N-CSRS 1 tdf_ncsrs0608.txt TDF NCSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-08394 --------- Templeton Dragon Fund, 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: 06/30/08 --------- Item 1. Reports to Stockholders. (GRAPHIC) JUNE 30, 2008 SEMIANNUAL REPORT AND SHAREHOLDER INFORMATION INTERNATIONAL TEMPLETON DRAGON FUND, INC. (FRANKLIN TEMPLETON INVESTMENTS (R) LOGO) Franklin - TEMPLETON - Mutual Series Semiannual Report Templeton Dragon Fund, Inc. YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Dragon Fund seeks long-term capital appreciation by investing at least 45% of its total assets in equity securities of "China companies," as defined in the Fund's prospectus. GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 6/30/08 China 55.7% Hong Kong 27.9% Taiwan 13.4% Cambodia 0.4% Singapore 0.2% Short-Term Investments & Other Net Assets 2.4%
Dear Shareholder: This semiannual report for Templeton Dragon Fund covers the period ended June 30, 2008. PERFORMANCE OVERVIEW Templeton Dragon Fund had cumulative total returns of -19.49% in market price terms and -17.22% in net asset value terms for the six months under review. You can find the Fund's long-term performance data in the Performance Summary on page 6. ECONOMIC AND MARKET OVERVIEW Chinese equities gave back some of last year's strong gains in the first half of 2008. Concerns of a U.S. recession, coupled with China's implementation of monetary tightening measures and high inflation, pressured stock markets to end the reporting period with a decline. Several major natural disasters also negatively affected market sentiment, including the worst snowstorms in more than 50 years in the central and southern regions, a major earthquake in Sichuan province and rainstorms in the southern parts of the country. The economic impact from these calamities, however, did not derail China's robust engine. China's economy grew a strong 10.6% year-over-year in the first quarter of 2008 despite slower export growth.(1) With inflation at relatively high levels, the central bank maintained a tightening policy throughout the reporting period. Foreign direct investment increased 45% to US$52.4 billion in the first six months of the year compared with the same period in 2007, reflecting (1.) Source: National Bureau of Statistics, China. 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 8. 2 | Semiannual Report foreign investors' confidence in China's future.(2) Politically, President Hu Jintao and Premier Wen Jiabao were re-elected for another five-year term by the National People's Congress in March. Gross domestic product growth in Hong Kong accelerated to 7.1% year-over-year in the first quarter of 2008.(3) Strong domestic demand, especially private consumption, was a key driver of growth. Unemployment remained low at 3.3%, while inflation rose to 6.1% year-over-year in June.(3) Taiwan outperformed its regional counterparts on expectations that its incoming president would be able to form closer economic ties with mainland China. President Ma Ying-Jeou's plans included relaxing investment restrictions in the mainland for Taiwanese companies and normalizing cross-strait relations with China. Taiwan and China concluded their first official talks since 1999 in June and resumed direct charter flights between Taipei and Beijing. INVESTMENT STRATEGY Our investment strategy employs a fundamental, value-oriented, long-term approach. In selecting companies for investment, we will consider overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, raw material costs and sources. Additional considerations include profit margins, returns on investment, capital resources, government regulation, management and other factors in comparison to other companies around the world that we believe are comparable. Our approach to selecting investments emphasizes fundamental company-by-company analysis (rather than broader analyses of specific industries or sectors of the economy), to construct an "action list" from which we make our buy decisions. Although we will consider historical value measures, the primary factor in selecting securities for investment by the Fund will be the company's current price relative to its long-term earnings potential. MANAGER'S DISCUSSION For the six months under review, the Fund's investments in the energy, telecommunication services and capital goods sectors had a negative impact on (2.) Source: Ministry of Commerce, China. (3.) Source: Census and Statistics Department, Hong Kong. Semiannual Report | 3 TOP 10 HOLDINGS 6/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS ---------------------------------------- ---------- Dairy Farm International Holdings Ltd. 14.7% FOOD & STAPLES RETAILING, HONG KONG China Mobile Ltd. 10.3% WIRELESS TELECOMMUNICATION SERVICES, CHINA Sinopec (China Petroleum and Chemical Corp.), H 8.4% OIL, GAS & CONSUMABLE FUELS, CHINA PetroChina Co. Ltd., H 6.9% OIL, GAS & CONSUMABLE FUELS, CHINA CNOOC Ltd. 6.0% OIL, GAS & CONSUMABLE FUELS, CHINA China Construction Bank Corp., H 4.8% COMMERCIAL BANKS, CHINA Cheung Kong Infrastructure Holdings Ltd. 4.3% ELECTRIC UTILITIES, HONG KONG Asustek Computer Inc. 3.3% COMPUTERS & PERIPHERALS, TAIWAN TSMC (Taiwan Semiconductor Manufacturing Co. Ltd.) 3.2% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, TAIWAN Bank of China Ltd., H 2.3% COMMERCIAL BANKS, CHINA
absolute performance, as regional stocks in these sectors experienced substantial corrections.(4) The most significant detractors were Sinopec (China Petroleum and Chemical), the country's largest integrated energy company, China Mobile, China's dominant mobile services provider, and PetroChina, the country's largest oil and gas company in terms of reserves. Over the longer term, however, we believed the Fund's investments in these sectors were well positioned to benefit from developments in the region. On the other hand, top contributors to Fund performance included Dairy Farm International Holdings, which operates supermarkets, hypermarkets (department store and supermarket) as well as convenience, home furnishing and health and beauty stores in Asia, Cheung Kong Infrastructure, a diversified infrastructure company in Hong Kong, and TSMC (Taiwan Semiconductor Manufacturing), the world's biggest independent integrated circuit foundry. Our investments in the food and staples retailing industry also had a positive impact on Fund returns. During the reporting period, we increased the Fund's investments in Hong Kong and Shenzhen B shares based on what we considered attractive valuations.(5) We also made purchases in semiconductors, automobile manufacturing, and packaged foods and meats companies.(6) Key buys included the aforementioned TSMC, Shin Zu Shing, Taiwan's largest hinge manufacturer, and Hopewell Holdings, a major conglomerate in Hong Kong with interests in infrastructure, property, hospitality and construction. (4.) The energy sector comprises oil, gas and consumable fuels in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. The capital goods sector comprises electrical equipment, industrial conglomerates and machinery in the SOI. (5.) "Shenzhen B" denotes shares of China-incorporated, Shenzhen-listed companies that are traded in Hong Kong dollars. (6.) The semiconductors industry is part of semiconductors and semiconductor equipment in the SOI. The automobile manufacturing industry is part of automobiles in the SOI. The packaged foods and meats industry is part of food products in the SOI. 4 | Semiannual Report Conversely, we made select sales in Hong Kong-listed China H and Red Chip shares as well as in Taiwan to focus on stocks we considered relatively more attractively valued within our investment universe.(7) We sold some positions as stocks reached sale price targets. As a result, the Fund's exposure to electrical components and equipment, diversified banking, and telecommunication services companies was reduced.(8) Major sales included China Telecom, the country's leading integrated telecommunication services provider, Phoenixtec Power, a leading uninterruptible power supply (UPS) systems designer and manufacturer in Taiwan, and China Mobile. In addition, we reduced the Fund's holding in China Construction Bank and added to Bank of China due to what we considered attractive valuations in the banks sector. Thank you for your continued participation in Templeton Dragon Fund. We look forward to serving your future investment needs. Sincerely, (PHOTO OF MARK MOBIUS) /s/ Mark Mobius Mark Mobius Executive Chairman Templeton Asset Management Ltd. (7.) "China H" denotes shares of China-incorporated, Hong Kong-listed companies with most businesses in China. "Red Chip" denotes shares of Hong Kong-listed companies with significant exposure to China. China H and Red Chip shares are traded on the Hong Kong Stock Exchange. (8.) The electrical components and equipment industry is part of electrical equipment in the SOI. The diversified banking industry is part of commercial banks in the SOI. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2008, 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. Semiannual Report | 5 Performance Summary as of 6/30/08 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. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. Total returns do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any unrealized gains on the sale of Fund shares. PRICE INFORMATION
SYMBOL: TDF CHANGE 6/30/08 12/31/07 ----------- ------ ------- -------- Net Asset Value (NAV) -$5.98 $28.75 $34.73 Market Price (NYSE) -$6.03 $24.91 $30.94
PERFORMANCE
6-MONTH 1-YEAR 5-YEAR 10-YEAR ------- ------ ------- -------- Cumulative Total Return(1) Based on change in NAV(2) -17.22% -1.70% +231.41% +480.19% Based on change in market price(3) -19.49% +0.91% +200.93% +544.93% Average Annual Total Return(1) Based on change in NAV(2) -17.22% -1.70% +27.07% +19.22% Based on change in market price(3) -19.49% +0.91% +24.64% +20.49%
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. ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY VOLATILITY, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. ALSO, AS A NONDIVERSIFIED INVESTMENT COMPANY INVESTING IN "CHINA COMPANIES," THE FUND MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT TO A GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES. (1.) Total return calculations represent the cumulative and average annual changes in value of an investment over the periods indicated. Six-month return has not been annualized. (2.) Assumes reinvestment of distributions based on net asset value. (3.) Assumes reinvestment of distributions based on the dividend reinvestment and cash purchase plan. 6 | Semiannual Report Templeton Dragon Fund, Inc. FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2008 ----------------------------------------------------------- (UNAUDITED) 2007 2006 2005 2004 2003 ------------- ---------- ---------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 34.73 $ 26.95 $ 21.80 $ 18.70 $ 16.62 $ 9.73 ---------- ---------- ---------- -------- -------- -------- Income from investment operations: Net investment income(a) ..................... 0.25 0.58 0.38 0.59 0.25 0.56 Net realized and unrealized gains (losses) ... (6.23) 10.44 7.12 3.28 2.39 6.75 ---------- ---------- ---------- -------- -------- -------- Total from investment operations ................ (5.98) 11.02 7.50 3.87 2.64 7.31 ---------- ---------- ---------- -------- -------- -------- Less distributions from: Net investment income ........................ -- (0.33) (0.37) (0.41) (0.16) (0.56) Net realized gains ........................... -- (2.91) (1.98) (0.36) (0.40) -- ---------- ---------- ---------- -------- -------- -------- Total distributions ............................. -- (3.24) (2.35) (0.77) (0.56) (0.56) ---------- ---------- ---------- -------- -------- -------- Repurchase of shares ............................ -- -- -- -- -- 0.14 ---------- ---------- ---------- -------- -------- -------- Net asset value, end of period .................. $ 28.75 $ 34.73 $ 26.95 $ 21.80 $ 18.70 $ 16.62 ========== ========== ========== ======== ======== ======== Market value, end of period(b) .................. $ 24.91 $ 30.94 $ 26.26 $ 19.18 $ 17.47 $ 17.99 ========== ========== ========== ======== ======== ======== Total return (based on market value per share)(c) ................................ (19.49)% 31.69% 49.56% 14.08% 0.36% 108.44% RATIOS TO AVERAGE NET ASSETS(d) Expenses ........................................ 1.50%(e) 1.47%(e) 1.49%(e) 1.52%(e) 1.52%(e) 1.64%(f) Net investment income ........................... 1.64% 1.85% 1.61% 2.92% 1.45% 4.57% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $1,088,808 $1,315,377 $1,017,910 $823,243 $706,138 $626,959 Portfolio turnover rate ......................... 3.12% 15.66% 18.83% 8.84% 19.42% 29.91%
(a) Based on average daily shares outstanding. (b) Based on the last sale on the New York Stock Exchange. (c) Total return is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Ratio of expenses to average net assets, excluding payments by affiliate, was 1.78%. The accompanying notes are an integral part of these financial statements. Semiannual Report | 7 Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, JUNE 30, 2008 (UNAUDITED)
COUNTRY SHARES/UNITS VALUE --------- ------------ ------------- COMMON STOCKS AND OTHER EQUITY INTERESTS 97.6% AIR FREIGHT & LOGISTICS 0.1% Sinotrans Ltd., H ............................................ China 4,063,000 $ 1,000,475 ------------- AUTO COMPONENTS 1.8% Cheng Shin Rubber Industry Co. Ltd. .......................... Taiwan 11,111,391 15,027,266 Norstar Founders Group Ltd. .................................. Hong Kong 13,376,000 3,551,036 (a) Zhejiang Glass Co. Ltd., H ................................... China 1,401,000 1,024,169 ------------- 19,602,471 ------------- AUTOMOBILES 1.2% Chongqing Changan Automobile Co. Ltd., B ..................... China 2,326,500 874,237 Dongfeng Motor Corp., H ...................................... China 27,354,000 10,945,459 Great Wall Motor Co. Ltd., H ................................. China 2,496,000 1,654,984 ------------- 13,474,680 ------------- COMMERCIAL BANKS 9.0% Bank of China Ltd., H ........................................ China 56,321,000 25,064,462 China Construction Bank Corp., H ............................. China 64,506,000 51,953,917 (b) Industrial and Commercial Bank of China, H, 144A ............. China 31,104,000 21,261,896 ------------- 98,280,275 ------------- COMMUNICATIONS EQUIPMENT 0.5% D-Link Corp. ................................................. Taiwan 1,524,240 2,058,901 ZTE Corp., H ................................................. China 683,200 3,277,012 ------------- 5,335,913 ------------- COMPUTERS & PERIPHERALS 4.8% Acer Inc. .................................................... Taiwan 3,636,360 7,164,179 Advantech Co. Ltd. ........................................... Taiwan 1,727,219 4,438,542 Asustek Computer Inc. ........................................ Taiwan 13,327,755 36,268,987 Lite-On IT Corp. ............................................. Taiwan 6,175,720 4,170,997 ------------- 52,042,705 ------------- DISTRIBUTORS 1.8% China Resources Enterprise Ltd. .............................. Hong Kong 5,818,000 16,602,071 Dah Chong Hong Holdings Ltd. ................................. Hong Kong 11,893,520 3,218,484 (b) Dah Chong Hong Holdings Ltd., 144A ........................... Hong Kong 550,000 148,835 ------------- 19,969,390 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES 1.5% China Netcom Group Corp. (Hong Kong) Ltd. .................... China 1,456,000 3,968,066 China Telecom Corp. Ltd., H .................................. China 23,174,000 12,601,591 ------------- 16,569,657 ------------- ELECTRIC UTILITIES 4.3% Cheung Kong Infrastructure Holdings Ltd. ..................... Hong Kong 11,060,000 46,808,811 ------------- ELECTRICAL EQUIPMENT 0.1% BYD Co. Ltd., H .............................................. China 1,107,700 1,420,629 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS 1.3% AU Optronics Corp. ........................................... Taiwan 7,710,845 12,117,659 Yorkey Optical International Cayman Ltd. ..................... China 9,987,000 2,100,572 ------------- 14,218,231 -------------
8 | Semiannual Report Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, JUNE 30, 2008 (UNAUDITED) (CONTINUED)
COUNTRY SHARES/UNITS VALUE --------- ------------ ------------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) FOOD & STAPLES RETAILING 14.7% (c) Beijing Jingkelong Supermarket Chain Group Co. Ltd., H ....... China 1,223,000 $ 799,936 Dairy Farm International Holdings Ltd. ....................... Hong Kong 32,976,078 159,604,217 ------------- 160,404,153 ------------- FOOD PRODUCTS 0.9% China Foods Ltd. ............................................. China 6,936,000 3,202,360 China Huiyuan Juice Group Ltd. ............................... China 806,000 506,512 China Mengniu Dairy Co. Ltd. ................................. China 583,000 1,652,416 People's Food Holdings Ltd. .................................. China 3,031,000 2,294,777 Uni-President Enterprises Corp. .............................. Taiwan 1,229,231 1,478,171 Xiwang Sugar Holdings Co. Ltd. ............................... Hong Kong 3,638,000 1,236,423 ------------- 10,370,659 ------------- HOTELS, RESTAURANTS & LEISURE 0.4% NagaCorp Ltd. ................................................ Cambodia 17,265,000 4,716,336 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.4% Datang International Power Generation Co. Ltd., H ............ China 29,806,000 17,698,776 Guangdong Electric Power Development Co. Ltd., B ............. China 10,224,960 4,707,763 Huadian Power International Corp. Ltd., H .................... China 8,404,000 2,220,301 Huaneng Power International Inc., H .......................... China 1,454,000 1,008,835 ------------- 25,635,675 ------------- INDUSTRIAL CONGLOMERATES 4.1% Citic Pacific Ltd. ........................................... Hong Kong 6,638,000 24,475,617 Shanghai Industrial Holdings Ltd. ............................ China 6,850,000 20,117,990 ------------- 44,593,607 ------------- INSURANCE 0.2% China Life Insurance Co. Ltd., H ............................. China 523,000 1,831,146 ------------- IT SERVICES 0.3% Travelsky Technology Ltd., H ................................. China 5,087,000 3,346,861 ------------- MACHINERY 1.7% China Infrastructure Machinery Holdings Ltd. ................. Hong Kong 2,433,000 2,262,240 China International Marine Containers (Group) Co. Ltd., B .... China 11,778,895 14,049,020 Shin Zu Shing Co. Ltd. ....................................... Taiwan 494,000 2,612,164 ------------- 18,923,424 ------------- MARINE 0.1% (a) Sinotrans Shipping Ltd. ...................................... Hong Kong 2,026,000 1,036,742 ------------- MEDIA 0.2% Next Media Ltd. .............................................. Hong Kong 614,000 235,450 (b) Next Media Ltd., 144A ........................................ Hong Kong 4,974,000 1,907,372 ------------- 2,142,822 ------------- METALS & MINING 0.1% Aluminum Corp. of China Ltd., H .............................. China 952,000 1,097,628 ------------- OIL, GAS & CONSUMABLE FUELS 25.0% (b) China Coal Energy Co., H, 144A ............................... China 891,000 1,558,657 China Petroleum and Chemical Corp., H ........................ China 97,904,000 91,660,419 China Shenhua Energy Co. Ltd., H ............................. China 6,125,500 24,039,283
Semiannual Report | 9 Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, JUNE 30, 2008 (UNAUDITED) (CONTINUED)
COUNTRY SHARES/UNITS VALUE --------- ------------ ------------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) OIL, GAS & CONSUMABLE FUELS (CONTINUED) CNOOC Ltd. .................................................... China 38,185,000 $ 65,720,953 PetroChina Co. Ltd., H ........................................ China 57,624,000 74,642,009 Yanzhou Coal Mining Co. Ltd., H ............................... China 7,984,000 14,847,286 ------------- 272,468,607 ------------- PAPER & FOREST PRODUCTS 0.1% Nine Dragons Paper Holdings Ltd. .............................. China 1,308,000 1,019,929 ------------- PHARMACEUTICALS 0.1% Tong Ren Tang Technologies Co. Ltd., H ........................ China 679,000 921,327 ------------- REAL ESTATE 1.4% Cheung Kong (Holdings) Ltd. ................................... Hong Kong 1,105,000 14,894,418 ------------- REAL ESTATE MANAGEMENT & DEVELOPMENT 0.2% Soho China Ltd. ............................................... China 2,873,500 1,566,241 (b) Soho China Ltd., 144A ......................................... China 764,000 416,429 ------------- 1,982,670 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.8% MediaTek Inc. ................................................. Taiwan 380,000 4,381,774 Novatek Microelectronics Corp. Ltd. ........................... Taiwan 2,848,673 8,277,698 (a) Semiconductor Manufacturing International Corp. ............... China 30,520,000 1,741,819 Sunplus Technology Co. Ltd. ................................... Taiwan 3,628,419 3,514,497 Taiwan Semiconductor Manufacturing Co. Ltd. ................... Taiwan 16,213,914 34,721,590 ------------- 52,637,378 ------------- SPECIALTY RETAIL 0.1% I.T. Ltd. ..................................................... Hong Kong 1,152,000 286,624 Sa Sa International Holdings Ltd. ............................. Hong Kong 882,000 400,434 ------------- 687,058 ------------- TEXTILES, APPAREL & LUXURY GOODS 0.4% Tack Fat Group International Ltd. ............................. Hong Kong 19,824,000 1,449,188 Tainan Enterprises Co. Ltd. ................................... Taiwan 1,657,443 1,766,490 Weiqiao Textile Co. Ltd., H .................................. China 801,000 623,562 ------------- 3,839,240 ------------- TRANSPORTATION INFRASTRUCTURE 2.9% Cosco Pacific Ltd. ............................................ China 3,354,000 5,497,338 Hopewell Holdings Ltd. ........................................ Hong Kong 6,568,000 23,333,047 (b) Rickmers Maritime, 144A ....................................... Singapore 2,904,000 2,412,084 ------------- 31,242,469 ------------- WIRELESS TELECOMMUNICATION SERVICES 11.1% China Mobile Ltd. ............................................. China 8,366,000 112,444,363 Taiwan Mobile Co. Ltd. ........................................ Taiwan 4,294,831 7,994,529 ------------- 120,438,892 ------------- TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $529,985,676) ........................................ 1,062,954,278 -------------
10 | Semiannual Report Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, JUNE 30, 2008 (UNAUDITED) (CONTINUED)
COUNTRY SHARES/UNITS VALUE ------------- ------------ -------------- SHORT TERM INVESTMENT (COST $21,517,945) 2.0% MONEY MARKET FUND 2.0% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.17%.... United States 21,517,945 $ 21,517,945 -------------- TOTAL INVESTMENTS (COST $ 551,503,621) 99.6%............................ 1,084,472,223 OTHER ASSETS, LESS LIABILITIES 0.4%..................................... 4,335,363 -------------- NET ASSETS 100.0%....................................................... $1,088,807,586 ==============
(a) Non-income producing for the twelve months ended June 30, 2008. (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 June 30, 2008, the aggregate value of these securities was $27,705,273, representing 2.54% of net assets. (c) A portion or all of the security purchased on a delayed delivery basis. See Note 1(c). (d) 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. The accompanying notes are an integral part of these financial statements. Semiannual Report | 11 Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES June 30, 2008 (unaudited) Assets: Investments in securities: Cost - Unaffiliated issuers .............. $ 529,985,676 Cost - Sweep Money Fund (Note 7) ......... 21,517,945 -------------- Total cost of investments ................ $ 551,503,621 -------------- Value - Unaffiliated issuers ............. $1,062,954,278 Value - Sweep Money Fund (Note 7) ........ 21,517,945 -------------- Total value of investments ............... 1,084,472,223 Cash ........................................ 2,139,981 Foreign currency, at value (cost $ 22,452)... 22,470 Receivables: Investment securities sold ............... 691,750 Dividends ................................ 2,957,460 -------------- Total assets .......................... 1,090,283,884 -------------- Liabilities: Payables: Investment securities purchased .......... 21,078 Affiliates ............................... 1,310,272 Custodian fees ........................... 125,752 Accrued expenses and other liabilities ...... 19,196 -------------- Total liabilities ..................... 1,476,298 -------------- Net assets, at value ............... $1,088,807,586 ============== Net assets consist of: Paid-in capital ............................. $ 458,954,780 Undistributed net investment income ......... 31,508,863 Net unrealized appreciation (depreciation)... 532,971,892 Accumulated net realized gain (loss) ........ 65,372,051 ============== Net assets, at value ............... $1,088,807,586 ============== Shares outstanding .......................... 37,873,327 ============== Net asset value per share ................... $ 28.75 ==============
The accompanying notes are an integral part of these financial statements. 12 | Semiannual Report Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended June 30, 2008 (unaudited) Investment income: Dividends: Unaffiliated issuers ................................ $ 18,201,262 Sweep Money Fund (Note 7) ........................... 125,228 ------------- Total investment income .......................... 18,326,490 ------------- Expenses: Management fees (Note 3a) .............................. 7,294,794 Administrative fees (Note 3b) .......................... 882,739 Transfer agent fees .................................... 56,701 Custodian fees (Note 4) ................................ 284,923 Reports to shareholders ................................ 40,065 Registration and filing fees ........................... 19,971 Professional fees ...................................... 89,639 Directors' fees and expenses ........................... 45,654 Other .................................................. 17,100 ------------- Total expenses ................................... 8,731,586 Expense reductions (Note 4) ...................... (2,108) ------------- Net expenses .................................. 8,729,478 ------------- Net investment income ...................... 9,597,012 ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ......................................... 23,496,513 Foreign currency transactions ....................... 21,195 ------------- Net realized gain (loss) ...................... 23,517,708 ------------- Net change in unrealized appreciation (depreciation) on: Investments ......................................... (259,686,871) Translation of assets and liabilities denominated in foreign currencies ............................... 2,514 ------------- Net change in unrealized appreciation (depreciation) ............................. (259,684,357) ------------- Net realized and unrealized gain (loss) ................... (236,166,649) ------------- Net increase (decrease) in net assets resulting from operations ............................................. $(226,569,637) =============
The accompanying notes are an integral part of these financial statements. Semiannual Report | 13 Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 2008 YEAR ENDED (UNAUDITED) DECEMBER 31, 2007 ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income ................................................................ $ 9,597,012 $ 21,951,375 Net realized gain (loss) from investments and foreign currency transactions .......... 23,517,708 118,772,230 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies .......................... (259,684,357) 276,726,468 -------------- -------------- Net increase (decrease) in net assets resulting from operations ................ (226,569,637) 417,450,073 -------------- -------------- Distributions to shareholders from: Net investment income ................................................................ -- (12,645,904) Net realized gains ................................................................... -- (110,120,527) -------------- -------------- Total distributions to shareholders ..................................................... -- (122,766,431) -------------- -------------- Capital share transactions: (Note 2) .................................................... -- 2,783,627 -------------- -------------- Net increase (decrease) in net assets .......................................... (226,569,637) 297,467,269 Net assets: Beginning of period ..................................................................... 1,315,377,223 1,017,909,954 -------------- -------------- End of period ........................................................................... $1,088,807,586 $1,315,377,223 ============== ============== Undistributed net investment income included in net assets: End of period ........................................................................... $ 31,508,863 $ 21,911,851 ============== ==============
The accompanying notes are an integral part of these financial statements. 14 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Dragon Fund, Inc. (Fund) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as a non-diversified, closed-end investment company. 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. 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. Semiannual Report | 15 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 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. 16 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. INCOME 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 has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. 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. 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. GUARANTEES AND INDEMNIFICATIONS Under the Fund'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, 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. Semiannual Report | 17 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK At June 30, 2008, there were 100 million shares authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2008 DECEMBER 31, 2007 ---------------- -------------------- SHARES AMOUNT SHARES AMOUNT ------ ------- ------- ---------- Shares issued for reinvestments of distributions... -- -- 103,212 $2,783,627
The Fund's Board of Directors previously authorized an open-market share repurchase program pursuant to which the Fund may purchase, from time to time, Fund shares in open-market transactions, at the discretion of management. This authorization remains in effect. During the period ended June 30, 2008 and the year ended December 31, 2007, there were no share repurchases. 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
A. MANAGEMENT FEES The Fund pays an investment management fee to TAML based on average weekly net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS ------------------- ------------------------------------------------- 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% In excess of $20 billion
B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.15% per year of the average weekly net assets, of which 0.10% is paid to Nomura Asset Management U.S.A. Inc., for sub-administrative services. 18 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 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 period ended June 30, 2008, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES For tax purposes, realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2007, the Fund deferred realized currency losses of $59,705. At June 30, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments.......................... $551,648,674 ------------ Unrealized appreciation...................... $571,353,296 Unrealized depreciation...................... (38,529,747) ------------ Net unrealized appreciation (depreciation)... $532,823,549 ============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2008, aggregated $36,622,278 and $56,653,516, respectively. 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. Semiannual Report | 19 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 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. REORGANIZATION TO A DELAWARE STATUTORY TRUST On May 29, 2002, the Board of Directors approved an Agreement and Plan of Reorganization (Agreement) whereby the Fund would be reorganized and its domicile changed from a Maryland corporation to a Delaware statutory trust. The completion of the reorganization is pending guidance from the National Tax Agency in Japan relating to the tax treatment of the Plan under Japanese laws with respect to the Fund's Japanese shareholders. If and when the reorganization is completed, the Delaware statutory trust will be the successor to the Fund. 10. FAIR VALUE MEASUREMENTS The Fund adopted Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fund has determined that the implementation of SFAS 157 did not have a material impact on the Fund's financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. As of June 30, 2008, all of the Funds' investments in securities carried at fair value were in Level 1 inputs. 20 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 11. NEW ACCOUNTING PRONOUNCEMENTS In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Semiannual Report | 21 Templeton Dragon Fund, Inc. ANNUAL MEETING OF SHAREHOLDERS, MAY 30, 2008 The Annual Meeting of Shareholders of the Fund was held at the Fund's offices, 500 E. Broward Blvd., Fort Lauderdale, Florida on May 30, 2008. The purpose of the meeting was to elect four Directors of the Fund and to consider the approval or rejection of a shareholder proposal to request that the Board of Directors consider approving, and submitting for shareholder approval at a future shareholder meeting, a proposal to convert the Fund from a closed-end fund to an open-end fund. At the meeting, the following persons were elected by the shareholders to serve as Directors of the Fund: Harris J. Ashton, Ann Torre Bates, Frank J. Crothers and Constantine D. Tseretopoulos.* Shareholders voted to reject the proposal to request that the Board of Directors consider approving, and submitting for shareholder approval at a future shareholder meeting, a proposal to convert the Fund from a closed-end fund to an open-end fund. No other business was transacted at the meeting. The results of the voting at the Annual Meeting are as follows: Proposal 1 - The election of four Directors:
% OF % OF SHARES % OF % OF SHARES OUTSTANDING PRESENT OUTSTANDING PRESENT TERM EXPIRING 2011 FOR SHARES AND VOTING WITHHELD SHARES AND VOTING -------------------------------- ---------- ----------- ----------- --------- ----------- ----------- Harris J. Ashton ............... 32,250,538 85.15% 96.67% 1,109,860 2.93% 3.33% Frank J. Crothers .............. 32,264,767 85.19% 96.72% 1,095,631 2.89% 3.28% Constantine D. Tseretopoulos ... 32,274,885 85.22% 96.75% 1,085,513 2.87% 3.25% TERM EXPIRING 2009 Ann Torre Bates ................ 32,284,244 85.24% 96.77% 1,076,154 2.84% 3.23%
Proposal 2 - The rejection of a shareholder proposal to request that the Board of Directors consider approving, and submitting for shareholder approval at a future shareholder meeting, a proposal to convert the Fund from a closed-end fund to an open-end fund:
% OF % OF SHARES SHARES OUTSTANDING PRESENT VOTED SHARES AND VOTING ---------- ----------- ----------- For ................ 6,856,747 18.10% 42.03% Against ............ 9,458,807 24.97% 57.97% Abstain ............ 315,071 0.83% N/A Broker Non-Votes ... 21,242,699 56.09% N/A
Note: Due to rounding, totals may not necessarily agree with the arithmetic sum of the figures. * Edith E. Holiday, Charles B. Johnson, Gregory E. Johnson, David W. Niemiec, Frank A. Olson, Larry D. Thompson and Robert E. Wade, are Directors of the Fund who are currently serving and whose terms of office continued after the Annual Meeting of Shareholders. 22 | Semiannual Report Templeton Dragon Fund, Inc. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan") with the following features: If shares of the Fund are held in the shareholder's name, the shareholder will automatically be a participant in the Plan, unless he elects to withdraw. Shareholders holding their shares through Japan Securities Depository Center, Inc., will not be enrolled in the Plan unless certain conditions are met and they elect to participate. If shares are registered in the name of a broker-dealer or other nominee (i.e., in "street name"), the broker-dealer or nominee will elect to participate in the Plan on the shareholder's behalf unless the shareholder instructs them otherwise, or unless the reinvestment service is not provided by the broker-dealer or nominee. Participants should contact BNY Mellon Shareowner Services, P.O. Box 358035, Pittsburgh, PA 15252-8035, to receive the Plan brochure. To receive dividends or distributions in cash, the shareholder must notify Mellon Bank, N.A. (the "Plan Administrator") at the address above or the institution in whose name the shares are held. The Plan Administrator must receive written notice within 10 business days before the record date for a distribution. Whenever the Fund declares dividends in either cash or common stock of the Fund, if the market price is equal to or exceeds net asset value at the valuation date, the participant will receive the dividends entirely in stock at a price equal to the net asset value, but not less than 95% of the then current market price of the Fund's shares. If the market price is lower than net asset value or if dividends and/or capital gains distributions are payable only in cash, the participant will receive shares purchased on the New York Stock Exchange or otherwise on the open market. A participant has the option of submitting additional payments to the Plan Administrator, in any amounts of at least $100, up to a maximum of $5,000 per month, for the purchase of Fund shares for his or her account. These payments shall be made by check or money order payable to "Mellon Bank, N.A." and sent to BNY Mellon Shareowner Services, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attention: Templeton Dragon Fund, Inc. The Plan Administrator shall apply such payments (less a $5.00 service charge and less a pro rata share of trading fees) to purchases of the Fund's shares on the open market. Whenever shares are purchased on the New York Stock Exchange or otherwise on the open market, each participant will pay a pro rata portion of trading fees. Trading fees will be deducted from amounts to be invested. The automatic reinvestment of dividends and/or capital gains does not relieve the participant of any income tax which may be payable on dividends or distributions. Semiannual Report | 23 Templeton Dragon Fund, Inc. DIRECT DEPOSIT SERVICE FOR REGISTERED SHAREHOLDERS Cash distributions can now be electronically credited to a checking or savings account at any financial institution that participates in the Automated Clearing House ("ACH") system. The Direct Deposit service is provided for registered shareholders at no charge. To enroll in the service, access your account online by going to www.melloninvestor.com/isd or dial 1-800-416-5585 (toll free) and follow the instructions. Direct Deposit will begin with the next scheduled distribution payment date following enrollment in the service. 24 | Semiannual Report Templeton Dragon Fund, Inc. TRANSFER AGENT BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015 1-800-416-5585 www.bnymellon.com DIRECT REGISTRATION If you are a registered shareholder of the Fund, purchases of shares of the Fund can be electronically credited to your Fund account at BNY Mellon Shareowner Services through Direct Registration. This service provides shareholders with a convenient way to keep track of shares through book entry transactions, to electronically move book-entry shares between broker-dealers, transfer agents and DRS eligible issuers, and eliminates the possibility of lost certificates. For additional information, please contact BNY Mellon Shareowner Services at 1-800-416-5585. SHAREHOLDER INFORMATION Shares of Templeton Dragon Fund, Inc. are traded on the New York Stock Exchange under the symbol TDF. The Fund's shares are also listed and traded in Japan on the Osaka Securities Exchange Co., Ltd. Information about the net asset value and the market price is published each Monday in the WALL STREET JOURNAL, weekly in BARRON'S and each Saturday in THE NEW YORK TIMES and other newspapers. Daily market prices for the Fund's shares are published in the New York Stock Exchange Composite Transactions section of newspapers. For current information about distributions and shareholder accounts, call 1-800-416-5585. Registered shareholders can now access their Fund account on-line with INVESTOR SERVICE DIRECT(R). For information go to BNY Mellon Shareowner Services' web site at http://www.mellonin-vestor.com/isd and follow the instructions. The daily closing net asset value as of the previous business day may be obtained when available by calling Franklin Templeton Fund Information after 7 a.m. Pacific time any business day at 1-800/DIAL BEN(R) (1-800-342-5236). The Fund's net asset value and dividends are also listed on the NASDAQ Stock Market, Inc.'s Mutual Fund Quotation Service ("NASDAQ MFQS"). Shareholders not receiving copies of the reports to shareholders because their shares are registered in the name of a broker or a custodian can request that they be added to the Fund's mailing list by writing Templeton Dragon Fund, Inc., 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030. Semiannual Report | 25 Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 25, 2008, the Board of Directors (Board), including a majority of non-interested or independent Directors, approved renewal of the investment management agreement for Templeton Dragon Fund, Inc. (Fund). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports on the Fund, information on its share price discount to net asset value, and other related financial information, as well as periodic reports on legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report prepared by Lipper, Inc. (Lipper), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper report compared the Fund's investment performance and expenses with those of other funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant, and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Fund by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale. In considering such materials, the independent Directors received assistance and advice from and met separately with independent counsel. In approving continuance of the investment management agreement for the Fund, the Board, including a majority of independent Directors, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Fund and its shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for the Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery 26 | Semiannual Report Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of the Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of the level of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper report furnished for the agreement renewal. The Lipper report prepared for the Fund showed its investment performance during 2007 and the previous 10 years ended December 31, 2007, in comparison with a four-fund performance universe consisting of the Fund and all other non-leveraged closed-end Pacific region funds as selected by Lipper. Such report considers total return on a net asset value basis without regard to market discounts or premiums to accurately reflect investment performance. The Lipper report showed the Fund's total return for 2007 was the highest in such Lipper performance universe, and its total return on an annualized basis was also the highest in such universe during each of the previous three-, five- and 10-year periods. The Board was satisfied with such performance. COMPARATIVE EXPENSES. Consideration was given to a Lipper report analysis of the management fees and total expense ratios of the Fund compared with those of a group of seven other funds selected by Lipper as its appropriate Lipper expense group. Prior to making such comparison, the Board relied upon a survey showing that the scope of services covered under the Fund's investment management agreement was similar to those provided by fund managers to other fund groups. In reviewing comparative costs, emphasis was given to the Fund's contractual investment management fee rate in comparison with the contractual investment management fee rate that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expense ratio of the Fund in comparison with those of such expense group. The Lipper management effective fee analysis considers administrative fees to be part of management fees and the results of such expense comparisons showed the Fund's contractual investment management fee rate to be the highest in its Lipper expense group, but that the Fund's actual total expense rate was within nine basis points of the median for such expense group. The Board found such expenses to be acceptable in light of the Fund's investment performance and the quality and experience of the Fund's portfolio managers and research staff. Semiannual Report | 27 Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the cost allocation methodology was consistent with that followed in profitability report presentations made in prior years and that the Fund's independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Fund's Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to the Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether the Manager realizes economies of scale as the Fund grows larger and the extent to which any such benefit is shared with the Fund and its shareholders. The Board believed that a Manager's ability to realize economies of scale and the sharing of such benefit is a more relevant consideration in the case of an open-end fund whose size increases as a result of the continuous sale of its shares. A closed-end investment company such as the Fund does not continuously offer shares, and growth following its initial public offering will primarily result from market appreciation, which benefits its shareholders. While believing economies of scale to be less of a factor in the context of a closed-end fund, the Board believes at some point an increase in size may lead to economies of scale that should be shared with the Fund and its shareholders and intends to monitor future growth of the Fund accordingly. The Board noted at the end of 2007 the Fund's net assets were slightly in excess of $1.3 billion and that it had previously added a breakpoint to the Fund's investment advisory fee at the $1 billion level. 28 | Semiannual Report Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION (CONTINUED) PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager 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. CERTIFICATIONS The Fund's Chief Executive Officer - Finance and Administration is required by the New York Stock Exchange's Listing Standards to file annually with the Exchange a certification that he is not aware of any violation by the Fund of the Exchange's Corporate Governance Standards applicable to the Fund. The Fund has filed such certification. In addition, the Fund's Chief Executive Officer - Finance and Administration and Chief Financial Officer and Chief Accounting Officer are required by the rules of the U.S. Securities and Exchange Commission to provide certain certifications with respect to the Fund's Form N-CSR and Form N-CSRS (which include the Fund's annual and semiannual reports to shareholders) that are filed semiannually with the Commission. The Fund has filed such certifications with its Form N-CSR for the year ended December 31, 2007. Additionally, the Fund expects to file, on or about August 31, 2008, such certifications with its Form N-CSRS for the six months ended June 30, 2008. Semiannual Report | 29 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. (FRANKLIN TEMPLETON INVESTMENTS (R) LOGO) 100 Fountain Parkway P.O. Box 33030 St. Petersburg, FL 33733-8030 SEMIANNUAL REPORT AND SHAREHOLDER INFORMATION TEMPLETON DRAGON FUND, INC. INVESTMENT MANAGER Templeton Asset Management Ltd. TRANSFER AGENT BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015 Toll free number: 1-800-416-5585 Hearing Impaired phone number: 1-800-231-5469 Foreign Shareholders phone number: 201-680-6578 www.bnymellon.com Investors should be aware that the value of investments made for the Fund may go down as well as up. 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. 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. 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. N/A Item 5. Audit Committee of Listed Registrants Members of the Audit Committee are: Frank J. Crothers, David W. Niemiec, Ann Torre Bates and Constantine D. Tseretopoulos Item 6. Schedule of Investments. N/A Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. The board of directors of the Fund has delegated the authority to vote proxies related to the portfolio securities held by the Fund to the Fund's manager Templeton Asset Management Ltd. in accordance with the Proxy Voting Policies and Procedures (Policies) adopted by the manager. The manager has delegated its administrative duties with respect to the voting of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All proxies received by the Proxy Group will be voted based upon the manager's instructions and/or policies. To assist it in analyzing proxies, the manager subscribes to RiskMetrics Group (RiskMetrics), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. In addition, the manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated third party analytical research firm, to receive analyses and vote recommendations on the shareholder meetings of publicly held U.S. companies. Although RiskMetrics' and/or Glass Lewis' analyses are thoroughly reviewed and considered in making a final voting decision, the manager does not consider recommendations from RiskMetrics, Glass Lewis or any other third party to be determinative of the manager's ultimate decision. The manager votes proxies solely in the interests of the Fund and its shareholders. As a matter of policy, the officers, directors/trustees and employees of the Fund, the manager and the Proxy Group will not be influenced by outside sources whose interests conflict with the interests of the Fund and its shareholders. Efforts are made to resolve all conflicts in the interests of the manager's clients. Material conflicts of interest are identified by the Proxy Group based upon analyses of client, broker and vendor lists, information periodically gathered from directors and officers, and information derived from other sources, including public filings. In situations where a material conflict of interest is identified, the Proxy Group may defer to the voting recommendation of RiskMetrics, Glass Lewis or those of another independent third party provider of proxy services; or send the proxy directly to the Fund with a recommendation regarding the vote for approval. If the conflict is not resolved by the Fund, the Proxy Group may refer the matter, along with the recommended course of action by the manager to an interdepartmental Proxy Review Committee (which may include portfolio managers and/or research analysts employed by the manager), for evaluation and voting instructions. The Proxy Review Committee may defer to the voting recommendation of RiskMetrics, Glass Lewis or those of another independent third party provider of proxy services; or send the proxy directly to the Fund. Where the Proxy Group or the Proxy Review Committee refers a matter to the Fund, it may rely upon the instructions of a representative of the Fund, such as the board of directors or a committee of the board. Where a material conflict of interest has been identified, but the items on which the manager's vote recommendations differ from Glass Lewis, RiskMetrics, or another independent third party provider of proxy services relate specifically to (1) shareholder proposals regarding social or environmental issues or political contributions, (2) "Other Business" without describing the matters that might be considered, or (3) items the manager wishes to vote in opposition to the recommendations of an issuer's management, the Proxy Group may defer to the vote recommendations of the manager rather than sending the proxy directly to the Fund for approval. To avoid certain potential conflicts of interest, the manager will employ echo voting, if possible, in the following instances: (1) when the Fund invests in an underlying fund in reliance on Sections 12(d)(1) of the 1940 Act, or pursuant to an SEC exemptive order; (2) when the Fund invests uninvested cash in affiliated money market funds pursuant to an SEC exemptive order ("cash sweep arrangement"); or (3) when required pursuant to the Fund's governing documents or applicable law. Echo voting means that the Investment Manager will vote the shares in the same proportion as the vote of all of the other holders of the fund's shares. The recommendation of management on any issue is a factor which the manager considers in determining how proxies should be voted, but is not determinative of the manager's ultimate decision. As a matter of practice, the votes with respect to most issues are cast in accordance with the position of the company's management. Each issue, however, is considered on its own merits, and the manager will not support the position of the company's management in any situation where it deems that the ratification of management's position would adversely affect the investment merits of owning that company's shares. Manager's proxy voting policies and principles The manager has adopted general proxy voting guidelines, which are summarized below. These guidelines are not an exhaustive list of all the issues that may arise and the manager cannot anticipate all future situations. In all cases, each proxy will be considered based on the relevant facts and circumstances. Board of directors. The manager supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. The manager will generally vote against management efforts to classify a board and will generally support proposals to declassify the board of directors. The manager may withhold votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, the manager will review this issue as well as proposals to restore or provide for cumulative voting on a case-by-case basis, taking into consideration factors such as the company's corporate governance guidelines or provisions and performance. Ratification of auditors of portfolio companies. In light of several high profile accounting scandals, the manager will closely scrutinize the role and performance of auditors. On a case-by-case basis, the manager will examine proposals relating to non-audit relationships and non-audit fees. The manager will also consider, on a case-by-case basis, proposals to rotate auditors, and will vote against the ratification of auditors when there is clear and compelling evidence of accounting irregularities or negligence. Management and director compensation. A company's equity-based compensation plan should be in alignment with its shareholders' long-term interests. The manager believes that executive compensation should be directly linked to the performance of the company. The manager evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable, including the RiskMetrics quantitative model utilized to assess such plans and/or the Glass Lewis evaluation of the plans. The manager will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment "evergreen" feature. The manager will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less. Severance compensation arrangements will be reviewed on a case-by-case basis, although the manager will generally oppose "golden parachutes" that are considered to be excessive. The manager will normally support proposals that require a percentage of directors' compensation to be in the form of common stock, as it aligns their interests with those of shareholders. The manager will review on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans. Anti-takeover mechanisms and related issues. The manager generally opposes anti-takeover measures since they tend to reduce shareholder rights. On occasion, the manager may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm the Fund or its shareholders' interests. The manager generally supports proposals that require shareholder rights' plans ("poison pills") to be subject to a shareholder vote and will closely evaluate such plans on a case-by-case basis to determine whether or not they warrant support. The manager will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. The manager generally opposes any supermajority voting requirements as well as the payment of "greenmail." The manager generally supports "fair price" provisions and confidential voting. Changes to capital structure. The manager will review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase and proposals seeking preemptive rights. The manager will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. The manager will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable. Mergers and corporate restructuring. Mergers and acquisitions will be subject to careful review by the research analyst to determine whether each will be beneficial to shareholders. The manager will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring and reincorporation proposals are also subject to a thorough examination on a case-by-case basis. Social and corporate policy issues. The manager will generally give management discretion with regard to social, environmental and ethical issues, although the manager may vote in favor of those that are believed to have significant economic benefits or implications for the Fund and its shareholders. Global corporate governance. Many of the tenets discussed above are applied to proxy voting decisions for international companies. However, the manager must be more flexible in these instances and must be mindful of the varied market practices of each region. The manager will attempt to process every proxy it receives for all domestic and foreign issuers. However, there may be situations in which the manager cannot process proxies, for example, where a meeting notice was received too late, or sell orders preclude the ability to vote. If a security is on loan, the manager may determine that it is not in the best interests of the Fund to recall the security for voting purposes. Also, the manager may abstain from voting under certain circumstances or vote against items such as "Other Business" when the manager is not given adequate information from the company. Shareholders may view the 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 available online at franklintempleton.com and posted on the SEC website at www.sec.gov. The proxy voting records are updated each year by August 31 to reflect the most recent 12-month period ended June 30. Item 8. Portfolio Managers of Closed-End Management Investment Company and Affiliated Purchasers. 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 F. 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 F. 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 Dragon Fund, Inc. By /s/GALEN G. VETTER --------------------------- Galen G. Vetter Chief Executive Officer - Finance and Administration Date August 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 August 27, 2008 By /s/LAURA F. FERGERSON --------------------------- Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date August 27, 2008