<PAGE>
Templeton
Income Fund
- --------------------------------------------------------------------------------
Your Fund's Objective:
The Templeton Income Fund seeks current income with capital appreciation and
growth of income through a flexible policy of investing primarily in debt
securities of companies, governments and government agencies of various nations
throughout the world. The Fund also invests in preferred stock, common stocks
which pay dividends, and income-producing securities convertible into common
stock of such companies.
- --------------------------------------------------------------------------------
April 14, 1995
Dear Shareholder:
We are pleased to bring you the semi-annual report of the Templeton Income Fund
for the period ended February 28, 1995.
During the six months under review, global bond markets continued to experience
the volatility they exhibited in the first half of 1994. Although inflation
remained relatively subdued in the U.S., the Federal Reserve Board continued to
raise short-term interest rates. In many other countries, interest rates rose by
as much as those in the U.S., which resulted in capital losses on many
outstanding fixed-income positions. Mexico's financial crisis following the
devaluation of its peso in the latter part of 1994 caused further declines in
the value of bonds of emerging market countries. Even U.S. dollar-denominated
bonds of developing countries were negatively affected.
Despite higher interest rates, economic growth strengthened in most
industrialized countries, as recovery from the recession became more
widespread. The U.S. led the way with a Gross Domestic Product (GDP) that
increased at an annualized rate of 5.1% in the fourth quarter of 1994.*
Although domestic demand in Germany was still relatively weak, strong exports
resulted in unexpectedly robust business activity. Japan, which experienced
only modest economic growth in the past six months, was an exception to this
growth trend. It may also face several months of weaker growth as it
continues to recover from the devastating January earthquake in Kobe.
*Source: U.S. Commerce Dept.
1
<PAGE>
The Fund's portfolio turnover during the six-month period was relatively low,
due in part to actions already taken in the Spring of 1994, which shortened
the portfolio's average bond maturity and raised cash reserves. This reduced
the Fund's risk to rising interest rates, while allowing it to earn stable
short-term returns as bond yields rose worldwide. Although our turnover was
low, we did make two primary strategic changes to the portfolio. One was a
general reduction of European holdings in favor of bonds in the U.S., and the
second was a reduction in holdings of the Mexican peso.
The reduction in our exposure to the peso was driven by Mexico's currency
devaluation in December. At the time of the devaluation, the Fund held
approximately 2.7% of its total net assets in peso-denominated securities, which
we sold because we believed the financial situation there was very unstable. The
proceeds were invested in short-term U.S. Treasury and government agency notes.
The general reduction in European bonds was due to the advancing business
cycle in Europe and the possibility that interest rates would soon have to be
raised to fend off inflation. We reduced our holdings in Denmark (from 4.8%
to zero), Germany (from 11.0% to 9.5%), and Greece
- --------------------------------------------------------------------------------
TEMPLETON
INCOME FUND
Geographic Distribution on 2/28/95
Based on Total Net Assets
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Europe 31.9%
Latin America 5.8%
Canada 10.3%
Australia & New Zealand 17.0%
United States 24.8%
Asia 10.2%
</TABLE>
(from 2.1% to zero), with all the proceeds reinvested into U.S. securities. The
Fund also reduced its combined Australian and New Zealand position, from 21.8%
on August 31, 1994 to 17.0% on February 28, 1995, as interest rates appeared
likely to rise in these markets as well.
Credit quality remains an important factor in our investment process. The
Fund's portfolio consists primarily of investment-grade securities, as rated
by one of the nationally recognized rating services, or of non-rated
securities we judge to be of equal quality. At the end of the
2
<PAGE>
- --------------------------------------------------------------------------------
TEMPLETON
INCOME FUND
Portfolio Breakdown on 2/28/95
Based on Total Net Assets
- --------------------------------------------------------------------------------
Government Bonds 66.7%
- --------------------------------------------------------------------------------
Corporate Bonds 10.1%
- --------------------------------------------------------------------------------
Indexed Securities 3.9%
- --------------------------------------------------------------------------------
Common Stocks 4.7%
- --------------------------------------------------------------------------------
Preferred Stocks 1.0%
- --------------------------------------------------------------------------------
Short-Term Obligations & Other Net Assets 13.6%
- --------------------------------------------------------------------------------
For a complete list of portfolio holdings, please see page 6 of this report.
reporting period, about 74% of the securities in the Fund's portfolio were
rated AA or better, 17% were rated A or BBB, and 5% were rated less than
investment grade. The lower-rated bonds represented obligations of Argentina,
Brazil, Venezuela, Columbia and Hungary. The average maturity of the Fund's
portfolio on February 28, 1995, was 6.6 years. Approximately 4% of the Fund's
portfolio was held in other net assets.
We believe the series of events global bond markets experienced during 1994
were unusual. Continued growth in the world economy could result in increased
investment and borrowing which may lead to higher inflation. However, it
appears that bond markets in developed countries have already adjusted to any
likely rise in inflation or further central bank tightening of monetary
policy. Since the beginning of 1995, longer-term interest rates in the
industrialized countries have become more stable and, in some cases, have
even declined. Looking forward, we are hopeful that the major bond markets
will have greater stability this year, which may result in favorable
investment opportunities for the Fund. As always, we remind you that there
are special risks involved with global investing related to market, currency,
economic, political, and other factors. These risks are further discussed in
your Fund's prospectus.
We thank you for your participation in the Templeton Income Fund and look
forward to serving your investment needs in the months and years to come.
Sincerely,
/s/ Thomas Latta
Thomas Latta
Portfolio Manager
Templeton Income Fund
3
<PAGE>
Performance Summary
During the reporting period, Templeton Income Fund shareholders received
distributions of 33 cents ($0.33) per share in dividend income. The Fund's
share price, as measured by net asset value, decreased from $9.05 on August
31, 1994 to $8.88 on February 28, 1995. Of course, past performance is not
indicative of future results, and distributions will vary depending on income
earned by the Fund.
The Fund reported a total return of 1.94% for the six-month period ended
February 28, 1995. Total return measures the change in value of an investment,
assuming reinvestment of dividends and capital gains distributions, and does not
include the maximum initial sales charge. We have always maintained a long-term
perspective when managing the Fund, and we encourage shareholders to view their
investments in a similar manner. As you can see from the chart below, the Fund
has delivered a cumulative total return of more than 83% since its inception on
September 18, 1986.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TEMPLETON INCOME FUND
Periods ended 2/28/95
Since
Inception
One-Year Five-Year (9/18/86)
<S> <C> <C> <C>
Average Annual
Total Return* -6.13% 6.52% 6.90%
Cumulative
Total Return** -2.01% 43.23% 83.49%
</TABLE>
*Average annual total return represents the average annual increase in value
of an investment over the indicated periods, and includes the maximum 4.25%
initial sales charge.
**Cumulative total return represents the change in value of an investment
over the specified periods. It does not include the maximum 4.25% initial
sales charge.
All total return calculations assume reinvestment of dividends and capital gains
when paid. Prior to July 1, 1994, Fund shares were offered at a higher sales
charge. Thus, actual total returns for purchasers of shares during that period
would have been somewhat lower than noted above. Investment return and principal
value will fluctuate with market conditions, currencies and the economic and
political climates where investments are made, and your shares, when redeemed,
may be worth more or less than their initial cost. Past performance is not
indicative of future results.
4
<PAGE>
Templeton Income Fund
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31
FEBRUARY 28, 1995 ------------------------------------------------
(UNAUDITED) 1994+ 1993 1992 1991 1990
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period $ 9.05 $ 9.96 $ 10.55 $ 9.81 $ 9.95 $ 10.18
-------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment income .37 .72 .82 .83 .91 .94
Net realized and
unrealized gain (loss) (.21) (.91) (.35) .75 (.11) (.18)
-------- -------- -------- -------- -------- --------
Total from investment
operations .16 (.19) .47 1.58 .80 .76
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from net in-
vestment income (.33) (.53) (.76) (.84) (.91) (.96)
Distributions from net
realized gains -- (.07) (.30) -- (.03) (.03)
Tax basis return of
capital -- (.12) -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions (.33) (.72) (1.06) (.84) (.94) (.99)
-------- -------- -------- -------- -------- --------
Change in net asset
value (.17) (.91) (.59) .74 (.14) (.23)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 8.88 $ 9.05 $ 9.96 $ 10.55 $ 9.81 $ 9.95
======== ======== ======== ======== ======== ========
TOTAL RETURN* 1.94% (2.01)% 5.00% 16.75% 8.43% 8.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000) $195,141 $205,482 $206,667 $179,799 $127,888 $112,492
Ratio of expenses to av-
erage net assets 1.19%** 1.18% 1.01% 0.98% 1.05% 1.04%
Ratio of net investment
income to average net
assets 8.37%** 7.50% 8.45% 8.14% 9.23% 9.50%
Portfolio turnover rate 10.43% 139.23% 266.93% 233.93% 408.39% 86.09%
</TABLE>
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS. NOT ANNUALIZED IN PERIODS OF
LESS THAN ONE YEAR.
**ANNUALIZED.
+BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Templeton Income Fund
Investment Portfolio, February 28, 1995 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY* VALUE
- -------------------------------------------------------------------------------
BONDS--CORPORATE: 10.1%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
5,000,000 U.S. AMR Corp., 9.00%, 8/01/12 $ 4,763,550
2,000,000 Banco de Galicia y Buenos Aires SA,
U.S. 9.00%, 11/01/03 1,167,500
2,300,000 U.S. Bombril SA, 8.00%, 8/26/98 1,851,500
4,000,000 Compania Sud Americana de Vapores SA,
U.S. 7.375%, 12/08/03 3,300,000
3,000,000 Henderson Capital International Ltd.,
U.S. 4.25%, 10/27/96 2,947,500
2,200,000 Aus. News America Holdings, 8.625%, 02/07/14 1,238,583
2,250,000 PIV Investment Finance (Cayman) Ltd.,
U.S. 4.50%, conv., 12/01/00 1,704,375
1,000,000 U.S. Pohang Iron & Steel, 6.625%, 7/01/03 906,120
2,000,000 U.S. Quantas Airways Ltd., 7.50%, 6/30/03 1,887,580
------------
TOTAL BONDS--CORPORATE (cost $23,312,969) 19,766,708
<CAPTION>
- -------------------------------------------------------------------------------
BONDS--GOVERNMENT & GOVERNMENT AGENCIES: 66.7%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
2,250,000 U.S. Bank of China, 8.25%, 3/15/14 2,011,545
1,973,000 Ind. Essar Gujarat Ltd., 9.40%, FRN, 7/15/99 1,958,203
1,900,000 Aus. Eurofima, 9.875%, 1/17/07 1,349,382
Federal Home Loan Banks:
250,000 U.S. 7.82%, 1/27/98 254,298
150,000 U.S. 7.735%, 2/09/98 152,280
400,000 Federal National Mortgage Assn., 7.74%,
U.S. 2/03/98 406,612
5,250,000 Aus. Government of Australia, 7.50%, 7/15/05 3,289,657
Government of Canada:
6,350,000 Can. 8.50%, 4/01/02 4,586,655
4,000,000 Can. 8.00%, 6/01/23 2,659,586
Government of Italy:
7,000,000 Itl. 12.00%, 10/01/95 4,192,861
1,000,000,000 Itl. 12.00%, 11/01/96 601,500
3,265,000,000 Itl. 12.00%, 1/01/97 1,963,505
4,000,000,000 Itl. 12.00%, 1/20/98 2,388,722
3,100,000,000 Itl. 12.00%, 5/19/98 1,865,207
15,000,000 Itl. 5.125%, 7/26/99 10,259,094
3,005,000,000 Itl. 11.10%, 8/01/99 1,801,378
19,000,000 Neth. Government of Netherlands, zero, 1/15/23 1,343,599
Government of New Zealand:
13,270,000 N.Z. 8.00%, 4/15/04 8,134,944
Government of Spain:
400,000,000 Sp. 11.90%, 7/15/96 3,159,319
300,000,000 Sp. 11.60%, 1/15/97 2,380,051
Government of Sweden:
18,000,000 Swe. 6.00%, 2/09/05 1,769,038
1,000,000 Hun. National Bank of Hungary, 7.95%, 11/01/03 799,950
2,600,000 New South Wales Treasury Corp. 7.00%,
Aus. 4/01/04 1,562,045
</TABLE>
6
<PAGE>
Templeton Income Fund
Investment Portfolio, February 28, 1995 (unaudited) (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY* VALUE
- -------------------------------------------------------------------------------
BONDS--GOVERNMENT & GOVERNMENT AGENCIES (CONT.)
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
2,000,000 Chn. Peoples Republic of China, 6.50%, 2/17/04 $ 1,741,609
Province of British Columbia:
3,000,000 Can. 7.75%, 6/16/03 2,023,323
5,000,000 Can. 8.50%,8/23/13 3,441,099
3,150,000 Can. Province of Nova Scotia, 8.75%, 4/01/22 3,186,476
3,000,000 Can. Province of Ontario, 8.00%, 3/11/03 2,033,012
3,000,000 Can. Province of Quebec, 9.25%, 4/01/02 2,169,077
3,900,000 Aus. Queensland Treasury Corp., 8.00%, 5/14/03 2,546,978
3,000,000 Arg. Republic of Argentina, 8.375%, 12/20/03 1,800,000
2,500,000 Col. Republic of Colombia, 7.25%, 2/23/04 2,106,250
11,500,000 Republic of Portugal, 5.125%, FRN,
Port. 7/15/99 7,879,512
3,000,000 Tur. Republic of Turkey, 9.00%, 6/15/99 2,655,000
8,600,000 Treasury Corp. of Victoria, 8.25%,
Aus. 10/15/03 5,573,868
U.K. Treasury Bonds:
4,000,000 U.K. 7.00%, 8/06/97 6,184,570
8,060,000 U.K. 7.75%, 9/08/06 11,959,286
2,277,000 U.S. U.S. Treasury Bond, 6.25%, 8/15/23 1,937,590
U.S. Treasury Notes:
3,085,000 U.S. 5.75%, 8/15/03 2,799,144
1,440,000 U.S. 8.125%, 2/15/98 1,486,354
1,400,000 U.S. 8.50%, 5/15/97 1,447,026
1,350,000 U.S. 8.75%, 10/15/97 1,410,116
5,700,000 U.S. 8.875%, 2/15/96 5,824,659
2,500,000 Venezuela Front Load Interest Reduction
Venz. Bond, 6.00%, 3/31/07 1,132,813
------------
TOTAL BONDS--GOVERNMENT & GOVERNMENT AGENCIES (cost
$143,804,489) 130,227,193
<CAPTION>
- -------------------------------------------------------------------------------
INDEXED SECURITIES: 3.9%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
2,000,000 Ger. Bayerishe Landesbank AG, (principal and
interest is linked to the change in the
Portuguese Escudos to U.S. Dollar
foreign exchange rate between issue date
(139.75 Escudes/U.S. Dollar) and
maturity date), 11.90%, 4/10/95 1,834,600
2,300,000 U.S. Caisse Nationale de Credit Agricole,
(principal linked to the difference in
the one year Deutschemarks swap rate and
the one year sterling swap rates plus 85
basis points times 15), 6.65%, CD,
10/06/95 1,826,430
4,000,000 Indo. Goldman Sachs Group LP, (principal and
interest is linked to the change in the
Indonesian Rupiah to U.S. Dollar foreign
exchange rate between issue date
(2,179.25 Rupiah/U.S. Dollar) and
maturity date), 14.00%, 6/15/95 3,915,200
------------
TOTAL INDEXED SECURITIES (cost $8,300,000) 7,576,230
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Templeton Income Fund
Investment Portfolio, February 28, 1995 (unaudited) (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES** VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS: 4.7%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
999,667 U.S. +AcadiaPartners LP $ 859,514
96,000 U.S. American Health Properties Inc. 2,088,000
108,000 U.S. Long Island Lighting Co. 1,728,000
68,000 U.S. Meditrust Inc. 2,176,000
333 U.S. +Penobscot Partners LP 2,340
70,000 U.S. Texas Utilties Electric Co. 2,301,250
------------
TOTAL COMMON STOCKS (cost $10,394,330) 9,155,104
<CAPTION>
- -------------------------------------------------------------------------------
PREFERRED STOCK: 1.0% (cost $2,002,728)
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
91,700 Sp. Santander Finance Ltd., B, pfd. 1,960,088
- -------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY*
- -------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS: 9.8%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
11,970,000 Aus. Australia Treasury Bill, 7.85%, 3/08/95 8,821,221
6,470,000 Federal Home Loan Banks, 5.82% to 5.85%
U.S. with maturities to 3/20/95 6,455,712
50,000,000 Thailand Military Bank, 6.875% to 7.50%
Thai. with maturities to 10/2/95 1,970,028
1,865,000 U.S. U.S. Treasury Bills, 5.30% to 5.45% with
maturities to 04/06/95 1,855,582
------------
TOTAL SHORT TERM OBLIGATIONS (cost $19,563,393) 19,102,543
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS: 96.2% (cost $207,377,909) 187,787,866
UNREALIZED LOSS IN FORWARD EXCHANGE CONTRACTS: (0.3%) (702,273)
OTHER ASSETS, LESS LIABILITIES: 4.1% 8,054,940
------------
TOTAL NET ASSETS: 100.0% $195,140,533
============
</TABLE>
*CURRENCY OF COUNTRIES INDICATED.
**COUNTRY OF ORIGIN INDICATED.
+NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Templeton Income Fund
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995 (unaudited)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost
$207,377,909) $187,787,866
Cash 31,128
Receivables:
Investment securities sold 4,828,774
Fund shares sold 360,940
Interest and dividends 3,683,149
Unrealized gains in forward exchange contracts (Note 5) 13,489
------------
Total assets 196,705,346
------------
Liabilities:
Payable for Fund shares redeemed 476,435
Unrealized loss in forward exchange contracts (Note 5) 715,762
Accrued expenses 372,616
------------
Total liabilities 1,564,813
------------
Net assets, at value $195,140,533
============
Net assets consists of:
Undistributed net investment income $ 907,202
Net unrealized depreciation (20,392,896)
Accumulated net realized loss (6,282,501)
Net capital paid in on shares of beneficial interest 220,908,728
------------
Net assets, at value $195,140,533
============
Shares outstanding 21,982,402
============
Net asset value per share
($195,140,533 / 21,982,402) $ 8.88
============
Maximum offering price ($8.88 / 95.75%) $ 9.27
============
</TABLE>
STATEMENT OF OPERATIONS
for the six months ended February 28, 1995 (unaudited)
<TABLE>
<S> <C> <C>
Investment Income (net of $112,422 foreign taxes
withheld):
Interest $ 8,962,587
Dividends 495,658
-----------
Total income $ 9,458,245
Expenses:
Management fees (Note 3) 494,627
Administrative fees (Note 3) 140,378
Distribution fees (Note 3) 216,432
Transfer agent fees (Note 3) 119,600
Custodian fees 65,500
Reports to shareholders 93,500
Audit fees 17,500
Legal fees 7,000
Registration and filing fees 9,000
Trustees' fees and expenses 14,000
Other 7,445
-----------
Total expenses 1,184,982
-----------
Net investment income 8,273,263
Realized and unrealized loss:
Net realized loss on:
Investments (1,321,025)
Foreign currency transactions including currency
options (1,988,527)
-----------
(3,309,552)
-----------
Net unrealized depreciation on:
Investments (9,169)
Foreign currency translations of other assets and
liabilities (1,387,282)
-----------
(1,396,451)
-----------
Net realized and unrealized loss (4,706,003)
-----------
Net increase in net assets resulting from operations $ 3,567,260
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
Templeton Income Fund
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, 1995 YEAR ENDED
(UNAUDITED) AUGUST 31, 1994
----------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 8,273,263 $ 15,674,014
Net realized loss from security and for-
eign currency transactions (3,309,552) (9,687,143)
Net unrealized depreciation (1,396,451) (10,250,363)
------------ ------------
Net increase (decrease) in net assets re-
sulting from operations 3,567,260 (4,263,492)
Distributions to shareholders:
From net investment income (7,370,512) (11,711,485)
From net realized gain -- (1,432,822)
Tax basis return of capital -- (2,602,410)
Fund share transactions (Note 2) (6,538,709) 18,825,809
------------ ------------
Net decrease in net assets (10,341,961) (1,184,400)
Net assets:
Beginning of period 205,482,494 206,666,894
------------ ------------
End of period $195,140,533 $205,482,494
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Templeton Income Fund
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Income Fund (the Fund) is a separate series of Templeton Income Trust
(the Trust), a Massachusetts Business Trust, which is an open-end, non-diversi-
fied management investment company, registered under the Investment Company Act
of 1940. The following summarizes the Fund's significant accounting policies.
a. Securities Valuations:
Securities, including options, listed or traded on a recognized national or
foreign stock exchange or NASDAQ are valued at the last reported sales prices
on the principal exchange on which the securities are traded. Over-the-counter
securities and listed securities for which no sale is reported are valued at
the mean between the last current bid and asked prices. Securities for which
market quotations are not readily available are valued at fair value as deter-
mined by management and approved in good faith by the Board of Trustees.
b. Foreign Exchange Contracts:
The Fund enters into forward exchange contracts and currency option contracts
in order to hedge against foreign exchange risks.
(i) Forward Exchange Contracts: These contracts are valued daily and the Fund's
equity therein, representing unrealized gain or loss on the contracts, is in-
cluded in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
(ii) Currency Option Contracts: Options purchased are recorded as investments;
options written (sold) are accounted for as liabilities. When an option ex-
pires, the premium (original option value) is realized as a gain if the option
was written or realized as a loss if the option was purchased. When the exer-
cise of an option results in a cash settlement, the difference between the pre-
mium and the settlement proceeds is realized as a gain or loss. When securities
are acquired or delivered upon exercise of an option, the acquisition cost or
sale proceeds are adjusted by the amount of the premium. When an option is
closed, the difference between the premium and the cost to close the position
is realized as a gain or loss.
c. Indexed Securities:
The Fund may invest in debt instruments in which the principal and/or interest
is dependent on another factor such as a yield curve, currency exchange rates
or commodity prices. The Fund's objective in holding these securities, commonly
called structured notes, is to tailor the Fund's investments to the specific
risk and returns it wishes to assume while avoiding unwanted risk or change the
Fund's exposure to a particular foreign exchange rate or the spread between two
foreign exchange rates.
d. Foreign Currency Translations:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign curren-
cies are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customar-
ily enters into foreign exchange contracts to minimize foreign exchange risk
between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of for-
eign currencies, currency gains or losses realized between the trade and set-
tlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities resulting
from changes in the exchange rates.
11
<PAGE>
Templeton Income Fund
Notes to Financial Statements (unaudited) (cont.)
- --------------------------------------------------------------------------------
e. Futures Contracts:
The Fund may enter into futures contracts and options written on futures con-
tracts in order to hedge against risks from changes in interest rates. These
futures contracts and options written on futures contracts are valued daily and
the Fund's equity therein, representing unrealized gain or loss on the con-
tract, is included in the Statement of Assets and Liabilities. Realized and
unrealized gains and losses are included in the Statement of Operations. Margin
deposits of cash or securities required with respect to contracts traded on ex-
changes are maintained by the Fund's custodian in segregated accounts. Varia-
tion margin payments are made or received on futures as appreciation or depre-
ciation in the contracts occurs each week.
f. income Taxes:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
g. Security Transactions, Investment income, Distributions and Expenses:
Security transactions are accounted for on trade date. Dividend income is re-
corded on the ex-dividend date. Certain dividend income from foreign securities
is recorded as soon as information is available to the Fund. Interest income
and estimated expenses are accrued daily. Distributions to shareholders, which
are determined in accordance with income tax regulations, are recorded on the
ex-dividend date.
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
At February 28, 1995, there were an unlimited number of shares of beneficial
interest authorized ($.01 par value). Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1995 AUGUST 31, 1994
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 2,305,447 $ 20,515,067 8,882,250 $ 85,550,991
Shares issued on
reinvestment of
distributions 569,955 5,054,545 1,129,745 10,728,845
Shares redeemed (3,609,077) (32,108,321) (8,055,682) (77,454,027)
---------- ------------ ---------- ------------
Net increase (decrease) (733,675) $ (6,538,709) 1,956,313 $ 18,825,809
========== ============ ========== ============
</TABLE>
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also officers of Templeton Investment Counsel,
Inc. (TICI), Templeton Global Investors, Inc. (TGII), Franklin Templeton Dis-
tributors, Inc. (FTD), and Franklin Templeton Investor Services, Inc. (FTIS),
the Fund's investment manager, administrative manager, principal underwriter
and transfer agent, respectively. The Fund pays monthly an investment manage-
ment fee to TICI equal, on annual basis, to 0.50% of the average daily net as-
sets of the Fund up to $200 million, reduced to 0.45% of such average daily net
assets in excess of $200 million and further reduced to 0.40% of such average
net assets in excess of $1.3 billion. The fee is subject to reduction in any
year to the extent that expenses (exclusive of certain expenses) of the Fund
exceed 2 1/2% of the first $30 million of net assets, 2% of the next $70 mil-
lion of net assets and 1 1/2% of the remainder. The Fund pays TGII monthly its
allocated share of an administrative fee of 0.15% per annum on the first $200
million of the Trust's average daily net assets, 0.135% of the next $500 mil-
lion, and 0.10% of the next $500 million and 0.075% per annum of such average
net assets in excess of $1.2 billion. For the six months ended February 28,
1995, FTD received net commissions of $14,237 from the sale of the Fund's
shares and FTIS received fees of $119,600.
Pursuant to a distribution plan, the Fund reimburses FTD monthly (subject to a
limit of 0.25% per annum of the Fund's average daily net assets) for FTD's
costs and expenses in connection with any activity which is primarily intended
to result in sales of Fund shares. Such distribution fees are set forth in the
Statement of Operations.
12
<PAGE>
Templeton Income Fund
Notes to Financial Statements (unaudited) (cont.)
- --------------------------------------------------------------------------------
An officer of the Trust is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $7,000 for the six months ended Feb-
ruary 28, 1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the six
months ended February 28, 1995 aggregated $17,687,412, and $30,076,177, respec-
tively. The cost of securities for federal income tax purposes is the same as
that shown in the investment portfolio. Realized gains and losses are reported
on an identified cost basis.
At February 28, 1995, the aggregate gross unrealized appreciation and deprecia-
tion of portfolio securities, based on cost for federal income tax purposes,
was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 1,382,663
Unrealized depreciation (20,972,706)
------------
Net unrealized depreciation $(19,590,043)
============
</TABLE>
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
During the six months ended February 28, 1995, the Fund has been a party to fi-
nancial instruments with off-balance sheet risks, primarily forward exchange
contracts, future contracts and written currency options, in order to minimize
the risk to the Fund, with respect to its portfolio transactions, from adverse
changes in the relationship between the U.S. dollar and foreign currencies and
interest rates. These instruments involve market risk in excess of the amount
recognized on the Statement of Assets and Liabilities. Some of these risks have
been minimized by offsetting contracts. Risks arise from the possible inability
of counterparties to meet the terms of their contracts, future movement in cur-
rency values and interest rates and contract positions that are not exact off-
sets. The contract amount indicates the extent of the Fund's involvement in
such contracts.
Forwards: A forward exchange contract is an agreement between two parties to
exchange different currencies at a specific rate at an agreed future date.
At February 28, 1995, the Fund had outstanding forward exchange contracts for
the purchase and sale of currencies as set out below. These contracts are re-
ported in the financial statements at the Fund's net equity, as measured by the
difference between the forward exchange rates at the reporting date and the
forward exchange rates at the date of entry into the contract:
<TABLE>
<S> <C>
Contracts to sell:
8,084,000 New Zealand dollars for 2,594,361 U.S. dollars,
March 10, 1995 $ 8,280
13,200,000 Canadian dollars for 9,473,231 U.S. dollars, March
10, 1995 5,209
---------
13,489
---------
Contracts to sell:
6,943,000 Deutschemarks for 4,499,093 U.S. dollars, August
29, 1995 $(293,079)
1,450,000 Deutschemarks for 9,679,573 U.S. dollars, March 7,
1995 (274,599)
3,800,000 Deutschemarks for 2,587,604 U.S. dollars, March 7,
1995 (21,075)
---------
(588,753)
Unrealized loss from offsetting forward exchange contracts (127,009)
---------
(715,762)
---------
Net unrealized loss in forward exchange contracts $(702,273)
=========
</TABLE>
13
<PAGE>
Templeton Income Fund
Notes to Financial Statements (unaudited) (cont.)
- --------------------------------------------------------------------------------
Written Options A written currency option obligates the Fund to deliver (a
call), or receive (a put) the contracted amount of currency or securities upon
exercise by the holder of the option. The value of the option contract is re-
corded as a liability and unrealized gain or loss is measured by the difference
between the current value and the premium received.
The following table summarizes the Fund's written options transactions for the
six months ended February 28, 1995:
<TABLE>
<CAPTION>
OPTIONS TERMINATED
------------------------
NUMBER OF PREMIUM
CONTRACTS RECEIVED COST REALIZED LOSS
--------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Contracts outstanding
beginning of period 1 $244,000 -- --
--- -------- ---------- -----------
1 244,000 -- --
--- -------- ---------- -----------
Contracts terminated
Exercised 1 244,000 $1,516,911 $(1,272,911)
--- -------- ---------- -----------
1 244,000 $1,516,911 $(1,272,911)
--- -------- ========== ===========
Contracts outstanding end of
period 0 0
=== ========
</TABLE>
14
<PAGE>
The Franklin Templeton Group
- --------------------------------------------------------------------------------
To receive a free brochure and prospectus, which contain more complete informa-
tion, including charges and expenses on each of the funds listed below, call
Franklin Fund Information, toll free, at 1-800-DIAL-BEN (1-800-342-5236) or
Templeton Fund Information at 1-800-292-9293. Please read the prospectus care-
fully before you invest or send money.
TEMPLETON
FAMILY OF FUNDS
Franklin Templeton Japan Fund
Templeton American Trust
Templeton Americas
Government Securities Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Rising
Dividends Fund
Templeton Growth Fund
Templeton Income Fund
Templeton Money Fund
Templeton Real Estate
Securities Fund
Templeton Smaller
Companies Growth Fund
Templeton World Fund
FRANKLIN GROUP OF FUNDS(R)
FRANKLIN GLOBAL/
INTERNATIONAL FUNDS
Franklin Global Health Care
Fund
Franklin Global Government
Income Fund
Franklin Global Utilities Fund
Franklin International Equity
Fund
Franklin Pacific Growth Fund
FUNDS SEEKING CAPITAL GROWTH
Franklin California Growth
Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin Small Cap Growth
Fund
FUNDS SEEKING GROWTH AND
INCOME
Franklin Balance Sheet
Investment Fund
Franklin Convertible
Securities Fund
Franklin Income Fund
Franklin Equity Income Fund
Franklin Utilities Fund
FUNDS SEEKING HIGH CURRENT
INCOME
Franklin's AGE High Income
Fund
Franklin Investment Grade Income
Fund
Franklin Premier Return Fund
Franklin U.S. Government
Securities Fund
FUNDS SEEKING TAX-FREE
INCOME
Franklin Federal Tax-Free
Income Fund
Franklin High Yield Tax-Free
Income Fund
Franklin California High Yield
Municipal Fund
Franklin Alabama Tax-Free
Income Fund
Franklin Arizona Tax-Free
Income Fund
Franklin California Tax-Free
Income Fund
Franklin Colorado Tax-Free
Income Fund
Franklin Connecticut Tax-Free
Income Fund
Franklin Florida Tax-Free
Income Fund
Franklin Georgia Tax-Free
Income Fund
Franklin Hawaii Municipal
Bond Fund
Franklin Indiana Tax-Free
Income Fund
Franklin Kentucky Tax-Free
Income Fund
Franklin Louisiana Tax-
Free Income Fund
Franklin Maryland Tax-
Free Income Fund
Franklin Missouri Tax-Free
Income Fund
Franklin New Jersey Tax-
Free Income Fund
Franklin New York Tax-
Free Income Fund
Franklin North Carolina
Tax-Free Income Fund
Franklin Oregon Tax-Free
Income Fund
Franklin Pennsylvania Tax-
Free Income Fund
Franklin Puerto Rico Tax-
Free Income Fund
Franklin Texas Tax-Free
Income Fund
Franklin Virginia Tax-Free
Income Fund
Franklin Washington
Municipal Bond Fund
FUNDS SEEKING TAX-FREE
INCOME THROUGH INSURED
PORTFOLIOS
Franklin Insured Tax-Free
Income Fund
Franklin Arizona Insured
Tax-Free Income Fund
Franklin California Insured
Tax-Free Income Fund
Franklin Florida Insured
Tax-Free Income Fund
Franklin Massachusetts
Insured Tax-Free Income
Fund
Franklin Michigan Insured
Tax-Free Income Fund
Franklin Minnesota Insured
Tax-Free Income Fund
Franklin New York Insured
Tax-Free Income Fund
Franklin Ohio Insured Tax-
Free Income Fund
FUNDS SEEKING HIGH CURRENT
INCOME AND STABILITY OF
PRINCIPAL
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities
Fund
Franklin Short-
Intermediate U.S.
Government Securities
Fund
FUND SEEKING HIGH AFTER-TAX
INCOME FOR CORPORATIONS
Franklin Corporate
Qualified Dividend Fund
MONEY MARKET FUNDS SEEKING
SAFETY OF PRINCIPAL AND
INCOME
Franklin Money Fund
Franklin Federal Money
Fund
Franklin Tax-Exempt
Money Fund
Franklin California Tax-
Exempt Money Fund
Franklin New York Tax-
Exempt Money Fund
IFT Franklin U.S. Treasury
Money Market Portfolio
FUNDS FOR
NON-U.S. INVESTORS
FRANKLIN PARTNERS FUNDS(R)
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged
U.S. Government
Securities Fund
<PAGE>
- --------------------------
TEMPLETON INCOME FUND
PRINCIPAL UNDERWRITER:
Franklin Templeton
Distributors, Inc.
700 Central Avenue
St. Petersburg,
Florida 33701-3628
Account Services
1-800-354-9191
Sales Information
1-800-292-9293
This report must be preceded or accompanied by the prospectus of Templeton
Income Fund. 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, as well as investment decisions by the investment
manager which will not always be profitable or wise. 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 determined bythe presence of a regular beeping tone.
- --------------------------
TL06 S95 04/95
[RECYCLING LOGO APPEARS HERE]
TEMPLETON
INCOME
FUND
Semi-Annual Report
February 28, 1995
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
