sales are driven by its flagship massage chair product line, and it has a number of newer products that were gaining traction in the marketplace. The company's purchase of U.S.-based Brookstone in 2005 widened its global reach and gave Osim direct access to a retail network of more than 300 stores. Our analysis indicated that the company's recent stock price weakness appeared relatively isolated to a single product and single market as the company received negative publicity from imitation products spreading to Hong Kong and Taiwan. At period-end, we continued to hold the stock because we remained confident in its long-term prospects. U.K.-based Fiberweb is one of the world's largest producers of nonwoven fabrics. The company was spun off from BBA Group in November 2006 and its stock price has declined in value since being added to the portfolio. However, we believed the stock remained attractively valued based on its restructuring potential. The company's new management, which assumed control last year, has set out a clearly defined restructuring plan. After completing a review of the company's business lines, Fiberweb shut down its underperforming sites and invested in equipment upgrades to boost the company's competitive edge. We believe these changes are positive and could contribute to higher margins. Shares of Takuma, a Japanese environmental equipment company, with a focus on designing, constructing and running waste and biomass power plants, declined during the period on lower-than-expected earnings. However, at 4 | Annual Report period-end, we believed the stock remained attractively valued, due to the company's strong network. Based on our analysis, we believe the company's margins should improve if domestic municipal demand for environmental products improves. Thank you for your continued participation in TIFI Foreign Smaller Companies Series. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Harlan B. Hodes Harlan B. Hodes, CPA [PHOTO OMITTED] /s/ Cynthia L. Sweeting Cynthia L. Sweeting, CFA Portfolio Management Team TIFI Foreign Smaller Companies Series THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2007, 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 - -------------------------------------------------------------------------------- HARLAN B. HODES assumed lead portfolio manager responsibilities for TIFI Foreign Smaller Companies Series in December 2007. Mr. Hodes has global research responsibilities for leisure equipment and products, small cap financial services and consumer goods, and Latin American banks. He also has country research coverage of the U.S., Israel and Egypt. Prior to joining Templeton in 2001, Mr. Hodes worked for Kaufman, Rossin & Co. in Miami. In this position, he was responsible for the analysis and reporting of hedge funds, taxation of individuals, corporations, S corporations, and partnerships. His responsibilities also included valuations, cash flow and financial analysis of other various entities. Prior to working for Kaufman, Rossin & Co., Mr. Hodes was with Arthur Andersen, where his responsibilities included the financial reporting and taxation of international banks. Mr. Hodes earned a B.A. from the University of Michigan and an M.B.A. from the Leonard N. Stern School of Business at New York University. He is a Certified Public Accountant (CPA) and a member of the American Institute of Certified Public Accountants (AICPA). - -------------------------------------------------------------------------------- 6 | Annual Report Performance Summary as of 12/31/07 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 12/31/07 12/31/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$2.22 $ 20.20 $ 22.42 - -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) - -------------------------------------------------------------------------------- Dividend Income $ 0.3852 - -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.3021 - -------------------------------------------------------------------------------- Long-Term Capital Gain $ 4.6698 - -------------------------------------------------------------------------------- TOTAL $ 5.3571 - -------------------------------------------------------------------------------- PERFORMANCE 1 THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------- 1-YEAR 5-YEAR INCEPTION (10/21/02) - -------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +15.09% +205.18% +208.24% - -------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +15.09% +25.00% +24.20% - -------------------------------------------------------------------------------------------------- Value of $1,000,000 Investment 4 $ 1,150,860 $3,051,732 $ 3,082,249 - -------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 - -------------------------------------------------------------------------------------------------- Without Waiver 1.07% - -------------------------------------------------------------------------------------------------- With Waiver 0.95% - --------------------------------------------------------------------------------------------------
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. THE MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED 0.95% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) UNTIL 4/30/08. 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 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. AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- 12/31/07 - ----------------------------------------- 1-Year +15.09% - ----------------------------------------- 5-Year +25.00% - ----------------------------------------- Since Inception (10/21/02) +24.20% - ----------------------------------------- 10/21/02-12/31/07 $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Date TIFI Foreign Smaller S&P/Citigroup Global Equity ex-U.S. Companies Series less than $2 Billion Index 6 - -------------------------------------------------------------------------------- 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 $2,678,214 $3,300,366 Jan-07 $2,711,646 $3,355,218 Feb-07 $2,735,531 $3,435,390 Mar-07 $2,854,769 $3,553,586 Apr-07 $3,010,631 $3,718,884 May-07 $3,147,307 $3,835,955 Jun-07 $3,204,839 $3,879,745 Jul-07 $3,289,964 $3,958,668 Aug-07 $3,185,636 $3,770,915 Sep-07 $3,287,542 $3,957,751 Oct-07 $3,369,053 $4,186,221 Nov-07 $3,099,318 $3,853,207 Dec-07 $3,082,249 $3,790,133 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. If the manager and administrator had not waived fees, 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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. 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, 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. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 - ---------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 961.80 $4.70 - ---------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.42 $4.84 - ----------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month 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. 10 | Annual Report Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS FOREIGN SMALLER COMPANIES SERIES
---------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2007 2006 2005 2004 2003 ---------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 22.42 $ 18.18 $ 17.45 $ 14.97 $ 10.10 ---------------------------------------------------------------- Income from investment operations a: Net investment income b ............................. 0.33 0.30 0.38 0.21 0.17 Net realized and unrealized gains (losses) .......... 2.81 4.89 1.74 2.93 4.99 ---------------------------------------------------------------- Total from investment operations ....................... 3.14 5.19 2.12 3.14 5.16 ---------------------------------------------------------------- Less distributions from: Net investment income ............................... (0.39) (0.33) (0.36) (0.16) (0.13) Net realized gains .................................. (4.97) (0.62) (1.03) (0.50) (0.16) ---------------------------------------------------------------- Total distributions .................................... (5.36) (0.95) (1.39) (0.66) (0.29) ---------------------------------------------------------------- Redemption fees ........................................ -- c -- c -- c -- -- ---------------------------------------------------------------- Net asset value, end of year ........................... $ 20.20 $ 22.42 $ 18.18 $ 17.45 $ 14.97 ================================================================ Total return ........................................... 15.09% 28.78% 12.28% 21.28% 51.21% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates ...... 1.07% 1.07% 1.07% 1.16% 1.58% Expenses net of waiver and payments by affiliates ...... 0.95% d 0.95% d 0.95% d 0.95% d 0.95% Net investment income .................................. 1.34% 1.45% 2.12% 1.34% 1.40% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $135,730 $170,757 $131,567 $97,495 $33,583 Portfolio turnover rate ................................ 20.95% 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 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, 2007
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 97.7% COMMON STOCKS 96.8% AUSTRALIA 3.4% Billabong International Ltd. .................. Textiles, Apparel & Luxury Goods 72,226 $ 937,822 Downer EDI Ltd. ............................... Commercial Services & Supplies 174,936 824,593 Iluka Resources Ltd. .......................... Metals & Mining 346,251 1,395,492 PaperlinX Ltd. ................................ Paper & Forest Products 626,803 1,460,801 -------------- 4,618,708 -------------- BAHAMAS 1.4% a Steiner Leisure Ltd. .......................... Diversified Consumer Services 43,710 1,930,234 -------------- BELGIUM 0.9% Barco NV ...................................... Electronic Equipment & Instruments 15,620 1,189,901 -------------- BRAZIL 3.2% b Companhia de Saneamento de Minas Gerais, 144A ....................................... Water Utilities 106,900 1,861,741 Lojas Renner SA ............................... Multiline Retail 122,000 2,467,416 -------------- 4,329,157 -------------- CANADA 9.7% CAE Inc. ...................................... Aerospace & Defense 57,320 767,728 Dorel Industries Inc., B ...................... Household Durables 50,800 1,502,913 a GSI Group Inc. ................................ Electronic Equipment & Instruments 113,780 1,051,327 Linamar Corp. ................................. Auto Components 59,490 1,220,630 a MDS Inc. ...................................... Health Care Services 86,890 1,677,906 a Mega Brands Inc. .............................. Leisure Equipment & Products 69,800 435,482 North West Co. Fund ........................... Diversified Financial Services 122,350 2,576,891 a Open Text Corp. ............................... Internet Software & Services 66,100 2,087,263 a Saxon Energy Services Inc. .................... Energy Equipment & Services 352,200 1,807,517 -------------- 13,127,657 -------------- CAYMAN ISLANDS 1.5% a Ju Teng International Holdings Ltd. ........... Electronic Equipment & Instruments 1,946,000 591,429 Stella International Holdings Ltd. ............ Textiles, Apparel & Luxury Goods 641,000 1,433,559 -------------- 2,024,988 -------------- CHINA 5.0% a AAC Acoustic Technologies Holdings Inc. ....... Communications Equipment 694,000 934,458 Bio-Treat Technology Ltd. ..................... Commercial Services & Supplies 2,472,000 1,337,653 People's Food Holdings Ltd. ................... Food Products 1,468,000 1,130,445 Sinotrans Ltd., H ............................. Air Freight & Logistics 3,424,000 1,510,440 Travelsky Technology Ltd., H .................. IT Services 1,126,000 1,197,028 Weiqiao Textile Co. Ltd., H ................... Textiles, Apparel & Luxury Goods 470,500 673,341 -------------- 6,783,365 -------------- DENMARK 1.1% a Vestas Wind Systems AS ........................ Electrical Equipment 14,250 1,539,485 --------------
12 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) FINLAND 4.0% Amer Sports OYJ ............................... Leisure Equipment & Products 92,970 $ 2,508,645 Elcoteq SE, A ................................. Communications Equipment 53,770 318,585 Huhtamaki OYJ ................................. Containers & Packaging 126,770 1,502,215 Konecranes OYJ ................................ Machinery 31,300 1,077,079 -------------- 5,406,524 -------------- GERMANY 3.9% Celesio AG .................................... Health Care Providers & Services 25,800 1,598,671 a Jenoptik AG ................................... Electronic Equipment & Instruments 128,600 1,118,528 a Thiel Logistik AG ............................. Air Freight & Logistics 112,430 410,187 Vossloh AG .................................... Machinery 18,700 2,202,290 -------------- 5,329,676 -------------- HONG KONG 5.5% Dah Sing Financial Group ...................... Commercial Banks 103,600 1,024,296 c Fountain Set (Holdings) Ltd. .................. Textiles, Apparel & Luxury Goods 2,470,000 627,153 Giordano International Ltd. ................... Specialty Retail 1,276,000 611,975 Hang Lung Group Ltd. .......................... Real Estate Management & Development 267,000 1,458,586 Hopewell Holdings Ltd. ........................ Transportation Infrastructure 289,000 1,334,171 Texwinca Holdings Ltd. ........................ Textiles, Apparel & Luxury Goods 1,095,000 984,336 Yue Yuen Industrial Holdings Ltd. ............. Textiles, Apparel & Luxury Goods 377,500 1,355,458 -------------- 7,395,975 -------------- INDIA 1.3% Hindustan Petroleum Corp. Ltd. ................ Oil, Gas & Consumable Fuels 106,787 1,000,527 Tata Motors Ltd., ADR ......................... Machinery 38,580 727,619 -------------- 1,728,146 -------------- INDONESIA 0.6% PT Indosat Tbk ................................ Diversified Telecommunication Services 915,400 843,035 -------------- JAPAN 5.4% Descente Ltd. ................................. Textiles, Apparel & Luxury Goods 261,900 1,345,726 Japan Airport Terminal Co. Ltd. ............... Transportation Infrastructure 49,900 851,542 MEITEC Corp. .................................. Commercial Services & Supplies 20,000 604,403 Sangetsu Co. Ltd. ............................. Household Durables 22,100 478,604 Sohgo Security Services Co. Ltd. .............. Commercial Services & Supplies 102,600 1,621,138 Takuma Co. Ltd. ............................... Machinery 281,000 1,138,968 USS Co. Ltd. .................................. Specialty Retail 21,540 1,342,447 -------------- 7,382,828 -------------- NETHERLANDS 8.0% Aalberts Industries NV ........................ Machinery 90,788 1,801,884 Draka Holding NV .............................. Electrical Equipment 34,565 1,160,176 Imtech NV ..................................... Construction & Engineering 61,470 1,519,624 OPG Groep NV .................................. Health Care Providers & Services 72,640 2,014,136 SBM Offshore NV ............................... Energy Equipment & Services 39,020 1,229,987 Vedior NV ..................................... Commercial Services & Supplies 125,870 3,163,114 -------------- 10,888,921 --------------
Annual Report | 13 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) NORWAY 0.7% Tomra Systems ASA ............................. Commercial Services & Supplies 137,060 $ 970,984 -------------- RUSSIA 0.7% a,d X 5 Retails Group NV, GDR, Reg S .............. Food & Staples Retailing 27,518 990,648 -------------- SINGAPORE 2.0% Cerebos Pacific Ltd. .......................... Food Products 435,358 1,322,882 Osim International Ltd. ....................... Specialty Retail 1,121,360 466,763 Venture Corp. Ltd. ............................ Electronic Equipment & Instruments 99,000 879,115 -------------- 2,668,760 -------------- SOUTH AFRICA 1.4% Foschini Ltd. ................................. Specialty Retail 73,352 516,082 JD Group Ltd. ................................. Specialty Retail 51,840 385,118 Massmart Holdings Ltd. ........................ Food & Staples Retailing 91,956 964,433 -------------- 1,865,633 -------------- SOUTH KOREA 9.2% Bank of Pusan ................................. Commercial Banks 140,160 2,350,849 a Binggrae Co. Ltd. ............................. Food Products 34,190 1,377,024 Daeduck Electronics Co. Ltd. .................. Electronic Equipment & Instruments 54,600 330,732 Daegu Bank Co. Ltd. ........................... Commercial Banks 94,590 1,571,363 Halla Climate Control Corp. ................... Auto Components 134,760 1,249,631 a Hansol Paper Co. Ltd. ......................... Paper & Forest Products 39,720 717,128 INTOPS Co. Ltd. ............................... Electronic Equipment & Instruments 25,968 835,038 People & Telecommunication .................... Communications Equipment 117,936 1,285,131 Sindo Ricoh Co. ............................... Office Electronics 9,657 670,589 Youngone Corp. ................................ Textiles, Apparel & Luxury Goods 189,680 2,066,915 -------------- 12,454,400 -------------- SPAIN 0.7% Sol Melia SA .................................. Hotels, Restaurants & Leisure 57,777 878,582 -------------- SWEDEN 2.3% D. Carnegie & Co. AB .......................... Capital Markets 86,860 1,685,963 Securitas Systems AB, B ....................... Commercial Services & Supplies 413,690 1,471,591 -------------- 3,157,554 -------------- SWITZERLAND 2.0% Verwaltungs-und Privat-Bank AG ................ Capital Markets 5,090 1,258,800 Vontobel Holding AG ........................... Capital Markets 30,640 1,480,357 -------------- 2,739,157 -------------- TAIWAN 7.2% D-Link Corp. .................................. Communications Equipment 1,055,448 1,864,853 Giant Manufacturing Co. Ltd. .................. Leisure Equipment & Products 708,000 1,584,977 KYE Systems Corp. ............................. Computers & Peripherals 975,279 1,560,807 Pihsiang Machinery Manufacturing Co. Ltd. ..... Health Care Equipment & Supplies 361,000 717,993 Simplo Technology Co. Ltd. .................... Computers & Peripherals 318,500 1,595,938 a Ta Chong Bank Ltd. ............................ Commercial Banks 3,036,000 931,489
14 | Annual Report Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) TAIWAN (CONTINUED) Taiwan Fu Hsing ............................... Building Products 465,110 $ 308,352 Test-Rite International Co. Ltd. .............. Distributors 1,980,171 1,175,402 -------------- 9,739,811 -------------- THAILAND 3.6% Bank of Ayudhya Public Co. Ltd. ............... Commercial Banks 2,145,700 1,672,098 Glow Energy Public Co. Ltd., fgn. ............. Independent Power Producers & Energy Traders 1,490,900 1,482,712 a Total Access Communication Public Co. Ltd., fgn. .................................... Wireless Telecommunication Services 1,544,000 1,775,600 -------------- 4,930,410 -------------- UNITED KINGDOM 12.1% Bodycote International PLC .................... Machinery 404,120 1,499,540 b Bodycote International PLC, 144A .............. Machinery 26,520 98,406 Burberry Group PLC ............................ Textiles, Apparel & Luxury Goods 117,890 1,334,006 Electrocomponents PLC ......................... Electronic Equipment & Instruments 158,120 655,058 Fiberweb PLC .................................. Personal Products 246,970 186,472 FKI PLC ....................................... Machinery 1,205,250 1,406,928 Future PLC .................................... Media 981,830 629,148 GAME Group PLC ................................ Specialty Retail 1,359,330 6,752,302 John Wood Group PLC ........................... Energy Equipment & Services 205,260 1,765,953 Kingfisher PLC ................................ Specialty Retail 308,940 893,763 Yule Catto & Company PLC ...................... Chemicals 324,690 1,212,869 -------------- 16,434,445 -------------- TOTAL COMMON STOCKS (COST $88,053,517) ........ 131,348,984 -------------- PREFERRED STOCK (COST $312,943) 0.9% GERMANY 0.9% Hugo Boss AG, pfd. ............................ Textiles, Apparel & Luxury Goods 22,130 1,247,895 -------------- TOTAL LONG TERM INVESTMENTS (COST $88,366,460) ......................... 132,596,879 --------------
Annual Report | 15 Templeton Institutional Funds, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENT 1.6% U.S. GOVERNMENT AND AGENCY SECURITY (COST $2,215,600) 1.6% e FHLB, 1/02/08 ............................................................................. $ 2,216,000 $ 2,216,000 -------------- TOTAL INVESTMENTS (COST $90,582,060) 99.3% ................................................ 134,812,879 OTHER ASSETS, LESS LIABILITIES 0.7% ....................................................... 916,970 -------------- NET ASSETS 100.0% ......................................................................... $ 135,729,849 ==============
SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FHLB - Federal Home Loan Bank GDR - Global Depository Receipt a Non-income producing for the twelve months ended December 31, 2007. 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, 2007, the aggregate value of these securities was $1,960,147, representing 1.44% of net assets. c A portion or all of the securities purchased on a when-issued or delayed delivery basis. See Note 1(c). d Security was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At December 31, 2007, the value of this security was $990,648, representing 0.73% of net assets. e 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, 2007
----------------- FOREIGN SMALLER COMPANIES SERIES ----------------- Assets: Investments in securities: Cost ...................................................................... $ 90,582,060 ================= Value ..................................................................... $ 134,812,879 Cash ......................................................................... 2,098 Foreign currency, at value (cost $790,149) ................................... 791,413 Receivables: Capital shares sold ....................................................... 342,808 Dividends ................................................................. 187,200 ----------------- Total assets ........................................................... 136,136,398 ----------------- Liabilities: Payables: Investment securities purchased ........................................... 139,733 Capital shares redeemed ................................................... 107,699 Affiliates ................................................................ 107,478 Accrued expenses and other liabilities ....................................... 51,639 ----------------- Total liabilities ...................................................... 406,549 ----------------- Net assets, at value ................................................ $ 135,729,849 ================= Net assets consist of: Paid-in capital .............................................................. $ 88,975,534 Undistributed net investment income .......................................... 309,079 Net unrealized appreciation (depreciation) ................................... 44,234,979 Accumulated net realized gain (loss) ......................................... 2,210,257 ----------------- Net assets, at value ................................................ $ 135,729,849 ================= Shares outstanding ........................................................... 6,718,643 ================= Net asset value per share a .................................................. $ 20.20 =================
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, 2007
----------------- FOREIGN SMALLER COMPANIES SERIES ----------------- Investment income: Dividends (net of foreign taxes of $350,400) ................................. $ 3,132,266 Interest (net of foreign taxes of $220) ...................................... 299,126 ----------------- Total investment income ................................................... 3,431,392 ----------------- Expenses: Management fees (Note 3a) .................................................... 1,125,723 Administrative fees (Note 3b) ................................................ 300,193 Transfer agent fees (Note 3c) ................................................ 17,815 Custodian fees (Note 4) ...................................................... 64,471 Reports to shareholders ...................................................... 19,156 Registration and filing fees ................................................. 14,861 Professional fees ............................................................ 38,937 Directors' fees and expenses ................................................. 10,356 Other ........................................................................ 17,025 ----------------- Total expenses ............................................................ 1,608,537 Expense reductions (Note 4) ............................................... (1,902) Expenses waived/paid by affiliates (Note 3d) .............................. (180,641) ----------------- Net expenses ........................................................ 1,425,994 ----------------- Net investment income ............................................ 2,005,398 ----------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ............................................................... 30,448,929 Foreign currency transactions ............................................. (155,776) ----------------- Net realized gain (loss) ............................................ 30,293,153 ----------------- Net change in unrealized appreciation (depreciation) on: Investments ............................................................... (12,886,336) Translation of assets and liabilities denominated in foreign currencies ... 10,756 Change in deferred taxes on unrealized appreciation (depreciation) ........... 17,081 ----------------- Net change in unrealized appreciation (depreciation) ................ (12,858,499) ----------------- Net realized and unrealized gain (loss) ......................................... 17,434,654 ----------------- Net increase (decrease) in net assets resulting from operations ................. $ 19,440,052 =================
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 SMALLER COMPANIES SERIES YEAR ENDED DECEMBER 31, --------------------------------- 2007 2006 --------------------------------- Increase (decrease) in net assets: Operations: Net investment income ................................................................. $ 2,005,398 $ 2,136,691 Net realized gain (loss) from investments and foreign currency transactions ........... 30,293,153 4,316,115 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liablilities denominated in foreign currencies, and deferred taxes ....... (12,858,499) 31,550,414 --------------------------------- Net increase (decrease) in net assets resulting from operations .................. 19,440,052 38,003,220 --------------------------------- Distributions to shareholders from: Net investment income ................................................................. (2,190,031) (2,432,984) Net realized gains .................................................................... (27,624,200) (4,533,082) --------------------------------- Total distributions to shareholders ...................................................... (29,814,231) (6,966,066) --------------------------------- Capital share transactions: (Note 2) ..................................................... (24,652,937) 8,152,453 --------------------------------- Redemption fees .......................................................................... 10 300 --------------------------------- Net increase (decrease) in net assets ............................................ (35,027,106) 39,189,907 Net assets: Beginning of year ........................................................................ 170,756,955 131,567,048 --------------------------------- End of year .............................................................................. $ 135,729,849 $ 170,756,955 ================================= Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year .............................................................................. $ 309,079 $ (345,904) =================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 19 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, (1940 Act) as an open-end investment company, consisting of three separate funds. The Foreign Smaller Companies Series (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. 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 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. 20 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Fund may purchase securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. 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 at a future 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. Annual Report | 21 Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because it is the Fund's policy 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. F. 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 of America. 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. G. 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. 22 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. 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. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. I. 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, 2007, there were 1.2 billion shares of TIFI authorized ($0.01 par value) of which 60 million shares were allocated to the Fund. Transactions in the Fund's shares were as follows:
-------------------------------------------------------- YEAR ENDED DECEMBER 31, 2007 2006 -------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------- Shares sold ......................................... 417,004 $ 10,235,055 727,781 $ 14,831,483 Shares issued in reinvestment of distributions ................................. 1,265,199 24,546,890 269,840 5,836,582 Shares redeemed ..................................... (2,581,541) (59,434,882) (618,009) (12,515,612) -------------------------------------------------------- Net increase (decrease) ............................. (899,338) $(24,652,937) 379,612 $ 8,152,453 ========================================================
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
Annual Report | 23 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 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 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 For the year ended December 31, 2007, the Fund paid transfer agent fees of $17,815, of which $10,969 was retained by Investor Services. D. WAIVER AND EXPENSE REIMBURSEMENTS FT Services and TIC have agreed in advance to waive a portion of their respective fees and to assume payment of other expenses through April 30, 2008. Total expenses waived are not subject to reimbursement by the Fund. After April 30, 2008, FT Services and TIC may discontinue this waiver at any time upon notice to the Fund's Board of Directors. 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, 2007, the custodian fees were reduced as noted in the Statement of Operations 24 | Annual Report Templeton Institutional Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 5. INCOME TAXES The Fund has reviewed the tax positions taken on federal income tax returns, for each of the three open tax years and as of December 31, 2007 and has determined that no provision for income tax is required in the Fund's financial statements. The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows: -------------------------- 2007 2006 -------------------------- Distributions paid from: Ordinary income ................... $ 3,862,682 $ 2,873,774 Long term capital gain ............ 25,951,549 4,092,292 -------------------------- $ 29,814,231 $ 6,966,066 ========================== At December 31, 2007, 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 .................................. $ 90,864,835 ============= Unrealized appreciation .............................. $ 50,824,215 Unrealized depreciation .............................. (6,876,171) ------------- Net unrealized appreciation (depreciation) ........... $ 43,948,044 ============= Undistributed ordinary income ........................ $ 309,079 Undistributed long term capital gains ................ 2,493,031 ------------- Distributable earnings ............................... $ 2,802,110 ============= 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. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and passive foreign investment company shares. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2007, aggregated $30,164,127 and $79,342,826, respectively. Annual Report | 25 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 AND LITIGATION 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 and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, 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. 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) FOREIGN SMALLER COMPANIES SERIES 9. NEW ACCOUNTING PRONOUNCEMENT In September 2006, Financial Accounting Standards Board (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. - 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 Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2007, 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, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2008 28 | Annual Report 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 $28,035,715 as a long term capital gain dividend for the fiscal year ended December 31, 2007. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $1,669,745 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, 2007. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $2,093,265 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2007. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. At December 31, 2007, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income 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, 2007, 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, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund, to shareholders of record. Record Date: 12/14/2007
- ------------------------------------------------------------------------------------------------------ FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED DIVIDENDS PER SHARE PER SHARE PER SHARE - ------------------------------------------------------------------------------------------------------ Fund shares ................. $0.0633 $0.4593 $0.2760
Annual Report | 29 Templeton Institutional Funds, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 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 In January 2008, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2007. 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 2007 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 bracket). 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 serves 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 141 Bar-S Foods (meat packing company). 500 East Broward Blvd. 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 Fortis, Inc. (utility holding company), 500 East Broward Blvd. Nuinsco Resources Limited (mineral Suite 2100 exploration), Royal Fidelity Merchant Fort Lauderdale, FL 33394-3091 Bank & Trust Limited (financial services), C.A. Bancorp Inc. (financial services). Victory Nickel Inc. (mineral exploration), ABACO Markets Limited (retail distributors) and Belize Electricity Limited (electric utility). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Company, 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) Lead Director since 141 Hess Corporation (exploration and 500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Heinz Suite 2100 Director Independent Company (processed foods and allied Fort Lauderdale, FL 33394-3091 Director since products), RTI International Metals, December 2007 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 Emeritus Corporation (assisted living) 500 East Broward Blvd. and OSI Pharmaceuticals, Inc. Suite 2100 (pharmaceutical products). Fort Lauderdale, FL 33394-3091 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 141 Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas) and Sentient Suite 2100 Jet (private jet service). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (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 (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since 2005 141 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. (credit card provider) (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). - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT E. WADE (1946) Director Since April 2007 34 El Oro and Exploration Co., p.l.c. 500 East Broward Blvd. (investments) and ARC Wireless Suite 2100 Solutions, Inc. (wireless components Fort Lauderdale, FL 33394-3091 and network products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Practicing attorney. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Director and 141 None One Franklin Parkway Chairman of Vice President San Mateo, CA 94403-1906 the Board and since 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 42 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ **GREGORY E. JOHNSON (1961) Director Since April 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 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 2004 San Mateo, CA 94403-1906 Officer and and Vice President Vice President - AML Compliance - AML since 2006 Compliance 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). - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President Suite 2100 and 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. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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. - ------------------------------------------------------------------------------------------------------------------------------------ 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. and of six of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ 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 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. - ------------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 18 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). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. 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 some of the other subsidiaries of Franklin Resources, Inc. and 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. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. Note 3: Prior to December 31, 2007, Nicholas F. Brady 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 HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. NIEMIEC QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. 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 BELIEVES THAT MR. NIEMIEC HAS 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. MR. NIEMIEC IS AN INDEPENDENT BOARD MEMBER 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 | 35 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. 36 | Annual Report [LOGO](R) FRANKLIN TEMPLETON INSTITUTIONAL FRANKLIN TEMPLETON INSTITUTIONAL 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN SMALLER COMPANIES 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 ftinstitutional.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 A2007 02/08 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 expert is David W. Niemiec and he is "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 $215,491 for the fiscal year ended December 31, 2007 and $221,376 for the fiscal year ended December 31, 2006. (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 $46,000 for the fiscal year ended December 31, 2007 and $3,961 for the fiscal year ended December 31, 2006. 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 $0 for the fiscal year ended December 31, 2007 and $5,610 for the fiscal year ended December 31, 2006. 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 other than services reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended December 31, 2007 and $170,251 for the fiscal year ended December 31, 2006. The services for which these fees were paid included review of materials provided to the fund Board in connect with the investment management contract renewal process. (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 $46,000 for the fiscal year ended December 31, 2007 and $179,822 for the fiscal year ended December 31, 2006. (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 Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura Fergerson, Chief Financial Officer and Chief Accounting 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/GALEN G. VETTER ---------------------------------- Galen G. Vetter Chief Executive Officer - Finance and Administration Date February 27, 2008 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/GALEN G. VETTER ------------------------------- Galen G. Vetter Chief Executive Officer - Finance and Administration Date February 27, 2008 By /s/LAURA FERGERSON ------------------------------- Laura Fergerson Chief Financial Officer and Chief Accounting Officer Date February 27, 2008 EX-99.CODE ETH 2 ncsr-code1205.txt CODE OF ETHICS FOR NCSR 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.CERT 3 tifi302_1207.txt 302 CERTS FOR TIFI Exhibit 12(a)(2) 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. 02/27/08 /s/ GALEN G. VETTER Galen G. Vetter Chief Executive Officer - Finance and Administration I, Laura F. Fergerson, 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. 02/27/08 /s/ LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 tifi906_1207.txt 906 CERTS FOR TIFI 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, Galen G. Vetter, 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 12/31/2007 (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: 02/27/08 /s/ GALEN G. VETTER Galen G. Vetter 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, Laura F. Fergerson, 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 12/31/2007 (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: 02/27/08 /s/ LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----