<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 a portfolio
of 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 16, 1996
Dear Shareholder:
We are pleased to bring you this semi-annual report of the Templeton Income Fund
for the period ended February 29, 1996.
The six months under review were marked by slow global economic growth, as
central banks eased monetary policy and cut benchmark interest rates.
Consequently, global bond prices rose, although the pace and magnitude of the
increases were different in each country.
In Europe, slower economic growth and lower interest rates were most beneficial
to higher-yielding bond markets such as Italy, Spain and Sweden. Declining
interest rates reduced pressure on these countries' currencies and diminished
the carrying costs of their large debt burdens. Perhaps the most important
factor affecting the performance of their bonds was the countries' efforts to
meet fiscal deficit and inflation standards required by the European Monetary
Union (EMU). Targeted to take effect in 1999, the EMU will result in a common
currency for all qualifying nations.
1
<PAGE>
In North America, the decline in short-term interest rates was particularly
pronounced in the United States. Believing that U.S. interest rates, which had
risen dramatically in 1994 and the early part of 1995, were too high, the
Federal Reserve Board lowered short-term rates twice during 1995 and again in
January 1996. Long-term yields also declined, and bond prices increased during
the period. In Canada, however, the bond market rally was not as significant due
to the September referendum on the possible secession of Quebec. Although the
province did not secede, this referendum alerted international investors to the
country's political uncertainty.
Underlying economic conditions in Pacific Rim countries were different from
conditions in the rest of the world. Despite the fact that Japan's short-term
interest rates declined during the period, its economic growth continued to
falter. In Australia and New Zealand, economic growth was among the highest of
any developed markets during the period, which led to modest currency
appreciation and tended to dampen any reduction in interest rates.
Even though interest rates were the most volatile factor in global bond markets
during the period, currency markets were also important, especially in January
when the U.S.
- ----------------------------------------------------
TEMPLETON INCOME FUND
Geographic Distribution of Issuer of Securities
Based on Total Net Assets
2/29/96
<TABLE>
<S> <C>
Europe 33.3%
United States 23.1%
Australia & New Zealand 14.7%
Canada 9.5%
Latin America 6.2%
Asia 4.7%
Short-Term Obligations & Other Net Assets 8.5%
</TABLE>
dollar began to appreciate against most European currencies. This lessened the
benefit of rising European bond prices to U.S. investors. The main factor behind
the dollar's strength was the belief of international investors that European
economic growth would remain low because governments were cutting budget
deficits in an effort to meet EMU entry requirements.
Within this environment, we stressed two different strategies. First, we
positioned the Fund's average maturity for lower interest rates. Because bonds
with longer maturi-
2
<PAGE>
ties tend to appreciate more than short-term bonds when interest rates decline,
we maintained an average portfolio maturity of approximately 7.5 years during
the period, an average maturity which the Fund manager believed was warranted.
Second, we emphasized investments in the United Kingdom, Sweden, Ireland, and
Spain, which were well-positioned to profit from reform in domestic finance. As
of February 29, 1996, the Fund had established positions in the United Kingdom
(7.9% of total net assets), Sweden (3.1%), and Ireland (1.0%). We also added
4.8% to the Fund's Spanish position. In markets where domestic conditions became
less attractive over the six-month period, including Germany and France, we
reduced our holdings. At the end of the period, our position in Germany had
declined from 14.6% to zero and in France from 4.9% to zero.
Credit quality remains an important factor in selecting the Fund's investments,
which on February 29, 1996, consisted primarily of investment-grade securities
as rated by one of the nationally recognized rating services, or of non-rated
securities we judged to be of equal quality. At the end of the period, about 74%
of the debt securities in the Fund's portfolio were rated AA or higher, 16% were
rated A or BBB, and 3% were rated below investment
- -------------------------------------------------------
TEMPLETON INCOME FUND
<TABLE>
<CAPTION>
Portfolio Breakdown on 2/29/96
Based on Total Net Assets
- -------------------------------------------------------
<S> <C>
Government Bonds 79.5%
- -------------------------------------------------------
Corporate Bonds 5.5%
- -------------------------------------------------------
Common Stocks 5.3%
- -------------------------------------------------------
Preferred Stocks 1.2%
- -------------------------------------------------------
Short-Term Obligations & Other Net Assets 8.5%
- -------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, please see page 9 of this report.
grade. The lower-rated bonds represented obligations of Hungary, Venezuela, and
Argentina. Approximately 85% of the Fund's portfolio was held in bonds, 6.5% in
equities, and the remaining 8.5% in short-term obligations and other net assets.
Looking forward, we believe that the major fundamental trends in the global
macroeconomic environment are subdued economic activity and low inflation. In
our opinion, interest rates in this environment may decline over the long term.
Although relative economic weakness in Europe may cause the U.S. dollar to rise
in the short term, we continue to believe that the underlying fundamentals in
the U.S. economy (inadequate savings and dependence on foreign capital) may lead
to a lower value for the currency relative to the currencies of its major
partners. As always, we remind you that there are special risks
3
<PAGE>
involved with global investing related to market, currency, economic, political,
and other factors, in addition to the heightened risks associated with the
relatively small size and lesser liquidity of developing markets.
In closing, we would like to mention that the Board of Directors has approved a
proposal to change the Fund's name. Although its investment objective of current
income, with capital appreciation and growth of income, will remain the same,
the Fund will be known as the Templeton Global Bond Fund, effective May 15,
1996, to better reflect the securities held within its portfolio.
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
4
<PAGE>
PERFORMANCE SUMMARY
CLASS I SHARES
The Templeton Income Fund Class I Shares reported a total return of 6.71% for
the six-month period ended February 29, 1996. Total return measures the change
in value of an investment, assuming reinvestment of dividends, and does not
include the maximum initial sales charge. While we expect market volatility in
the short term, we have always maintained a long-term perspective when managing
the Fund and encourage shareholders to view their investments in a similar
manner. As you can see from the table to the right, the Fund has delivered a
cumulative total return of more than 112% since inception on September 18, 1986.
During the reporting period, the price of the Fund's Class I Shares, as measured
by net asset value, increased from $9.32 on August 31, 1995 to $9.64 on February
29, 1996. During this time, shareholders received distributions of 30 cents
($0.30) per share in dividend income. Of course, past performance is not
predictive of future results, and distributions will vary depending on income
earned by the Fund, as well as any profits realized from the sale of securities
in the portfolio.
- --------------------------------------------------------------------------------
TEMPLETON INCOME FUND
CLASS I SHARES
<TABLE>
<CAPTION>
Periods Ended 2/29/96
Since
Inception
One-Year Five-Year (9/18/86)
<S> <C> <C> <C>
Cumulative
Total Return/1/ 15.73% 44.79% 112.38%
Average Annual
Total Return/2/ 10.85% 6.75% 7.81%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods, and does not include the maximum 4.25% initial sales
charge. See Note below.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods, and includes the maximum 4.25% initial
sales charge. See Note below.
Note: All total return figures assume reinvestment of dividends and capital
gains when paid. Prior to July 1, 1992, Fund shares were offered at a higher
sales charge. Thus, actual total return to 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, so that your shares,
when redeemed, may be worth more or less than their initial cost. Past
performance is not predictive of future results.
5
<PAGE>
PERFORMANCE SUMMARY
CLASS II SHARES
The Templeton Income Fund Class II Shares reported a total return of 6.60% for
the six-month period ended February 29, 1996. Total return measures the change
in value of an investment, assuming reinvestment of dividends, and does not
include any sales charges. While we expect market volatility in the short term,
we have always maintained a long-term perspective when managing the Fund and
encourage shareholders to view their investments in a similar manner.
During the reporting period, the price of the Fund's Class II Shares, as
measured by net asset value, increased from $9.31 on August 31, 1995 to $9.66 on
February 29, 1996. During this time, shareholders received distributions of
27.97 cents ($0.2797) per share in dividend income. Of course, past performance
is not predictive of future results, and distributions will vary depending on
income earned by the Fund, as well as any profits realized from the sale of
securities in the portfolio.
- --------------------------------------------------------------------------------
TEMPLETON INCOME FUND
CLASS II SHARES
Periods Ended 2/29/96
<TABLE>
<CAPTION>
Since
Inception
Six-Month (5/1/95)
<S> <C> <C>
Cumulative
Total Return/1/ 6.60% 11.95%
Aggregate
Total Return/2/ 4.79% 9.86%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods. It does not include the 1.0% initial sales charge nor the
1.0% contingent deferred sales charge (CDSC), applicable to shares redeemed
within the first 18 months of investment. See Note below.
2. Aggregate total return represents the change in value of an investment over
the indicated periods. It does include the 1.0% initial sales charge and 1.0%
CDSC, applicable to shares redeemed within the first 18 months of investment.
Since Class II Shares have been in existence for less than one year, average
annual total returns are not provided. See Note below.
Note: All total return figures assume reinvestment of dividends and capital
gains when paid. Investment return and principal value will fluctuate with
market conditions, currencies, and the economic and political climates where
investments are made, so that your shares, when redeemed, may be worth more or
less than their initial cost. Past performance is not predictive of future
results.
6
<PAGE>
Templeton Income Fund
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE--CLASS I
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31
FEBRUARY 29, 1996 ------------------------------------------------
(UNAUDITED) 1995 1994+ 1993 1992 1991
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.32 $ 9.05 $ 9.96 $ 10.55 $ 9.81 $ 9.95
-------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment income .34 .73 .72 .82 .83 .91
Net realized and
unrealized gain (loss) .28 .17 (.91) (.35) .75 (.11)
-------- -------- -------- -------- -------- --------
Total from investment
operations .62 .90 (.19) .47 1.58 .80
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from net
investment income (.30) (.54) (.53) (.76) (.84) (.91)
Distributions from net
realized gains -- -- (.07) (.30) -- (.03)
Tax basis return of
capital -- (.09) (.12) -- -- --
-------- -------- -------- -------- -------- --------
Total distributions (.30) (.63) (.72) (1.06) (.84) (.94)
-------- -------- -------- -------- -------- --------
Change in net asset
value .32 .27 (.91) (.59) .74 (.14)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 9.64 $ 9.32 $ 9.05 $ 9.96 $ 10.55 $ 9.81
======== ======== ======== ======== ======== ========
TOTAL RETURN* 6.71% 10.43% (2.01)% 5.00% 16.75% 8.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000) $189,669 $191,301 $205,482 $206,667 $179,799 $127,888
Ratio of expenses to
average net assets 1.12%** 1.18% 1.18% 1.01% 0.98% 1.05%
Ratio of net investment
income to average net
assets 6.94%** 7.99% 7.50% 8.45% 8.14% 9.23%
Portfolio turnover rate 42.03% 101.12% 139.23% 266.93% 233.93% 408.39%
</TABLE>
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS. NOT ANNUALIZED IN PERIODS OF
LESS THAN ONE YEAR.
**ANNUALIZED.
+BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING.
7
<PAGE>
Templeton Income Fund
Financial Highlights (cont.)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE--CLASS II
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
SIX MONTHS FOR THE PERIOD
ENDED MAY 1, 1995+
FEBRUARY 29, 1996 THROUGH
(UNAUDITED) AUGUST 31, 1995
----------------- ---------------
<S> <C> <C>
Net asset value, beginning of period $ 9.31 $ 9.05
------ -------
Income from investment operations:
Net investment income .30 .21
Net realized and unrealized gain .33 .24
------ -------
Total from investment operations .63 .45
------ -------
Distributions:
Dividends from net investment income (.28) (.15)
Tax basis return of capital -- (.04)
------ -------
Total distributions (.28) (.19)
------ -------
Change in net asset value .35 .26
------ -------
Net asset value, end of period $ 9.66 $ 9.31
====== =======
TOTAL RETURN* 6.60% 5.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $3,721 $ 2,043
Ratio of expenses to average net assets 1.56%** 1.57%**
Ratio of net investment income to average
net assets 6.53%** 7.47%**
Portfolio turnover rate 42.03% 101.12%
</TABLE>
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE DEFERRED CONTINGENT
SALES CHARGE. NOT ANNUALIZED IN PERIODS OF LESS THAN ONE YEAR.
**ANNUALIZED.
+COMMENCEMENT OF SALES.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Templeton Income Fund
Investment Portfolio, February 29, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY* COUNTRY ISSUE VALUE
<C> <C> <S> <C>
- -----------------------------------------------------------------------------
BONDS--CORPORATE: 5.5%
- -----------------------------------------------------------------------------
Banco de Galicia y Buenos Aires SA,
2,000,000 U.S. 9.00%, 11/01/03 $ 1,720,000
Compania Sud Americana de Vapores SA,
4,000,000 U.S. 7.375%, 12/08/03 4,020,000
PIV Investment Finance (Cayman) Ltd.,
2,250,000 U.S. 4.50%, conv., 12/01/00 1,940,625
1,000,000 U.S. Pohang Iron & Steel, 6.625%, 7/01/03 983,010
2,000,000 U.S. Quantas Airways Ltd., 7.50%, 6/30/03 2,030,820
------------
TOTAL BONDS--CORPORATE (cost $10,641,316) 10,694,455
- -----------------------------------------------------------------------------
BONDS--GOVERNMENT & GOVERNMENT AGENCIES: 79.5%
- -----------------------------------------------------------------------------
Buoni Poliennali del Tes, 10.50%,
2,545,000,000 Itl. 9/01/05 1,650,480
Buoni Poliennali del Tes, 8.50%,
3,950,000,000 Itl. 8/01/99 2,454,808
Essar Gujarat Ltd., 8.099%, FRN,
1,973,000 U.S. 7/15/99, 144A 1,940,939
1,900,000 Aus. Eurofima, 9.875%, 1/17/07 1,517,815
Government of Canada:
6,350,000 Can. 8.50%, 4/01/02 4,952,801
4,000,000 Can. 8.00%, 6/01/23 2,896,818
Government of Denmark:
10,238,000 Dem. 9.00%, 11/15/98 1,953,991
20,769,000 Dem. 8.00%, 5/15/03 3,836,695
Government of Italy:
3,265,000,000 Itl. BTP, 12.00%, 1/01/97 2,125,805
4,000,000,000 Itl. CTO, 12.00%, 1/20/98 2,662,435
3,005,000,000 Itl. CCTS, 11.60%, FRN, 8/01/99 1,956,135
6,220,000,000 Itl. 10.50%, 7/15/00 4,109,315
Government of New Zealand, 6.50%,
3,325,000 N.Z. 2/15/00 2,129,898
Government of Spain:
300,000,000 Sp. 11.90%, 7/15/96 2,446,581
400,000,000 Sp. 11.60%, 1/15/97 3,309,933
426,300,000 Sp. 12.25%, 3/25/00 3,805,137
374,300,000 Sp. 11.30%, 1/15/02 3,288,373
271,500,000 Sp. 10.00%, 2/28/05 2,237,843
21,472,000 Dem. Kingdom of Denmark, 8.00%, 11/15/01 4,002,085
Kingdom of Sweden:
16,200,000 Sek. 10.25%, 5/05/03 2,625,038
8,200,000 Sek. 9.00%, 4/20/09 1,215,957
National Bank of Hungary, 7.95%,
1,000,000 Hun. 11/01/03 987,500
New South Wales Treasury Corp.:
1,600,000 Aus. 12.00%, 12/01/01 1,413,817
10,000,000 Aus. 12.00%, 12/01/01 8,836,359
1,700,000 Aus. 7.00%, 4/01/04 1,165,725
900,000 Aus. Euro, 7.00%, 4/01/04 617,148
</TABLE>
9
<PAGE>
Templeton Income Fund
Investment Portfolio, February 29, 1996 (unaudited) (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY* COUNTRY ISSUE VALUE
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
BONDS--GOVERNMENT & GOVERNMENT AGENCIES (CONT.)
- -------------------------------------------------------------------------------
Province of British Columbia:
3,000,000 Can. 7.75%, 6/16/03 $ 2,224,004
5,000,000 Can. 8.50%, 8/23/13 3,768,998
2,000,000 Idn. PT Astra International, 9.75%, 4/29/01 2,180,000
Queensland Treasury Corp. Exch. Global,
3,900,000 Aus. 8.00%, 5/14/03 2,876,232
Treasury Corp. of Victoria, 8.25%,
10,660,000 Aus. 10/15/03 7,951,016
3,000,000 Can. Province of Ontario, 8.00%, 3/11/03 2,246,747
3,000,000 Can. Province of Quebec, 9.25%, 4/01/02 2,367,241
3,000,000 Arg. Republic of Argentina, 8.375%, 12/20/03 2,565,003
2,500,000 Col. Republic of Colombia, 7.25%, 2/23/04 2,385,000
1,320,000 Irl. Republic of Ireland, 6.25%, 10/18/04 1,886,577
Thailand Military Bank:
40,000,000 Thai. 11.125%, 6/03/96 1,586,672
13,000,000 Thai. 11.00%, 6/05/96 513,090
United Kingdom:
2,380,000 U.K. 9.50%, 1/15/99 3,887,364
5,425,000 U.K. 6.75%, 11/26/04 7,694,512
2,400,000 U.K. 8.50%, 7/16/07 3,787,867
189,000 U.S. U.S. Treasury Bond, 7.625%, 2/15/25 213,954
U.S. Treasury Notes:
2,800,000 U.S. 6.50%, 5/15/05 2,865,632
650,000 U.S. 8.75%, 8/15/00 727,084
8,680,000 U.S. 11.625%, 11/15/04 11,873,980
1,501,000 U.S. 5.75%, 8/15/03 1,476,143
4,570,000 U.S. 5.875%, 11/15/05 4,476,452
1,775,000 U.S. 6.125%, 7/31/00 1,800,241
4,360,000 U.S. 6.50%, 8/15/05 4,460,149
2,450,000 U.S. 7.25%, 5/15/04 2,628,385
3,300,000 U.S. 7.875%, 8/15/01 3,616,602
Venezuela Front Load Interest Reduction
2,500,000 Vez. Bond, A, 3/31/07 1,396,875
------------
TOTAL BONDS--GOVERNMENT & GOVERNMENT AGENCIES (cost
$156,990,221) 153,595,251
- -------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Templeton Income Fund
Investment Portfolio, February 29, 1996 (unaudited) (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES** COUNTRY ISSUE VALUE
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS: 5.3%
- -------------------------------------------------------------------------------
999,667 U.S. +Acadia Partners LP $ 998,267
96,000 U.S. American Health Properties Inc. 2,232,000
108,000 U.S. Long Island Lighting Co. 1,890,000
68,000 U.S. Meditrust Inc. 2,261,000
333 U.S. +Penobscot Partners LP 1,982
70,000 U.S. Texas Utilities Electric Co. 2,826,250
------------
TOTAL COMMON STOCKS (cost $10,244,598) 10,209,499
- -------------------------------------------------------------------------------
PREFERRED STOCKS: 1.2%
- -------------------------------------------------------------------------------
American Health Properties Psychiatric
9,600 U.S. Group, pfd. 146,400
91,700 U.S. Santander Finance Ltd., B, pfd. 2,212,263
------------
TOTAL PREFERRED STOCKS (cost $2,228,099) 2,358,663
- -------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY*
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
SHORT TERM OBLIGATIONS: 4.9%
- -------------------------------------------------------------------------------
20,000,000 Thai. Bangkok Bank, 11.50%, 5/16/96 794,592
700,000 U.S. Federal Home Loan Bank, 5.26%, 4/10/96 696,010
Federal Home Loan Mortgage Corp.,
765,000 U.S. 5.26%, 3/04/96 764,671
New Zealand Treasury Bills, with
6,913,000 N.Z. maturities to 12/18/96 4,414,957
16,000,000 Sek. Sweden Treasury Bill, 11/20/96 2,246,341
U.S. Treasury Bills, 4.82% to 4.98%
with
550,000 U.S. maturities to 6/6/96 543,306
------------
TOTAL SHORT TERM OBLIGATIONS (cost $9,482,687) 9,459,877
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS: 96.4% (cost $189,586,921) 186,317,745
UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS: (0.1%) (9,637)
OTHER ASSETS, LESS LIABILITIES: 3.7% 7,082,146
------------
TOTAL NET ASSETS: 100.0% $193,390,254
============
</TABLE>
*CURRENCY OF COUNTRIES INDICATED.
**COUNTRY OF ORIGIN INDICATED.
+NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Templeton Income Fund
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996 (unaudited)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost
$189,586,921) $186,317,745
Receivables:
Investment securities sold 12,256,222
Fund shares sold 216,029
Interest 4,402,601
Unrealized gains in forward exchange contracts (Note 5) 76,121
------------
Total assets 203,268,718
------------
Liabilities:
Payables:
Investment securities purchased 9,173,856
Fund shares redeemed 327,637
Unrealized loss in forward exchange contracts (Note 5) 85,758
Accrued expenses 291,213
------------
Total liabilities 9,878,464
------------
Net assets, at value $193,390,254
============
Net assets consist of:
Undistributed net investment income $ 695,736
Net unrealized depreciation (3,278,402)
Accumulated net realized loss (5,009,961)
Net capital paid in on shares of beneficial interest 200,982,881
------------
Net assets, at value $193,390,254
============
Class I:
Net asset value per share ($189,669,516 / 19,668,155) $ 9.64
============
Maximum offering price ($9.64 / 95.75%) $ 10.07
============
Class II:
Net asset value per share ($3,720,738 / 385,363) $ 9.66
============
Maximum offering price
($9.66/99.00%) $ 9.76
============
</TABLE>
STATEMENT OF OPERATIONS
for the six months ended
February 29, 1996 (unaudited)
<TABLE>
<S> <C> <C>
Investment Income
(net of $159,291)
foreign taxes withheld):
Interest $7,479,551
Dividends 418,484
----------
Total income $ 7,898,035
Expenses:
Management fees (Note 3) 488,960
Administrative fees (Note 3) 140,194
Distribution fees (Note 3)
Class I shares 207,602
Class II shares 9,376
Transfer agent fees (Note 3) 127,500
Custodian fees 11,000
Reports to shareholders 71,500
Audit fees 16,000
Legal fees (Note 3) 6,000
Registration and filing fees 17,400
Trustees' fees and expenses 5,500
Other 1,247
----------
Total expenses 1,102,279
-----------
Net investment income 6,795,756
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 683,414
Foreign currency transactions including currency
options (404,998)
----------
278,416
----------
Net unrealized appreciation on:
Investments 5,817,901
Foreign currency translations of other assets and
liabilities 1,082
----------
5,818,983
----------
Net realized and unrealized gain 6,097,399
-----------
Net increase in net assets resulting from operations $12,893,155
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Templeton Income Fund
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 29, 1996 YEAR ENDED
(UNAUDITED) AUGUST 31, 1995
----------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 6,795,756 $ 15,815,724
Net realized gain (loss) from security
and foreign currency transactions 278,416 (6,288,764)
Net unrealized appreciation 5,818,983 9,899,060
------------ ------------
Net increase in net assets resulting
from operations 12,893,155 19,426,020
Distributions to shareholders:
From net investment income
Class I (6,014,695) (11,763,904)
Class II (85,325) (15,280)
Tax basis return of capital
Class I -- (1,970,755)
Class II -- (4,562)
Fund share transactions (Note 2)
Class I (8,352,079) (19,854,728)
Class II 1,605,461 2,044,452
------------ ------------
Net increase (decrease) in net assets 46,517 (12,138,757)
Net assets:
Beginning of period 193,343,737 205,482,494
------------ ------------
End of period $193,390,254 $193,343,737
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<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 Fund seeks current income with capital appreciation and growth of
income through a flexible policy of investing in debt securities, including
governments and government agencies of various nations throughout the world.
The following summarizes the Fund's significant accounting policies.
a. Securities Valuations:
Securities including options listed or traded on a recognized national or for-
eign 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 se-
curities 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 determined 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.
14
<PAGE>
Templeton Income Fund
Notes to Financial Statements (unaudited) (cont.)
- --------------------------------------------------------------------------------
d. Foreign Currency Transactions:
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.
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.
h. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles 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 expense during the reporting
period. Actual results could differ from those estimates.
15
<PAGE>
Templeton Income Fund
Notes to Financial Statements (unaudited) (cont.)
- --------------------------------------------------------------------------------
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Fund offers two classes of shares: Class I and Class II Shares. Shares of
each class are identical except for their initial sales load, a contingent de-
ferred sales charge on Class II shares, distribution fees, and voting rights on
matters affecting a single class. At February 29, 1996, there were an unlimited
number of shares of beneficial interest authorized ($.01 par value). Transac-
tions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 29, 1996 AUGUST 31, 1995
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 2,018,862 $ 19,492,074 3,800,472 $ 34,199,533
Shares issued on
reinvestment
of distributions 431,840 4,147,027 1,045,727 9,400,075
Shares redeemed (3,319,117) (31,991,180) (7,025,706) (63,454,336)
---------- ------------ ---------- ------------
Net decrease (868,415) $ (8,352,079) (2,179,507) $(19,854,728)
========== ============ ========== ============
<CAPTION>
CLASS II
--------------------------------------------------
FOR THE PERIOD
MAY 1, 1995
THROUGH
AUGUST 31, 1995
SIX MONTHS ENDED ------------------------
FEBRUARY 29, 1996 SHARES AMOUNT
------------------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 226,105 $ 2,183,150 243,599 $ 2,270,114
Shares issued on
reinvestment
of distributions 6,850 65,964 1,611 14,937
Shares redeemed (66,947) (643,653) (25,855) (240,599)
---------- ------------ ---------- ------------
Net increase 166,008 $ 1,605,461 219,355 $ 2,044,452
========== ============ ========== ============
</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 management fee to TICI equal, on annual ba-
sis, to 0.50% of the average daily net assets 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 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 as-
sets, 0.135% of the next $500 million, 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 29, 1996, FTD received net commissions of $9,726 and
FTIS received fees of $127,500.
Under the distribution plans for Class I and Class II shares, the Fund reim-
burses FTD monthly, for FTD's cost and expenses in connection with any activity
which is primarily intended to result in sales of Fund shares, subject to a
maximum of 0.25% and 0.65% per annum of the average daily net assets of Class I
and Class II shares, respectively. Under the Class I distribution plan costs
and expenses exceeding the maximum may be reimbursed in subsequent periods. At
February 29, 1996, there were no unreimbursed expenses. Class II shares re-
deemed within 18 months are subject to a contingent deferred sales charge. Con-
tingent deferred sales charges of $1,055 were paid during the period ended Feb-
ruary 29, 1996.
An officer of the Trust is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $6,000 for the six months ended Feb-
ruary 29, 1996.
16
<PAGE>
Templeton Income Fund
Notes to Financial Statements (unaudited) (cont.)
- --------------------------------------------------------------------------------
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the six
months ended February 29, 1996, aggregated $77,008,655, and $85,196,959, re-
spectively. The cost of securities for federal income tax purposes is the same
as that shown in the investment portfolio. Realized gains and losses are re-
ported on an identified cost basis.
February 29, 1996, the aggregate gross unrealized appreciation and depreciation
of portfolio securities, based on cost for federal income tax purposes, was as
follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 3,348,335
Unrealized depreciation (6,617,511)
-----------
Net unrealized depreciation $(3,269,176)
===========
</TABLE>
5. FINANCIAL INSTRUMENTS
During the six months ended February 29, 1996, the Fund has been a party to fi-
nancial instruments with off-balance sheet risks, primarily forward exchange
contracts, in order to minimize the risk to the Fund, with respect to its port-
folio 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 currency values and interest rates and con-
tract positions that are not exact offsets. 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 29, 1996, 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:
Contracts to sell:
<TABLE>
<S> <C>
6,200,000,000 Italian Lira for 3,904,331 U.S. dollars, March 18, 1996 $(85,758)
11,750,000 German Deutschemarks for 8,103,448 U.S. dollars, March 25, 1996 76,121
--------
Net unrealized loss on forward exchange contracts $ (9,637)
========
</TABLE>
6. TAX LOSS CARRYOVERS
At August 31, 1995, the Fund had tax basis capital losses of $3,500,000 which
may be carried over to offset future capital gains. Such losses expire in 2003.
In addition as required by the tax rules the Fund has deferred currency losses
occurring subsequent to October 31, 1994 of $1,800,000 to the year ending Au-
gust 31, 1996.
17
<PAGE>
Notes
-----
<PAGE>
THE FRANKLIN TEMPLETON GROUP
Literature Request - Call today for a free descriptive brochure and prospectus
on any of the funds listed below. The prospectus contains more complete
information, including fees, charges and expenses, and should be read carefully
before investing or sending money.
Templeton Funds
Americas Government
Securities Fund
Developing Markets Trust
Foreign Fund
Global Infrastructure Fund
Global Opportunities Trust
Greater European Fund
Growth Fund
Growth and Income Fund
Income Fund
Latin America Fund
Real Estate
Securities Fund
Smaller Companies
Growth Fund
World Fund
Franklin Funds Seeking
Tax-Free Income
Federal Tax-Free
Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
High Yield Tax-Free
Income Fund
Insured Tax-Free
Income Fund***
Puerto Rico Tax-Free
Income Fund
Franklin State-Specific
Funds Seeking Tax-Free
Income
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan***
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee
Texas
Virginia
Washington**
Franklin Funds
Seeking Capital Growth
California Growth Fund
DynaTech Fund
Equity Fund
Global Health
Care Fund
Gold Fund
Growth Fund
International
Equity Fund
Japan Fund
Pacific Growth Fund
Small Cap Growth Fund
Franklin Funds Seeking
Growth and Income
Balance Sheet
Investment Fund
Convertible Securities Fund
Equity Income Fund
Global Utilities Fund
Income Fund
Natural Resources Fund
Premier Return Fund
Real Estate Securities Fund
Rising Dividends Fund
Strategic Income Fund
Utilities Fund
Franklin Funds Seeking
High Current Income
AGE High Income Fund
Global Government
Income Fund
Investment Grade
Income Fund
U.S. Government
Securities Fund
Franklin Funds Seeking
High Current Income and
Stability of Principal
Adjustable Rate
Securities Fund
Adjustable U.S. Government
Securities Fund
Short-Intermediate U.S.
Government
Securities Fund
Franklin Funds for
Non-U.S. Investors
Tax-Advantaged High Yield
Securities Fund
Tax-Advantaged International
Bond Fund
Tax-Advantaged U.S.
Government Securities Fund
Franklin Templeton Global
Currency Funds
German Government
Bond Fund
Global Currency Fund
High Income Currency Fund
Hard Currency Fund
Franklin Money
Market Funds
Money Fund
Federal Money Fund
Tax-Exempt Money
Fund
California Tax-Exempt
Money Fund
New York Tax-Exempt
Money Fund
IFT U.S. Treasury Money
Market Portfolio
Franklin Fund for
Corporations
Corporate Qualified
Dividend Fund
Franklin Tax-Deferred
Annuity
Franklin Valuemark
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
Fund Information: 1-800/342-5236
Shareholder Services: 1-800/632-2301
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 by the presence of a regular beeping tone.
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and a high yield
portfolio (CA).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF RECYCLED PAPER APPEARS HERE] TL406 S96 04/96
TEMPLETON INCOME FUND
PRINCIPAL UNDERWRITER:
Franklin Templeton
Distributors, Inc.
700 Central Avenue
St. Petersburg,
Florida 33701-3628
Shareholder Services
1-800-632-2301
Fund Information
1-800-342-5236
This report must be preceded or accompanied by the current prospectus of the
Templeton Income Fund, which contains more complete information including
charges and expenses. 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 by the presence of a regular beeping tone.
- --------------------------------------------------------------------------------
TEMPLETON
INCOME
FUND
Semi-Annual Report
February 29, 1996
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
