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 811-07866
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TEMPLETON EMERGING MARKETS INCOME FUND
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 8/31
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Date of reporting period: 8/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS
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AUGUST 31, 2006
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ANNUAL REPORT | INCOME
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[GRAPHIC OMITTED]
TEMPLETON EMERGING MARKETS
INCOME FUND
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o TEMPLETON o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
Contents
ANNUAL REPORT
Templeton Emerging Markets Income Fund .................................... 1
Performance Summary ....................................................... 7
Important Notice to Shareholders .......................................... 8
Financial Highlights and Statement of Investments ......................... 9
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 17
Report of Independent Registered Public Accounting Firm ................... 26
Tax Designation ........................................................... 27
Annual Meeting of Shareholders ............................................ 29
Dividend Reinvestment and Cash Purchase Plan .............................. 30
Board Members and Officers ................................................ 33
Shareholder Information ................................................... 39
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Annual Report
Templeton Emerging Markets
Income Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Templeton Emerging Markets Income Fund
seeks high, current income, with a secondary goal of capital appreciation, by
investing, under normal market conditions, at least 80% of its total net assets
in income-producing securities of sovereign or sovereign-related entities and
private sector companies in emerging market countries.
GEOGRAPHIC BREAKDOWN*
Based on Total Net Assets as of 8/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Americas 47.1%
Asia 26.1%
Europe 18.7%
Middle East & Africa 5.8%
Other Assets, less Liabilities 2.3%
* The Geographic Breakdown is a snapshot of the Fund on 8/31/06 and may not
reflect ongoing repositioning or reinvestment of cash in the Fund.
Dear Shareholder:
We are pleased to bring you Templeton Emerging Markets Income Fund's annual
report for the fiscal year ended August 31, 2006.
PERFORMANCE OVERVIEW
For the 12 months under review, Templeton Emerging Markets Income Fund posted
cumulative total returns of +8.71% based on market price and +13.55% based on
net asset value. The Fund performed comparably with the J.P. Morgan (JPM)
Emerging Markets Bond Index Global (EMBIG), which posted a +9.02% cumulative
total return in U.S. dollar terms for the same period. 1 You can find the Fund's
long-term performance data in the Performance Summary on page 7.
1. Source: J.P. Morgan. The JPM EMBIG tracks total returns for U.S.
dollar-denominated debt instruments issued by emerging market sovereign
and quasi-sovereign entities: Brady bonds, loans and Eurobonds. Local and
regional bond market returns are derived from country subindexes of the
JPM EMBIG. The index is unmanaged and includes reinvested interest. 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 10.
Annual Report | 1
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WHAT IS A CURRENT ACCOUNT?
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A current account is that part of the balance of payments where all of one
country's international transactions in goods and services are recorded.
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WHAT IS BALANCE OF PAYMENTS?
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Balance of payments is a record of all of a country's exports and imports of
goods and services, borrowing and lending with the rest of the world during a
particular time period. It helps a country evaluate its competitive strengths
and weaknesses and forecast the strength of its currency.
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ECONOMIC AND MARKET OVERVIEW
Global economic growth remained strong for the year under review and
demonstrated resilience to higher commodity prices, including oil, and the
normalization of global interest rates. Regionally, growth was generally robust
in Asia, strengthening in Europe and moderating in the U.S.
The U.S. Federal Reserve Board (Fed) led the global interest rate tightening
cycle with consecutive 25-basis-point increases starting mid-2004 (100 basis
points equal one percentage point). As household consumption moderated and the
housing market cooled amid inflation pressure stemming from labor costs and
energy prices, the Fed paused with the federal funds target rate at 5.25% after
raising short-term interest rates 175 basis points during the 12-month period.
Inflation rose to its highest level since 2001, or 2.8%, in August as measured
by the core Consumer Price Index (CPI). 2 Higher inflation and the Fed's
tightening of short-term interest rates pressured U.S. bond yields higher in the
past 12 months, leaving a relatively flat yield curve with the 10-year Treasury
note yield at 4.74% on August 31, 2006, and the 30-year Treasury bond yield at
4.88%. Although the U.S. dollar weakened 3.02% versus its major trading partners
and the difference in growth rates between the U.S. and its major trading
partners narrowed during the period, the U.S. current account deficit remained
large at 6.6% of gross domestic product (GDP) at the end of second quarter
2006. 3
Regionally, the Pacific Rim,which accounted for 48% of the U.S. trade deficit,
continued to play a prominent role in terms of global imbalances, characterized
by the large U.S. current account deficit. 4 The international reserve
accumulation by major oil producers and export-intensive countries such as China
remained significant during the reporting period. For example, by the end of
June 2006, China's international reserves were US$941 billion, increasing on
average nearly US$20 billion per month. 5 Growth in Asia was generally robust,
accompanied by increasing domestic demand in some countries. Trade surpluses in
Asia (outside of China) narrowed, as oil prices and stronger domestic demand
contributed to rising imports. Relative to the 3.6% GDP growth in the U.S. in
second quarter 2006 year-over-year, China's economy grew 11.3%, Singapore's 8.1%
and South Korea's 5.3%. 6 Although Asia's interest rate policy tightened during
the year, the most notable shift in monetary policy was in Japan. During the
period, the country ended its policy of quantitative easing and a zero percent
interest rate, adopted in 2001 to combat entrenched deflation
2. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
3. Sources: Federal Reserve; U.S. Bureau of Economic Analysis.
4. Source: U.S. Department of the Treasury.
5. Source: The People's Bank of China.
6. Sources: U.S. Bureau of Economic Analysis; National Bureau of Statistics,
China; Singapore Department of Statistics; Bank of Korea.
2 | Annual Report
and weak domestic growth prospects. Stronger domestic demand, driven by
investment, and prospects for sustainable positive inflation led the Bank of
Japan to increase interest rates 25 basis points in July 2006.
INVESTMENT STRATEGY
We invest selectively in bonds around the world to generate income for the Fund,
seeking opportunities while monitoring changes in interest rates, currency
exchange rates and credit risk.
MANAGER'S DISCUSSION
U.S. dollar-denominated emerging market bonds generated strong positive
performance in the 12-month period, despite the rise in U.S. Treasury yields.
For example, U.S. 10-year Treasury yields rose 71 basis points to 4.74% over the
period. The JPM EMBIG, composed of U.S. dollar-denominated emerging market
sovereign debt, returned +9.02% for the period. 1 Sovereign interest rate
spreads, a valuation measure, narrowed from 281 basis points over the U.S.
Treasury market on August 31, 2005, to 197 basis points at period-end.
Regionally, sovereign debt returned +11.64% in Latin America, +10.00% in Asia,
and +3.56% in central and eastern Europe. 1 In addition to holding U.S. dollar-
and euro-denominated sovereign debt, the Fund continued to diversify its
currency exposure with holdings in local currency-denominated debt.
LATIN AMERICA
Among the U.S. dollar-denominated debt included in the JPM EMBIG, Latin American
bonds provided the highest return over the past year. Strong global demand
boosted production, and high prices for regional exports allowed some countries
to improve external balances and debt structures. Peru was one such country, as
its US$6.5 billion positive trade balance for the year ended June 2006, and an
improving current account allowed the country to lower its external debt-to-GDP
ratio to 34.4% in first quarter 2006, down from 44.3% one year earlier. 7 This
robust expansion along with a market-friendly presidential election result led
to our decision to increase the Fund's position in Peru. However, the U.S.
dollar-denominated Peruvian sub-index of the JPM EMBIG underperformed the EMBIG
as a whole and worked against the Fund's relative performance. The Fund's
overweighted position in Argentina helped the Fund's relative performance.
Argentinean U.S. dollar-denominated bonds benefited from the third consecutive
year of strong GDP growth and were
TOP 10 COUNTRIES
8/31/06
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% OF TOTAL
NET ASSETS
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Indonesia 14.5%
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Brazil 11.5%
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Argentina 11.0%
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Russia 8.8%
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Peru 8.6%
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Iraq 4.7%
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Venezuela 4.7%
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Philippines 4.6%
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Poland 4.5%
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Ukraine 3.6%
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7. Source: Banco Central de Reserva del Peru.
Annual Report | 3
shielded from the peso's high level of inflation. Additionally, the Fund
benefited from exposure to Venezuela earlier in the fiscal year, as most of the
country's +16.65% bond market return was generated in the first half of the
reporting period. 1 Venezuela's bond market was supported by high oil prices and
a 36.2% increase in exports for the year ended June 30, 2006. 8 Our
underweighted position in Brazil detracted from relative performance, as the
Brazilian bond market returned +17.50% over the period. 1 The Fund also
diversified into local currency-denominated positions within Latin America,
including Peru, which benefited from the same fundamental developments that
drove U.S. dollar-denominated bond performance discussed above. Peruvian
long-term bond yields declined from a high of 7.96% to 6.84% by period-end while
Peru's currency, the sol, also generated positive currency returns against the
U.S. dollar. 9
EASTERN EUROPE
Credit quality in Russia continued to strengthen during the year. Because Russia
is a major oil producer, high oil prices supported strong external liquidity
conditions, foreign reserve accumulation and capacity to repay external
liabilities. These positive factors culminated in a credit rating upgrade to BBB
from BBB- by independent credit rating agency Standard & Poor's in December
2005, and further credit improvement through August 2006 garnered another
upgrade, to BBB+, just a few days after the Fund's fiscal year concluded. During
the period, Russia used oil revenue savings to fully repay its obligations to
the Paris Club (an organization of international creditors that provides debt
relief to countries in need), accounting for US$22 billion in external debt. 10
Including the impact of this payment, Russia's foreign reserves rose US$110
billion over the year to US$258 billion. 11 In addition to the positive impact
of oil on trade, Russian economic growth was robust, accelerating to 7.4% in
second quarter 2006 while nominal currency appreciation combined with some
policy factors helped inflation slow to single-digit levels for the first time
since 1998. 11 Despite strong economic and credit fundamentals, the Russian
subindex of the JPM EMBIG underperformed the index as a whole, returning +2.51%
over the year; however, relative performance benefited from the Fund's
underweighted position. 1
8. Source: Banco Central de Venezuela.
9. Source: Citibank Peru.
10. Source: Russian Finance Ministry.
11. Source: The Central Bank of the Russian Federation.
4 | Annual Report
Among our local currency holdings in Europe, the Polish zloty appreciated 6.20%
against the U.S. dollar, and the Polish bond market rose 8.36% in U.S. dollar
terms in the JPM Government Bond Index (GBI) Broad for the year under review,
which detracted slightly from the Fund's performance versus the JPM EMBIG. 12
The Polish economy benefited from a strong competitive positioning, which
bolstered double-digit export growth, while excess supply conditions provided
room for low-inflationary economic growth. For example, Poland had 5.5% GDP
growth in second quarter 2006 while inflation was 1.3% in July, significantly
below the 2.5% target level. 13
ASIA
Given the strong regional growth dynamics discussed earlier, we maintained a
relatively short duration positioning among our Asian local currency bonds, with
the exception of Indonesia. Thailand was among the more aggressive interest rate
tightening countries, hiking rates 225 basis points over the period, followed by
South Korea which tightened 125 basis points. 14 In addition to short-term
inflationary pressures from higher energy prices, rising capacity constraints in
the region continued to increase medium-term risk factors to inflation, despite
recent interest rate tightening. In Indonesia, the Fund's significantly
overweighted position in longer duration local currency bonds benefited from the
100-basis-point interest rate reduction during the year. 15 Over the 12-month
period, the Indonesian bond market returned +27.70% in local currency terms as
measured by the HSBC Asian Local Bond Index (ALBI). 16 The Fund also benefited
from currency exposure to the Indonesian rupiah, which rose 13.22% against the
U.S. dollar. 17 Other Asian currencies also generated positive returns, with the
Thai baht returning +9.88% against the U.S. dollar, followed by the South Korean
won, which returned +8.22%. 17 Among the Fund's U.S. dollar-denominated
sovereign bond holdings, the Philippines returned +17.65% following improved
fiscal prospects and debt sustainability. 1 However, the Fund's underweighted
exposure versus the JPM EMBIG worked against relative performance over the
period.
12. Source: J.P. Morgan. The JPM GBI Broad is a combination of the JPM GBI
Global and selected other countries, launched in 1997 to increase country
and return diversification in international fixed income markets. The JPM
GBI Global tracks total returns for liquid, fixed-rate, domestic
government bonds with maturities greater than one year issued by developed
countries globally.
13. Sources: National Bank of Poland; World Bank.
14. Sources: Bank of Thailand; Bank of Korea.
15. Source: Bank Indonesia.
16. Source: HSBC. The HSBC ALBI tracks total return performance of a bond
portfolio, which consists of local-currency denominated, high quality and
liquid bonds in Asia ex-Japan. Local bond market returns are from country
subindexes of the HSBC ALBI.
17. Source: Compustat.
Annual Report | 5
Thank you for your continued participation in Templeton Emerging Markets Income
Fund. We look forward to serving your future investment needs.
Sincerely,
[PHOTO OMITTED] /s/ Michael Hasenstab
Michael Hasenstab, Ph.D.
Portfolio Manager
Templeton Emerging Markets Income Fund
6 | Annual Report
Performance Summary as of 8/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. 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 sales charges paid at inception or brokerage
commissions paid on secondary market purchases. The performance table does not
reflect any taxes that a shareholder would pay on Fund dividends, capital gain
distributions, if any, or realized gains on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
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SYMBOL: TEI CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) +$0.88 $14.63 $13.75
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Market Price (NYSE) +$0.17 $13.49 $13.32
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DISTRIBUTIONS (9/1/05 - 8/31/06)
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Dividend Income $0.91
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PERFORMANCE
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1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1
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Based on change in NAV 2 +13.55% +94.23% +186.00%
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Based on change in market price 3 +8.71% +89.36% +210.00%
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Average Annual Total Return 1
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Based on change in NAV 2 +13.55% +14.20% +11.08%
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Based on change in market price 3 +8.71% +13.62% +11.98%
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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, THE FUND MAY
INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT TO
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.
2. Assumes reinvestment of distributions based on net asset value.
3. Assumes reinvestment of distributions based on the dividend reinvestment
and cash purchase plan.
Annual Report | 7
Important Notice to Shareholders
SHARE REPURCHASE PROGRAM
The Fund's Board previously authorized management to implement an open-market
share repurchase program pursuant to which the Fund may purchase Fund shares,
from time to time, in open-market transactions, at the discretion of management.
This authorization remains in effect.
PORTFOLIO MANAGEMENT UPDATE
Dr. Michael Hasenstab, who has been a manager of the Fund since 2002, became the
sole manager of the Fund effective June 1, 2006.
8 | Annual Report
Templeton Emerging Markets Income Fund
FINANCIAL HIGHLIGHTS
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YEAR ENDED AUGUST 31,
2006 2005 2004 2003 2002
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PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 13.75 $ 13.23 $ 12.53 $ 11.11 $ 11.48
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Income from investment operations:
Net investment income a ..................................... 0.89 0.82 0.84 0.93 1.16
Net realized and unrealized gains (losses) .................. 0.90 0.70 0.86 1.61 (0.27)
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Total from investment operations ............................. 1.79 1.52 1.70 2.54 0.89
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Less distributions from net investment income ................ (0.91) (1.00) (1.00) (1.12) (1.26)
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Net asset value, end of year ................................. $ 14.63 $ 13.75 $ 13.23 $ 12.53 $ 11.11
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Market value, end of year b .................................. $ 13.49 $ 13.32 $ 12.82 $ 12.43 $ 11.00
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Total return (based on market value per share) ............... 8.71% 11.74% 11.48% 24.44% 12.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $ 692,469 $ 650,806 $ 624,112 $ 591,029 $ 522,210
Ratios to average net assets:
Expenses .................................................... 1.22% c 1.21% c 1.24% c 1.17% 1.15%
Net investment income ....................................... 6.29% 5.97% 6.46% 7.78% 9.99%
Portfolio turnover rate ...................................... 23.68% 53.16% 68.25% 142.71% 95.94%
a Based on average daily shares outstanding.
b Based on the last sale on the New York Stock Exchange.
c Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 9
Templeton Emerging Markets Income Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006
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PRINCIPAL AMOUNT i VALUE
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LONG TERM INVESTMENTS 89.0%
BONDS 87.9%
ARGENTINA 9.9%
a,b Government of Argentina, FRN, 3.01%, 8/03/12 ..................... 97,845,000 $ 68,858,443
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BOSNIA AND HERZEGOVINA 1.8%
a Government of Bosnia & Herzegovina, FRN, 3.50%, 12/11/17 ......... 11,135,636 EUR 12,786,777
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BRAZIL 11.5%
Government of Brazil,
7.875%, 3/07/15 ................................................ 1,275,000 1,393,575
12.50%, 1/05/16 ................................................ 15,000,000 BRL 7,074,977
8.00%, 1/15/18 ................................................. 61,615,000 67,653,270
a FRN, 11.25%, 6/29/09 ........................................... 2,900,000 3,324,125
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79,445,947
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COLOMBIA 2.6%
Government of Colombia,
12.00%, 10/22/15 ............................................... 23,931,000,000 COP 11,718,403
11.75%, 2/25/20 ................................................ 4,255,000 5,967,148
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17,685,551
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EL SALVADOR 0.4%
c Government of El Salvador, 144A, 7.65%, 6/15/35 .................. 2,650,000 2,789,125
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INDONESIA 14.5%
Government of Indonesia,
10.00%, 10/15/11 ............................................... 1,690,000,000 IDR 175,404
11.00%, 12/15/12 ............................................... 3,650,000,000 IDR 393,845
11.00%, 10/15/14 ............................................... 120,832,000,000 IDR 12,898,949
9.50%, 6/15/15 ................................................. 9,450,000,000 IDR 915,770
10.75%, 5/15/16 ................................................ 26,870,000,000 IDR 2,792,511
10.00%, 7/15/17 ................................................ 18,800,000,000 IDR 1,846,079
11.50%, 9/15/19 ................................................ 40,000,000,000 IDR 4,320,500
11.00%, 11/15/20 ............................................... 132,050,000,000 IDR 13,705,417
12.90%, 6/15/22 ................................................ 2,000,000,000 IDR 235,878
12.00%, 9/15/26 ................................................ 7,850,000,000 IDR 877,173
d Reg S, 7.50%, 1/15/16 .......................................... 3,300,000 3,483,480
Indonesia Recapital Bonds,
15.425%, 9/15/10 ............................................... 2,800,000,000 IDR 348,196
14.25%, 6/15/13 ................................................ 234,282,000,000 IDR 28,825,917
14.275%, 12/15/13 .............................................. 166,215,000,000 IDR 20,523,912
e,f,g,h PT Indah Kiat Finance Mauritius Ltd.,
a FRN, 4.19%, 4/29/15 ............................................ 3,155,909 1,179,363
a FRN, 4.19%, 4/29/18 ............................................ 8,284,051 3,095,750
zero cpn., 4/29/25 ............................................. 5,370,423 2,006,927
e,f,g,h Tjiwi Kimia Finance Mauritius, secured note, 144A
a FRN, 4.19%, 4/29/15 ............................................ 1,184,694 352,565
a FRN, 4.19%, 4/29/18 ............................................ 3,049,247 907,456
zero cpn., 4/29/25 ............................................. 3,927,195 1,168,733
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100,053,825
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10 | Annual Report
Templeton Emerging Markets Income Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
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PRINCIPAL AMOUNT i VALUE
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LONG TERM INVESTMENTS (CONTINUED)
BONDS (CONTINUED)
IRAQ 4.7%
c Government of Iraq, 144A, 5.80%, 1/15/28 ......................... 50,575,000 $ 32,747,312
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MEXICO 1.4%
Government of Mexico, 10.00%, 12/05/24 ........................... 90,500,000 MXN 9,471,048
------------------
PANAMA 0.9%
Government of Panama, 6.70%, 1/26/36 ............................. 6,639,000 6,506,220
------------------
PERU 8.6%
Government of Peru,
9.875%, 2/06/15 ................................................ 4,255,000 5,249,606
9.91%, 5/05/15 ................................................. 51,975,000 PEN 19,238,793
7.84%, 8/12/20 ................................................. 485,000 PEN 157,034
7.35%, 7/21/25 ................................................. 10,520,000 11,046,000
8.75%, 11/21/33 ................................................ 12,550,000 15,122,750
Series 7, 8.60%, 8/12/17 ....................................... 24,910,000 PEN 8,543,212
------------------
59,357,395
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PHILIPPINES 4.6%
Government of the Philippines,
9.00%, 2/15/13 ................................................. 11,460,000 12,849,525
8.875%, 3/17/15 ................................................ 2,100,000 2,362,500
10.625%, 3/16/25 ............................................... 2,500,000 3,284,375
9.50%, 2/02/30 ................................................. 5,400,000 6,597,801
7.75%, 1/14/31 ................................................. 500,000 518,125
d Reg S, 9.125%, 2/22/10 ......................................... 160,000 EUR 230,616
d Reg S, 8.75%, 10/07/16 ......................................... 5,450,000 6,104,000
------------------
31,946,942
------------------
POLAND 4.5%
Government of Poland,
8.50%, 11/12/06 ................................................ 20,000,000 PLN 6,543,626
8.50%, 5/12/07 ................................................. 33,300,000 PLN 11,100,360
6.00%, 5/24/09 ................................................. 23,000,000 PLN 7,624,549
6.25%, 10/24/15 ................................................ 15,380,000 PLN 5,221,118
5.75%, 9/23/22 ................................................. 2,000,000 PLN 645,281
------------------
31,134,934
------------------
RUSSIA 8.8%
d Aries Vermogen, Reg S, 9.60%, 10/25/14 ........................... 24,000,000 30,812,400
d Government of Russia,
Reg S, 11.00%, 7/24/18 ......................................... 12,670,000 18,247,549
Reg S, 12.75%, 6/24/28 ......................................... 6,566,000 11,761,348
------------------
60,821,297
------------------
Annual Report | 11
Templeton Emerging Markets Income Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT i VALUE
-----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
BONDS (CONTINUED)
SOUTH KOREA 3.1%
Government of Korea,
6.90%, 1/16/07 ................................................. 10,000,000,000 KRW $ 10,489,670
4.75%, 3/12/08 ................................................. 10,465,000,000 KRW 10,882,566
------------------
21,372,236
------------------
THAILAND 2.2%
Bank of Thailand Bond, 3.25%, 5/19/07 ............................ 17,165,000 THB 451,042
Government of Thailand,
8.00%, 12/08/06 ................................................ 244,500,000 THB 6,555,333
4.125%, 2/12/08 ................................................ 98,000,000 THB 2,568,990
8.50%, 12/08/08 ................................................ 11,000,000 THB 312,893
4.80%, 4/09/10 ................................................. 212,000,000 THB 5,560,126
------------------
15,448,384
------------------
UKRAINE 3.6%
c Government of Ukraine,
144A, 7.65%, 6/11/13 ........................................... 11,948,000 12,754,490
a 144A, FRN, 8.903%, 8/05/09 ..................................... 11,660,000 12,403,325
------------------
25,157,815
------------------
VENEZUELA 4.7%
Government of Venezuela, 9.25%, 9/15/27 .......................... 26,184,000 32,585,988
------------------
VIETNAM 0.1%
a Government of Vietnam, FRN, 5.875%, 3/12/16 ...................... 949,565 950,515
------------------
TOTAL BONDS (COST $553,102,208)................................... 609,119,754
------------------
WARRANTS (COST $7,140,043) 1.1%
e,j ARGENTINA 1.1%
Government of Argentina, wts., 12/15/35 .......................... 75,000,000 7,275,000
------------------
TOTAL LONG TERM INVESTMENTS (COST $560,242,251)................... 616,394,754
------------------
SHORT TERM INVESTMENTS 8.7%
GOVERNMENT AND AGENCY SECURITIES 2.7%
EGYPT 1.1%
k Egypt Treasury Bills, 11/21/06 - 7/24/07 ......................... 46,700,000 EGP 7,701,734
------------------
THAILAND 1.6%
k Thailand Treasury Bill, 10/12/06 ................................. 413,600,000 THB 10,951,012
------------------
TOTAL GOVERNMENT AND AGENCY SECURITIES (COST $17,797,914)......... 18,652,746
------------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND (COST $578,040,165).... 635,047,500
------------------
12 | Annual Report
Templeton Emerging Markets Income Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------
SHARES VALUE
-----------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND (COST $41,804,166) 6.0%
UNITED STATES 6.0%
l Franklin Institutional Fiduciary Trust Money Market Portfolio,
4.99% .......................................................... 41,804,166 $ 41,804,166
------------------
TOTAL INVESTMENTS (COST $619,844,331) 97.7% ...................... 676,851,666
NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 0.0% m ........ 99,859
OTHER ASSETS, LESS LIABILITIES 2.3% .............................. 15,516,996
------------------
NET ASSETS 100.0% ................................................ $ 692,468,521
==================
CURRENCY ABBREVIATIONS
BRL - Brazilian Real
COP - Colombian Peso
EGP - Egyptian Pound
EUR - Euro
IDR - Indonesian Rupiah
KRW - Korean Won
MXN - Mexican Peso
PEN - Peruvian Nuevo Sol
PLN - Polish Zloty
THB - Thailand Baht
SELECTED PORTFOLIO ABBREVIATION
FRN - Floating Rate Note
a The coupon rate shown represents the rate at period end.
b The principal amount is stated in original face, and scheduled paydowns
are reflected in the market price on ex-date.
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 Trustees. At August 31,2006,
the aggregate value of these securities was $60,694,252, representing
8.76% of net assets.
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 Trustees. At August 31, 2006, the
aggregate value of these securities was $70,639,393, representing 10.20%
of net assets.
e Non-income producing for the twelve months ended August 31, 2006.
f See Note 10 regarding restricted securities.
g See Note 11 regarding other considerations.
h Security has been deemed illiquid because it may not be able to be sold
within seven days. At August 31, 2006, the aggregate value of these
securities was $8,710,794, representing 1.26% of net assets.
i The principal amount is stated in U.S. dollars unless otherwise indicated.
j Security is linked to Argentine Republic Gross Domestic Product (GDP).
Security does not pay principal over life of security or at expiration.
Payments are based on growth of Argentine GDP, subject to certain
conditions.
k The security is traded on a discount basis with no stated coupon rate.
l See Note 12 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
m Rounds to less than 0.1% of net assets.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 13
Templeton Emerging Markets Income Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................................................... $578,040,165
Cost - Sweep Money Fund (Note 12) .................................................... 41,804,166
------------
Total cost of investments ............................................................ $619,844,331
============
Value - Unaffiliated issuers ......................................................... $635,047,500
Value - Sweep Money Fund (Note 12) ................................................... 41,804,166
------------
Total value of investments ........................................................... 676,851,666
Foreign currency, at value (cost $267,615) ............................................ 215,227
Receivables:
Investment securities sold ........................................................... 11,718,866
Dividends and interest ............................................................... 11,305,292
Unrealized gain on forward exchange contracts (Note 7) ................................ 99,859
------------
Total assets ..................................................................... 700,190,910
------------
Liabilities:
Payables:
Investment securities purchased ...................................................... 51,835
Deferred sales proceeds (Note 11) .................................................... 6,699,350
Affiliates ........................................................................... 695,301
Accrued expenses and other liabilities ................................................ 275,903
------------
Total liabilities ................................................................ 7,722,389
------------
Net assets, at value ........................................................... $692,468,521
============
Net assets consist of:
Paid-in capital ....................................................................... $662,750,400
Undistributed net investment income ................................................... 5,636,772
Net unrealized appreciation (depreciation) ............................................ 57,055,359
Accumulated net realized gain (loss) .................................................. (32,974,010)
------------
Net assets, at value ........................................................... $692,468,521
============
Shares outstanding .................................................................... 47,338,848
============
Net asset value per share ............................................................. $14.63
============
14 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton Emerging Markets Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended August 31, 2006
Investment income:
Dividends - Sweep Money Fund (Note 12) ................................................ $ 1,154,567
Interest (net of foreign taxes of $977,345) ........................................... 49,074,302
------------
Total investment income .......................................................... 50,228,869
------------
Expenses:
Management fees (Note 3a) ............................................................. 5,593,102
Administrative fees (Note 3b) ......................................................... 1,003,423
Transfer agent fees ................................................................... 772,085
Custodian fees (Note 4) ............................................................... 527,994
Reports to shareholders ............................................................... 77,055
Registration and filing fees .......................................................... 43,768
Professional fees ..................................................................... 58,622
Trustees' fees and expenses ........................................................... 52,743
Other ................................................................................. 25,155
------------
Total expenses ................................................................... 8,153,947
Expense reductions (Note 4) ...................................................... (2,261)
------------
Net expenses ................................................................... 8,151,686
------------
Net investment income ........................................................ 42,077,183
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .......................................................................... 33,153,812
Foreign currency transactions ........................................................ 214,519
------------
Net realized gain (loss)........................................................ 33,368,331
------------
Net change in unrealized appreciation (depreciation) on:
Investments .......................................................................... 9,170,657
Translation of assets and liabilities denominated in foreign currencies .............. 124,714
------------
Net change in unrealized appreciation (depreciation) ........................... 9,295,371
------------
Net realized and unrealized gain (loss) ................................................ 42,663,702
------------
Net increase (decrease) in net assets resulting from operations ........................ $ 84,740,885
============
Annual Report |
The accompanying notes are an integral part of these financial statements. | 15
Templeton Emerging Markets Income Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------
YEAR ENDED AUGUST 31,
2006 2005
-----------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................. $ 42,077,183 $ 38,923,565
Net realized gain (loss) from investments and foreign currency transactions ............ 33,368,331 5,070,669
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies .............................. 9,295,371 27,576,153
-----------------------------
Net increase (decrease) in net assets resulting from operations .................... 84,740,885 71,570,387
-----------------------------
Distributions to shareholders from net investment income ................................ (43,078,352) (47,234,148)
-----------------------------
Capital share transactions: (Note 2) .................................................... -- 2,358,018
-----------------------------
Net increase (decrease) in net assets .............................................. 41,662,533 26,694,257
Net assets:
Beginning of year ....................................................................... 650,805,988 624,111,731
-----------------------------
End of year ............................................................................. $ 692,468,521 $650,805,988
=============================
Undistributed net investment income (distributions in excess of net investment
income) included in net assets:
End of year ............................................................................. $ 5,636,772 $ (5,390,960)
=============================
16 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Emerging Markets Income Fund (the Fund) is registered under the
Investment Company Act of 1940 (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.
Corporate debt securities and 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.
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. 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
Trustees.
Annual Report | 17
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (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 Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
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.
18 | Annual Report
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
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.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded on the ex-dividend date and are determined according
to income tax regulations (tax basis). Distributable earnings determined on a
tax basis may differ from earnings recorded in accordance with accounting
principles generally accepted in the United States. These differences may be
permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and trustees 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. However, based on experience, the
Fund expects the risk of loss to be remote.
Annual Report | 19
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At August 31, 2006, there were an unlimited number of shares authorized (without
par value). During the year ended August 31, 2006, there were no shares issued;
all reinvested distributions were satisfied with previously issued shares
purchased in the open market. During the year ended August 31, 2005, 173,815
shares were issued for $2,358,018 from reinvested distributions.
The Fund's Board of Trustees 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. Through August 31, 2006, the Fund had
repurchased a total of 610,500 shares. During the year ended August 31, 2006,
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
trustees of the Fund are also officers and/or directors of the following
subsidiaries:
--------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
--------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
The Fund pays investment management fees to Advisers based on the average daily
net assets of the Fund as follows:
--------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
--------------------------------------------------------------------------------
0.850% Up to and including $1 billion
0.830% Over $1 billion, up to and including $5 billion
0.810% Over $5 billion, up to and including $10 billion
0.790% Over $10 billion, up to and including $15 billion
0.770% Over $15 billion, up to and including $20 billion
0.750% 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 daily net assets of the Fund.
20 | Annual Report
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (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 year ended August 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At August 31, 2006, the Fund had tax basis capital losses which may be carried
over to offset future capital gains, if any. During the year ended August 31,
2006, the Fund utilized $18,062,664 of capital loss carryforwards. At August 31,
2006, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in:
2010 .................................................. $ 8,361,871
2011 .................................................. 24,484,014
-----------
$32,845,885
===========
The tax character of distributions paid during the years ended August 31, 2006
and 2005, was as follows:
-------------------------
2006 2005
-------------------------
Distributions paid from:
Ordinary income ....................... $43,078,352 $47,234,148
At August 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ..................................... $ 623,206,588
=============
Unrealized appreciation ................................. $ 57,613,111
Unrealized depreciation ................................. (3,968,033)
-------------
Net unrealized appreciation (depreciation) .............. $ 53,645,078
=============
Distributable earnings - undistributed ordinary income .. $ 9,994,630
=============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and bond discounts
and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and bond discounts and premiums.
Annual Report | 21
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended August 31, 2006, aggregated $146,542,592 and $198,641,646,
respectively.
7. FORWARD EXCHANGE CONTRACTS
At August 31, 2006, the Fund had the following forward exchange contracts
outstanding:
------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT DATE GAIN (LOSS)
------------------------------------------------------------------------------------------------
61,513,239 Mexican Peso ....................... $5,568,321 8/16/07 $ 48,305
42,706,994 Mexican Peso ....................... 3,882,807 8/20/07 51,554
-----------
Net unrealized gain (loss) on forward exchange contracts .... $ 99,859
===========
8. CREDIT RISK
The Fund has 76.15% of its portfolio invested in below investment grade and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.
9. 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.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
certain restricted securities held at period end. The issuer generally incurs
all registration costs.
22 | Annual Report
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
At August 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Trustees as reflecting fair value, as
follows:
-----------------------------------------------------------------------------------------------------------------------
ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE COST VALUE
-----------------------------------------------------------------------------------------------------------------------
$3,155,909 PT Indah Kiat Finance Mauritius Ltd.,
FRN, 4.19%, 4/29/15 ..................................... 4/29/05 $1,208,050 $ 1,179,363
8,284,051 PT Indah Kiat Finance Mauritius Ltd.,
FRN, 4.19%, 4/29/18 ..................................... 4/29/05 3,171,052 3,095,750
5,370,423 PT Indah Kiat Finance Mauritius Ltd.,
zero cpn., 4/29/25 ...................................... 4/29/05 2,055,744 2,006,927
1,184,694 Tjiwi Kimia Finance Mauritius, secured
note, 144A, FRN, 4.19%, 4/29/15 ......................... 4/29/05 361,095 352,565
3,049,247 Tjiwi Kimia Finance Mauritius, secured
note, 144A, FRN, 4.19%, 4/29/18 ......................... 4/29/05 929,410 907,456
3,927,195 Tjiwi Kimia Finance Mauritius, secured
note, 144A, zero cpn., 4/29/25 .......................... 4/29/05 1,197,009 1,168,733
-----------
TOTAL RESTRICTED SECURITIES (1.26% OF NET ASSETS) ................................................... $ 8,710,794
===========
11. OTHER CONSIDERATIONS
Subject to certain terms and conditions, the Fund has agreed to sell its
holdings in PT Indah Kiat Finance Mauritius Ltd. and Tjiwi Kimia Finance
Mauritius in November 2006. Until the completion of the sale, the transaction is
being accounted for as a secured borrowing with a pledge of collateral. Any
preliminary sales proceeds or other interest and cash distibutions received are
deferred until the completion of the sale transaction and will be recorded as
part of the net sales proceeds.
12. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. 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.
13. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
Annual Report | 23
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY MATTERS (CONTINUED)
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
The Fund did not participate in the CAGO Settlement.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order and disbursement of the settlement
monies to the designated funds in accordance with the terms and conditions of
the SEC's order and the plan was completed in September 2006. The Fund did not
participate in the December 13, 2004 SEC Order.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
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.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly 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.
24 | Annual Report
Templeton Emerging Markets Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Fund is currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
Annual Report | 25
Templeton Emerging Markets Income Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON EMERGING MARKETS INCOME
FUND
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 Templeton Emerging Markets Income
Fund (the "Fund") at August 31, 2006, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 2006 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
October 18, 2006
26 | Annual Report
Templeton Emerging Markets Income Fund
TAX DESIGNATION (UNAUDITED)
Under Section 871(k)(1)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $1,154,593 as interest
related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of
the Code for the fiscal year ended August 31, 2006.
At August 31, 2006, more than 50% of the Templeton Emerging Markets Income Funds
total assets were invested in securities of foreign issuers. In most instances,
foreign taxes were withheld from dividends paid to the Fund on these
investments. As shown in the table below, the Fund designates to shareholders
the foreign source income and foreign taxes paid, pursuant to Section 853 of the
Code. This designation will allow shareholders of record on September 29, 2006,
to treat their proportionate share of foreign taxes paid by the Fund as having
been paid directly by them. The shareholder shall consider these amounts as
foreign taxes paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis, by country, of foreign tax
paid, foreign source income, and foreign qualified dividends as designated by
the Fund, to shareholders of record.
RECORD DATE: 9/29/2006
--------------------------------------------------------------------------------------------------
FOREIGN
FOREIGN TAX FOREIGN QUALIFIED
PAID SOURCE INCOME DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
--------------------------------------------------------------------------------------------------
Argentina .............................................. $0.0000 $0.1254 $0.0000
Bosnia and Herzegovina ................................. 0.0000 0.0117 0.0000
Brazil ................................................. 0.0000 0.1357 0.0000
Colombia ............................................... 0.0000 0.0355 0.0000
Egypt .................................................. 0.0000 0.0102 0.0000
El Salvador ............................................ 0.0000 0.0002 0.0000
Indonesia .............................................. 0.0160 0.1793 0.0000
Iraq ................................................... 0.0000 0.0195 0.0000
Mexico ................................................. 0.0000 0.0037 0.0000
Panama ................................................. 0.0000 0.0083 0.0000
Peru ................................................... 0.0000 0.0538 0.0000
Philippines ............................................ 0.0000 0.0449 0.0000
Poland ................................................. 0.0000 0.0376 0.0000
Russia ................................................. 0.0000 0.0707 0.0000
Slovak Republic ........................................ 0.0000 0.0025 0.0000
South Africa ........................................... 0.0000 0.0035 0.0000
South Korea ............................................ 0.0046 0.0254 0.0000
Thailand ............................................... 0.0000 0.0178 0.0000
Ukraine ................................................ 0.0000 0.0329 0.0000
Venezuela .............................................. 0.0000 0.0798 0.0000
Vietnam ................................................ 0.0000 0.0012 0.0000
---------------------------------------
TOTAL .................................................. $0.0206 $0.8996 $0.0000
=======================================
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.
Annual Report | 27
Templeton Emerging Markets Income Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
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 2007, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2006 individual income
tax returns.
1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax brackets). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
28 | Annual Report
Templeton Emerging Markets Income Fund
ANNUAL MEETING OF SHAREHOLDERS, FEBRUARY 24, 2006
The Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Blvd., Fort Lauderdale, Florida, on February 24, 2006. The
purpose of the meeting was to elect three Trustees of the Fund. At the meeting,
the following persons were elected by the shareholders to serve as Trustees of
the Fund: Gordon S. Macklin, David W. Niemiec and Larry D. Thompson.*No other
business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
The election of three (3) Trustees:
---------------------------------------------------------------------------------------------
% OF % OF
SHARES SHARES
% OF PRESENT % OF PRESENT
OUTSTANDING AND OUTSTANDING AND
TERM EXPIRING 2009 FOR SHARES VOTING WITHHELD SHARES VOTING
---------------------------------------------------------------------------------------------
Gordon S. Macklin ..... 42,913,910 90.65% 97.92% 909,561 1.92% 2.08%
David W. Niemiec ...... 43,089,828 91.02% 98.33% 733,643 1.55% 1.67%
Larry D. Thompson ..... 43,081,592 91.01% 98.31% 741,879 1.57% 1.69%
* Harris J. Ashton, Harmon E. Burns, Frank J. Crothers, S. Joseph Fortunato,
Edith E. Holiday, Charles B. Johnson, Frank A. Olson and Constantine D.
Tseretopoulos are Trustees of the Fund who are currently serving and whose
terms of office continued after the Annual Meeting of Shareholders.
Annual Report | 29
Templeton Emerging Markets Income Fund
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. If the
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 Mellon Investor Services, P.O. Box 3338, South
Hackensack, NJ 07606-1938, to receive the Plan brochure.
To receive dividends or distributions in cash, the shareholder must notify
Mellon Investor Services (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 ten business days before the record date for the
distribution.
Whenever the Fund declares dividends in either cash or shares 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 shares 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 cash 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
Mellon Investor Services, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attention:
Templeton Emerging Markets Income Fund. 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.
The automatic reinvestment of dividends and/or capital gains does not relieve
the participant of any income tax that may be payable on dividends or
distributions.
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 Plan
Administrator's fees for a sale of shares through the Plan are $15.00 per
transaction plus a $0.12 per share trading fee.
30 | Annual Report
Templeton Emerging Markets Income Fund
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
A participant may withdraw from the Plan without penalty at any time by written
notice to the Plan Administrator sent to Mellon Investor Services, P.O. Box
3338, South Hackensack, NJ 07606-1938. Upon withdrawal, the participant will
receive, without charge, share certificates issued in the participant's name for
all full shares held by the Plan Administrator; or, if the participant wishes,
the Plan Administrator will sell the shares and send the proceeds to the
participant, less a service charge of $15.00 and less trading fees of $0.12 per
share.
Annual Report | 31
Templeton Emerging Markets Income Fund
TRANSFER AGENT
Mellon Investor Services LLC
480 Washington Boulevard
Jersey City, NJ 07310
1-800-416-5585
www.melloninvestor.com
SHAREHOLDER INFORMATION
Shares of Templeton Emerging Markets Income Fund are traded on the New York
Stock Exchange under the symbol "TEI." 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 access their Fund account on-line
with Investor ServiceDirect(R). For information go to Mellon Investor Services'
web site at https://vault.melloninvestor.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 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 Emerging Markets
Income Fund, 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL
33733-8030.
32 | Annual Report
Templeton Emerging Markets Income Fund
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 a three-year term that continues until that person's
successor is appointed 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) Trustee Since 1993 143 Director, Bar-S Foods (meat packing
500 East Broward Blvd. company).
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
------------------------------------------------------------------------------------------------------------------------------------
FRANK J. CROTHERS (1944) Trustee Since 1999 19 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company
Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
(1977-2003).
------------------------------------------------------------------------------------------------------------------------------------
***S. JOSEPH FORTUNATO (1932) Trustee Since 1993 144 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 1996 139 Director, Hess Corporation (formerly,
500 East Broward Blvd. Amerada Hess Corporation)
Suite 2100 (exploration and refining of oil and
Fort Lauderdale, FL 33394-3091 gas), H.J. Heinz Company (processed
foods and allied products), RTI
International Metals, Inc.
(manufacture and distribution of
titanium), Canadian National Railway
(railroad) and White Mountains
Insurance Group, Ltd. (holding
company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
***GORDON S. MACKLIN (1928) Trustee Since 1993 143 Director, MedImmune, Inc.
500 East Broward Blvd. (biotechnology) and Overstock.com
Suite 2100 (Internet services); and FORMERLY,
Fort Lauderdale, FL 33394-3091 Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding
company) (1987-2004), Spacehab, Inc.
(aerospace services) (1994-2003) and
Martek Biosciences Corporation
(1998-2006).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; Senior Business Advisor, Martek Biosciences Corporation (research and development); and FORMERLY,
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial
services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of
Securities Dealers, Inc. (1970-1987).
------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Trustee Since 2005 19 Director, Emeritus Corporation
500 East Broward Blvd. (assisted living) and OSI
Suite 2100 Pharmaceuticals, Inc. (pharmaceutical
Fort Lauderdale, FL 33394-3091 products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga
Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc.
(investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2003 102 Director, Hess Corporation (formerly,
500 East Broward Blvd. Amerada Hess Corporation)
Suite 2100 (exploration and refining of oil and
Fort Lauderdale, FL 33394-3091 gas) and Sentient Jet (private jet
service); and FORMERLY, Director,
Becton Dickinson and Company (medical
technology), Cooper Industries, Inc.
(electrical products and tools and
hardware), Health Net, Inc.
(formerly, Foundation Health)
(integrated managed care), The Hertz
Corporation, Pacific Southwest
Airlines, The RCA Corporation, Unicom
(formerly, Commonwealth Edison), UAL
Corporation (airlines) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (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).
------------------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Trustee Since 2005 19 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); Senior Fellow of The Brookings
Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S.
Department of Justice (2001-2003).
------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Trustee Since 1999 19 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) Trustee Since March 2006 29 Director, El Oro and Exploration Co.,
500 East Broward Blvd. p.l.c. (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.
------------------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------------------
**HARMON E. BURNS (1945) Trustee and Trustee since 21 None
One Franklin Parkway Vice President 1993 and
San Mateo, CA 94403-1906 Vice President
since 1996
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, 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 45 of the investment companies in Franklin Templeton
Investments.
------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee, Trustee and 143 None
One Franklin Parkway Chairman of Chairman of the
San Mateo, CA 94403-1906 the Board and Board since 1995
Vice President and Vice
President since
1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, 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.
------------------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance since
Compliance February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable
PO Box N-7759
Lyford Cay, Nassau, Bahamas
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; and officer of 14 of the investment companies in Franklin Templeton
Investments.
------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL 33394-3091 Officer-Finance
and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 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 47 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in
Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission
(1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until
1979).
------------------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------------------
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.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, 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 45 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.; Assistant Vice President, Franklin Templeton Distributors, 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.
------------------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER J. MOLUMPHY (1962) President and Since 2002 Not Applicable Not Applicable
One Franklin Parkway Chief Executive
San Mateo, CA 94403-1906 Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President, Franklin Advisors, Inc.; and officer 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:
Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Assistant Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International
of the South; and officer of 14 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
GALEN VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 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 Trust
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 Trust's investment manager. Harmon E.
Burns is considered to be an interested person of the Trust under the
federal securities laws due to his position as officer and director of
Resources.
*** Subsequent to August 31, 2006, Mr. Fortunato and Mr. Macklin each ceased
to be a trustee of the Fund.
**** During the reporting period, Mr. Wade became a trustee.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Prior to
August 31, 2006, Mr. Fred R. Millsaps ceased to be a trustee of the Fund.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND
EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT
COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL
EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES
HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT
COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND
NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION
AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF
EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT
COMMITTEE MEMBER OF HESS CORPORATION (FORMERLY AMERADA HESS COPORATION), AND A
FORMER DIRECTOR AND AUDIT COMMITTEE MEMBER OF WHITE MOUNTAINS INSURANCE GROUP,
LTD., AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL
CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY
ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS
CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS
FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS
VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF
DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD
OF TRUSTEES BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN
UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL
STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE
ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING
FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF
ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE
INDEPENDENT TRUSTEES AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S.
SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES OR THE LISTING STANDARDS
APPLICABLE TO THE FUND.
38 | Annual Report
Templeton Emerging Markets Income Fund
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held May 11, 2006, the Board of Trustees ("Board"), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for the 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 information accompanying such report was a memorandum
prepared by management describing enhancements 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 Trustees 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 Trustees, 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
Annual Report | 39
Templeton Emerging Markets Income Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Board, and the accuracy of net asset value calculations. Favorable consideration
was given to management's efforts and expenditures in establishing back-up
systems and recovery procedures to function in the event of a natural disaster,
it being noted by the Board that such systems and procedures had functioned
smoothly during the hurricanes and blackout experienced last year in Florida.
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 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 reports furnished for the agreement
renewals. The Lipper report for the Fund showed its investment performance in
respect to both a closed-end fund group, as well as an open-end performance
universe for the one-year period ended February 28, 2006, as well as the
previous ten years ended that date. Such report considered the Fund's income
return and total return on a net asset value basis without regard to market
discounts or premiums to accurately reflect investment performance. The
closed-end fund group selected by Lipper consisted of the Fund and one other
non-leveraged closed-end emerging markets debt fund. The open-end universe
consisted of the Fund and all open-end retail and institutional emerging markets
debt funds as selected by Lipper. The Lipper report showed the Fund's income
return to be below that of the other fund in the closed-end fund group for the
one-year period and previous three-, five- and ten-year periods, but to be in
the highest quintile of the open-end performance universe for the one-year
period as well as for each of the previous three- and five-year periods on an
annualized basis, and in the middle quintile for the previous ten-year period on
an annualized basis. Such report showed the Fund's total return to be below that
of the other fund in the closed-end fund group for the one-year period and each
of the previous three-, five- and ten-year periods on an annualized basis, and
to be in the lowest quintile of the open-end performance universe for the
one-year period and the lowest or second-lowest quintile of such universe for
each of the previous three-, five- and ten-year periods on an annualized basis.
The Board found such investment performance acceptable, noting that as shown in
the Lipper report the Fund's total return was 9.7% for the one-year period and
on an annualized basis exceeded 15% for the three-year period, exceeded 13% for
the five-year period, and exceeded 11% for the ten-year period.
40 | Annual Report
Templeton Emerging Markets Income Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of the Fund compared with a Lipper
expense group consisting of the Fund and six other emerging markets debt funds
as selected by Lipper. Prior to making such comparison, the Board relied upon a
survey showing that the scope of management advisory services covered under the
Fund's investment management agreement was similar to those provided by fund
managers to other fund groups that would be used as a basis of comparison in the
Lipper reports. In reviewing comparative costs, emphasis was given to each
Fund's management fee in comparison with the effective management fee that would
have been charged by the other six funds within the Lipper expense group
assuming they were the same size as the Fund, as well as the actual total
expenses of the Fund in comparison with those of the other six funds. The Lipper
effective management fee analysis considers administrative fees to be part of
management fees and the results of such expense comparison showed the Fund's
effective management fee rate to be at the median of the Lipper expense group,
while its total actual expenses were the third-highest in such group. The Board
found the Fund's management fee and expenses in comparison to those of the
expense group to be acceptable, noting that the Fund's total expense ratio was
within three basis points of the group median.
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
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations.
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 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. Included in the analysis were the revenue and related costs involved
in providing services to the Fund, as well as the Fund's relative contribution
to the profitability of the Manager's parent. In reviewing and discussing such
analysis, management discussed with the Board its belief that costs incurred in
establishing the infrastructure necessary to 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
Annual Report | 41
Templeton Emerging Markets Income Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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.
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 also noted that it had
previously added a breakpoint to the Fund's investment advisory fee at the $1
billion level.
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.
42 | Annual Report
Templeton Emerging Markets Income Fund
SHAREHOLDER INFORMATION (CONTINUED)
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-CSRS for
the six months ended February 28, 2006. Additionally, the Fund expects to file,
on or about October 31, 2006, such certifications with its Form N-CSR for the
year ended August 31, 2006.
Annual Report | 43
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM . INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 6
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 8
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
6. Portfolio of insured municipal securities.
7. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
8. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
07/06 Not part of the annual report
[LOGO](R) 100 Fountain Parkway
FRANKLIN TEMPLETON P.O. Box 33030
INVESTMENTS St. Petersburg, FL 33733-8030
ANNUAL REPORT
TEMPLETON EMERGING MARKETS INCOME FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
TRANSFER AGENT
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1915
Toll free number: 1-800/416-5585
Hearing Impaired phone number: 1-800/231-5469
Foreign Shareholders phone number: 201/680-6578
www.melloninvestor.com/isd
FUND INFORMATION
1-800/342-5236
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.
TLTEI A2006 10/06
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
financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are David W. Niemiec and Frank A.
Olson, they are "independent" as defined under the relevant Securities and
Exchange Commission Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $48,586 for the fiscal year ended August 31, 2006 and $42,423 for the
fiscal year ended August 31, 2005.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
There were no 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.
(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 $386 for the fiscal year ended August 31, 2006
and $0 for the fiscal year ended August 31, 2005. The services for which these
fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $175,475 for the fiscal year ended August
31, 2006 and $0 for the fiscal year ended August 31, 2005. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process.
(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 $175,861 for the fiscal year ended August 31, 2006 and $0 for
the fiscal year ended August 31, 2005.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Members of the Audit Committee are: Frank J. Crothers, David W. Niemiec, Frank
A. Olson 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 trustees of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Franklin Advisers, Inc. 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 Institutional
Shareholder Services (ISS), 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 ISS' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from ISS, 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. In situations where the
manager perceives a material conflict of interest, the manager may: disclose the
conflict to the Fund's board of trustees; defer to the voting recommendation of
the Fund's board of trustees, ISS, Glass Lewis or those of another independent
third party provider of proxy services; or take such other action in good faith
(in consultation with counsel) which would protect the interests of the Fund and
its shareholders.
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
evaluates plans on a case-by-case basis by considering several factors to
determine whether the plan is fair and reasonable, including the ISS
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 issues. 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 1-954-527-76788 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 and reflect the twelve-month period beginning
July 1, 2005, and ending June 30, 2006.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
(a)(1) As of October 27, 2006, the portfolio managers of the Fund are as
follows:
MICHAEL HASENSTAB, PORTFOLIO MANAGER/RESEARCH ANALYST OF FRANKLIN ADVISERS, INC.
Mr. Hasenstab has been a manager of the Fund since 2002. He has final authority
over all aspects of the Fund's investment portfolio, including but not limited
to, purchases and sales of individual securities, portfolio risk assessment,
and the management of daily cash balances in accordance with anticipated
management requirements. The degree to which he may perform these functions,
and the nature of these functions, may change from time to time. He joined
Franklin Templeton Investments in 1987.
(a)(2) This section reflects information about the portfolio managers as of the
fiscal year ended August 31, 2006.
The following table shows the number of other accounts managed by each portfolio
manager and the total assets in the accounts managed within each category:
---------------------------------------------------------------------------------------------------------
ASSETS ASSETS OF
NUMBER OF OTHER OTHER POOLED ASSETS OF
OF OTHER REGISTERED NUMBER OF INVESTMENTS OTHER
REGISTERED INVESTMENT OTHER POOLED VEHICLES NUMBER OF ACCOUNTS
INVESTMENT COMPANIES INVESTMENT MANAGED OTHERS MANAGED
COMPANIES MANAGED VEHICLES (X $1 ACCOUNTS (X $1
NAME MANAGED (x $1 MILLION) MANAGED/1 MILLION)/1 MANAGED/1 MILLION)/1
---------------------------------------------------------------------------------------------------------
Michael Hasenstab 9 5,599.6 18 7,105.8 0 N/A
---------------------------------------------------------------------------------------------------------
1. The various pooled investment vehicles and accounts listed are managed by a
team of investment professionals. Accordingly, the individual managers listed
would not be solely responsible for managing such listed amounts.
Portfolio managers that provide investment services to the Fund may also provide
services to a variety of other investment products, including other funds,
institutional accounts and private accounts. The advisory fees for some of such
other products and accounts may be different than that charged to the Fund and
may include performance-based compensation. This may result in fees that are
higher (or lower) than the advisory fees paid by the Fund. As a matter of
policy, each fund or account is managed solely for the benefit of the beneficial
owners thereof. As discussed below, the separation of the trading execution
function from the portfolio management function and the application of
objectively based trade allocation procedures helps to mitigate potential
conflicts of interest that may arise as a result of the portfolio managers
managing accounts with different advisory fees.
CONFLICTS. The management of multiple funds, including the Fund, and accounts
may also give rise to potential conflicts of interest if the funds and other
accounts have different objectives, benchmarks, time horizons, and fees as the
portfolio manager must allocate his or her time and investment ideas across
multiple funds and accounts. The manager seeks to manage such competing
interests for the time and attention of portfolio managers by having portfolio
manager's focus on a particular investment discipline. Most other accounts
managed by a portfolio manager are managed using the same investment strategies
that are used in connection with the management of the Fund. Accordingly,
portfolio holdings, position sizes, and industry and sector exposures tend to be
similar across similar portfolios, which may minimize the potential for
conflicts of interest. As noted above, the separate management of the trade
execution and valuation functions from the portfolio management process also
helps to reduce potential conflicts of interest. However, securities selected
for funds or accounts other than the Fund may outperform the securities selected
for the Fund. Moreover, if a portfolio manager identifies a limited investment
opportunity that may be suitable for more than one fund or other account, the
Fund may not be able to take full advantage of that opportunity due to an
allocation of that opportunity across all eligible funds and other accounts. The
manager seeks to manage such potential conflicts by using procedures intended to
provide a fair allocation of buy and sell opportunities among funds and other
accounts.
The structure of a portfolio manager's compensation may give rise to potential
conflicts of interest. A portfolio manager's base pay and bonus tend to increase
with additional and more complex responsibilities that include increased assets
under management. As such, there may be an indirect relationship between a
portfolio manager's marketing or sales efforts and his or her bonus.
Finally, the management of personal accounts by a portfolio manager may give
rise to potential conflicts of interest. While the funds and the manager have
adopted a code of ethics, which they believe contains provisions reasonably
necessary to prevent a wide range of prohibited activities by portfolio managers
and others with respect to their personal trading activities, there can be no
assurance that the code of ethics addresses all individual conduct that could
result in conflicts of interest.
The manager and the Fund have adopted certain compliance procedures that are
designed to address these, and other, types of conflicts. However, there is no
guarantee that such procedures will detect each and every situation where a
conflict arises.
COMPENSATION. The manager seeks to maintain a compensation program that is
competitively positioned to attract, retain and motivate top-quality investment
professionals. Portfolio managers receive a base salary, a cash incentive bonus
opportunity, an equity compensation opportunity, and a benefits package.
Portfolio manager compensation is reviewed annually and the level of
compensation is based on individual performance, the salary range for a
portfolio manager's level of responsibility and Franklin Templeton guidelines.
Portfolio managers are provided no financial incentive to favor one fund or
account over another. Each portfolio manager's compensation consists of the
following three elements:
BASE SALARY Each portfolio manager is paid a base salary.
ANNUAL BONUS Annual bonuses are structured to align the interests of
the portfolio manager with those of the Fund's shareholders. Each
portfolio manager is eligible to receive an annual bonus. Bonuses
generally are split between cash (50% to 65%) and restricted shares of
a Franklin Resources stock (17.5% to 25%) and mutual fund shares
(17.5% to 25%). The deferred equity-based compensation is intended to
build a vested interest of the portfolio manager in the financial
performance of both Franklin Resources and mutual funds advised by the
manager. The bonus plan is intended to provide a competitive level of
annual bonus compensation that is tied to the portfolio manager
achieving consistently strong investment performance, which aligns the
financial incentives of the portfolio manager and Fund shareholders.
The Chief Investment Officer of the manager and/or other officers of
the manager, with responsibility for the Fund, have discretion in the
granting of annual bonuses to portfolio managers in accordance with
Franklin Templeton guidelines. The following factors are generally
used in determining bonuses under the plan:
o INVESTMENT PERFORMANCE. Primary consideration is given to
the historic investment performance over the 1, 3 and 5 preceding
years of all accounts managed by the portfolio manager. The
pre-tax performance of each fund managed is measured relative to a
relevant peer group and/or applicable benchmark as appropriate.
o NON-INVESTMENT PERFORMANCE. The more qualitative contributions
of a portfolio manager to the manager's business and the
investment management team, including business knowledge,
contribution to team efforts, mentoring of junior staff, and
contribution to the marketing of the Fund, are evaluated in
determining the amount of any bonus award.
o RESPONSIBILITIES. The characteristics and complexity of funds
managed by the portfolio manager are factored in the manager's
appraisal.
ADDITIONAL LONG-TERM EQUITY-BASED COMPENSATION Portfolio managers may
also be awarded restricted shares or units of one or more mutual funds,
and options to purchase common shares of a Franklin Templeton fund.
Awards of such deferred equity-based compensation typically vest over
time, so as to create incentives to retain key talent.
Portfolio managers also participate in benefit plans and programs available
generally to all employees of the manager.
OWNERSHIP OF FUND SHARES. The manager has a policy of encouraging portfolio
managers to invest in the funds they manage. Exceptions arise when, for example,
a fund is closed to new investors or when tax considerations or jurisdictional
constraints cause such an investment to be inappropriate for the portfolio
manager. The following is the dollar range of Fund shares beneficially owned by
each portfolio manager as of August 31, 2006 (such amounts may change from
time to time):
--------------------------------------------------------
Dollar Range of Fund Shares
Portfolio Manager Beneficially Owned
--------------------------------------------------------
Michael Hasenstab None
--------------------------------------------------------
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANIES AND AFFILIATED PURCHASES. N/A
ITEM 10. SUBMISSION OF MATTERS OF 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 Trustees that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON EMERGING MARKETS INCOME FUND
By /s/JIMMY D. GAMBILL
Chief Executive Officer - Finance and Administration
Date October 26, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/JIMMY D. GAMBILL
Chief Executive Officer - Finance and Administration
Date October 26, 2006
By /s/GALEN G. VETTER
Chief Financial Officer
Date October 26, 2006