TEMPLETON INSTITUTIONAL FUNDS INC, N-30D, 1998-03-05

TEMPLETON INSTITUTIONAL FUNDS INC
N-30D, 1998-03-05

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TEMPLETON INSTITUTIONAL FUNDS, INC.

TIFI Emerging Markets Series
ANNUAL REPORT

[Templeton Logo] December 31, 1997

<PAGE>
TECHNOLOGY UPDATE: FRANKLIN TEMPLETON
COMBATS THE YEAR 2000 PROBLEM
By Charles B. Johnson
President of Franklin Resources, Inc.

As we near the 21st century, Franklin Templeton is taking important steps
to tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the
Millennium Bug. The problem originated from the software designers' attempt to
save memory by recording years in a two-digit format -- "98" instead of "1998",
for example -- but didn't take into account that the year 2000 or "00", could
also be interpreted as 1900. Uncorrected, this problem could prevent computers
from accurately processing date-sensitive data after 1999.

Franklin Templeton's Information Services & Technology division established
a Year 2000 Project Team that has already begun making the necessary software
changes to help ensure that our computer systems, which service the funds and
their shareholders, will be Year-2000 Compliant. As changes reach completion, we
will conduct comprehensive tests to verify their effectiveness. We will also
require all of our major software or data-services suppliers to be Year-2000
Compliant.

In addition, with an estimated 80% of businesses facing the Year 2000
Problem, mutual fund portfolio managers must be aware of the impact it could
have on companies in their portfolios. That is why Franklin Templeton portfolio
managers consistently keep this issue in mind while selecting investments and
managing their portfolios.

MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ARE NOT FDIC INSURED;
- ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION;
- ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.

INVESTING IN DEVELOPING MARKETS INVOLVES SPECIAL CONSIDERATIONS, WHICH MAY
INCLUDE RISKS RELATED TO MARKET AND CURRENCY VOLATILITY, ADVERSE SOCIAL AND
POLITICAL DEVELOPMENTS, AND THE RELATIVELY SMALL SIZE AND LESSER LIQUIDITY OF
THESE MARKETS. THESE SPECIAL RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S
PROSPECTUS. THE FUND IS DESIGNED FOR THE AGGRESSIVE PORTION OF A WELL-
DIVERSIFIED PORTFOLIO.

<PAGE>
December 31, 1997

Dear Shareholder...

The fourth quarter of 1997 was a difficult one, with the International Finance
Corporation ("IFC") Investable Composite Index declining 19%, led by a
decline of 37% in the IFC Asia Index. Political uncertainties, corporate
bankruptcies, and worries over the trend on Wall Street battered Asian
currencies and stock markets over the last several months of the year. We saw a
panicked retreat in all Asian emerging markets as a result of what we believe
are misguided government policies designed to fix exchange rates against the
U.S. dollar at unrealistically high levels. This, combined with an undeveloped
capital market structure in most of those countries, led to high interest rates
relative to U.S. dollar interest rates and excessive U.S. dollar borrowing. The
U.S. dollar peg allowed many Asian banks and corporations to borrow inexpensive
dollars abroad without the related exchange rate risk. When the fixed exchange
rates collapsed as a result of higher inflation in those countries relative to
the U.S., the U.S. dollar liabilities of companies in the region increased
dramatically in local

TOTAL RETURNS AS OF 12/31/97
<TABLE>
<CAPTION>
CUMULATIVE
ONE-YEAR THREE-YEAR SINCE
AVERAGE AVERAGE INCEPTION(1),(3)
ANNUAL(1),(2) ANNUAL(1),(2) (05/03/93)
<S> <C> <C> <C>
TIFI Emerging Markets Series -11.3% 1.4% 22.6%
IFC Investable Composite
Index(4) -14.9% -5.2% 23.6%
</TABLE>

(1) The Investment Manager and Fund Administrator have agreed in advance to
waive a portion of their respective fees in order to limit the total
expenses of the Fund to 1.6% of average net assets through April 30, 1998.
If these fee waivers are insufficient to so limit the Fund's expenses, the
Fund Administrator has agreed to make certain payments to reduce the Fund's
expenses. After April 30, 1998, these agreements may end at any time upon
notice to the Board. These voluntary agreements did not result in any fee
waivers for the Fund for the fiscal year ended December 31, 1997. Past
expense waivers by the Fund's manager increased the Fund's total returns.

(2) Average annual total return represents the average annual change in value
of an investment over the indicated periods.

(3) Cumulative total return represents the change in value of an investment
over the indicated periods.

(4) The index is unmanaged, does not contain cash, and does not include
management expenses. The index includes reinvested dividends. One cannot
invest directly in an index.

All calculations assume reinvestment of dividends and capital gains at net
asset value. Investment return and principal value will fluctuate with
market conditions, currency volatility, and the economic, social, and
political climates of the countries where investments are made. Emerging
markets involve heightened risks related to the same factors, in addition
to those associated with the relatively small size and lesser liquidity of
these markets. You may have a gain or loss when you sell your shares. Past
performance is not predictive of future results.

continued...

MARK MOBIUS JOINED TEMPLETON IN 1987 AS MANAGING DIRECTOR OF ITS FAR EAST
DIVISION IN HONG KONG, WITH RESPONSIBILITY FOR THE TEMPLETON GROUP'S
RESEARCH EXPERTISE, PRINCIPALLY IN EMERGING MARKETS COUNTRIES. IN THIS
CAPACITY, HE DIRECTS THE ANALYSTS BASED IN HONG KONG AND SINGAPORE AND
MANAGES OUR EMERGING MARKETS PORTFOLIOS. DR. MOBIUS HAS SPENT OVER TWENTY
YEARS WORKING IN ASIA, AND HAS EXTENSIVE EXPERIENCE IN ECONOMIC RESEARCH
AND ANALYSIS.

PRIOR TO JOINING TEMPLETON, FROM 1983 TO 1986 HE WAS PRESIDENT OF
INTERNATIONAL INVESTMENT TRUST COMPANY LTD. IN TAIPEI, TAIWAN - THAT
COUNTRY'S FIRST AND LARGEST INVESTMENT MANAGEMENT FIRM. BEFORE THAT, HE
SERVED AS A DIRECTOR AT VICKERS DA COSTA, AN INTERNATIONAL SECURITIES FIRM.
INITIALLY, HE STARTED IN THAT FIRM'S HONG KONG OFFICE IN 1980, AND THEN
MOVED TO TAIWAN IN 1983 TO OPEN THAT FIRM'S OFFICE THERE AND TO DIRECT
OPERATIONS IN INDIA, INDONESIA, THAILAND, THE PHILIPPINES, AND KOREA. BEFORE
JOINING VICKERS, DR. MOBIUS OPERATED HIS OWN CONSULTING FIRM IN HONG KONG
FOR TEN YEARS, AND WAS A RESEARCH SCIENTIST FOR MONSANTO OVERSEAS
ENTERPRISES COMPANY IN HONG KONG AND THE AMERICAN INSTITUTE FOR RESEARCH IN
KOREA AND THAILAND.

DR. MOBIUS HOLDS BACHELORS AND MASTERS DEGREES FROM BOSTON UNIVERSITY, AND
RECEIVED HIS PH.D. IN ECONOMICS AND POLITICAL SCIENCE IN 1964 FROM THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY. HE ALSO STUDIED AT THE UNIVERSITY OF
WISCONSIN, UNIVERSITY OF NEW MEXICO, AND KYOTO UNIVERSITY IN JAPAN.

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKET SERIES
- -----------------------------------------------------------------------------
letter continued
<TABLE>
<CAPTION>
[GEOGRAPHIC DISTRIBUTION ON 12/31/97 GRAPH]
<S> <C>
Latin America 33.3%
Asia 32.7%
Middle-East/Africa 4.9%
Europe 15.1%
</TABLE>

[FUND ASSET ALLOCATION ON 12/31/97 GRAPH]
<TABLE>
<CAPTION>
<S> <C>
Short-option & Other 14.0%
Equity* 86.0%
</TABLE>
*Equity includes convertible and preferred securities

currency terms. Since June of 1997, the exchange rates of currencies against
the U.S. dollar have declined by 45% in Thailand, 56% in Indonesia, 35% in
Malaysia, 48% in South Korea, 35% in the Philippines, 15% in Singapore, and 15%
in Taiwan.(1) In addition, over the last half of 1997, the stock markets of
those countries also declined so that the combined effects of falling
currencies and markets meant that, in U.S. dollar terms, the Thai stock markets
declined by 65%, Indonesia by 75%, Malaysia by 68%, South Korea by 71%, the
Philippines by 54%, Singapore by 24%, and Taiwan by 25%.(2) As a result of
these declines, many stocks in Asia now look attractive as exchange rates and
equity prices fall to levels not seen for many years, particularly in Thailand,
Malaysia, South Korea, and Indonesia.

Within this challenging environment, the unmanaged IFC Investable
Composite Index return was -19.4% for the fourth quarter of 1997, compared to a
- -25.7% return for the Templeton Institutional Funds, Inc. Emerging Markets
Series (the "Fund"). For the one- and three-year periods ending December 31,
1997, the Fund reported a return of -11.3% and 1.4% against an IFC Index return
of -14.9% and -5.2%, respectively. Please remember that the Fund's performance
differs from that of the index because, among other things, the index does not
contain cash (the Fund generally carries a certain percentage of cash at any
given time), is not managed according to any investment strategy, and includes
no management expenses. Of course, one cannot invest directly in an index.

The massive currency devaluations in Asia raised the specter of price wars
and global deflation, as regional manufacturers struggle to raise foreign
currency to service U.S. dollar-denominated liabilities. Involvement from the
International Monetary Fund ("IMF") in South Korea, Thailand, and Malaysia
could bring with it certain positive consequences, including trade
liberalization and the opening of markets. One result could be a surge in
foreign investment through takeovers, until now taboo in many Asian markets.
Much depends on whether the governments follow the IMF'S recommendations, and
if they do, albeit at a slower rate than most of us hope, the economic crisis
may force the pace of innovation, market liberalization, and reforms.

Another concern is whether China might devalue the yuan, which could set
off another round of competitive devaluation and threaten the Hong Kong
dollar's peg against the U.S. dollar. However, there may not be any immediate
need for China to devalue now, as it has a current account surplus and minimal
foreign debt. How Japan tries to rejuvenate consumer demand and its approach to
the debilitated banking sector is another area to monitor. By allowing Hokkaido
Takushoku Bank to fold and letting Yamaichi Securities fail, the government is
starting to deal with the terminally ill. However, the Japanese government has
delayed action for a long time, and will find it challenging to strike the
right balance between recapitalizing the banks and closing them. The bottom
line for Asia is not only one of overcapacity, but it is also an issue of the
shortage of demand, especially in Japan, the region's largest economy.

In our view, investor confidence is at a low point in Southeast Asia. When
it comes to banking or financial markets in general,

1. Source: Reuters.

2. Source: International Finance Corporation (IFC) and Morgan Stanley Capital
International (MSCI).

<PAGE>
confidence is an extremely important ingredient. If lenders are not confident
that the people they are lending to will pay them back, they will hesitate to
lend even to their best customers. Investors will also hesitate to buy
securities if they feel the capital is at risk or they will not earn a return on
their investment. This loss of confidence has turned into widespread nervousness
in various parts of Asia.

Although we cannot predict the bottom of a market, we attempted to purchase
securities at what we believed to be the maximum point of pessimism. At such
times, prices may fall beyond levels that are appropriate given the
fundamentals. We believe that now is such a time. We have seen a drop in
confidence of foreign and domestic investors. In these circumstances economies
tend to freeze, and can cause investors to panic. This can lead to a paralysis
of the system where no one is providing or accepting credit. If there is general
suspicion between buyers and sellers, the economy generally slows down. We
believe that such circumstances are temporary and normalcy will eventually
return.

We believe many countries in Asia are well placed for an export-led
recovery, despite higher imported raw material costs. The Asian crisis also may
force many governments to address much needed structural changes, and to
postpone or cancel over-ambitious infrastructure projects and other projects
which may not be economically viable. As investors at Templeton, volatility,
particularly if it is on the downside, gives us an opportunity to buy
potentially cheap stocks that may have overreacted in relation to their
underlying value. Since Asia has seen a great deal of downside volatility, we
have been attracted to Asian stocks more than to stocks in other parts of the
world.

In the wake of the Asian crisis some other emerging market governments have
begun to address much needed structural reforms. This is particularly true in
Brazil where the Real Plan has been successful in temporarily achieving relative
price stability and positive economic growth. However, as the experience in Asia
has shown, fixed exchange rate policies have not been a good long-term solution.
Major structural reforms are needed in Brazil, but are unlikely to be
implemented before 1999. In the meantime, macroeconomic stability will depend
upon tight monetary policy and the continuation of the privatization process.
Despite the recent fall-out from the Asian currency crisis, the strength of the
Brazilian market may be sustained if promised structural reforms are made and
price stability continues.

Mexico experienced the strongest stock market returns in Latin America in
1997, reporting returns of over 50% according to the IFC Index. Mexican
exporters may be nervous that competitive devaluations of Southeast Asian
currencies could threaten their market share; however, domestic consumption has
rebounded and rejuvenated some local retailers. If the government continues to
focus on the country's solid economic footing, and if the U.S. market holds up,
Mexico has the potential to continue to perform well into 1998. If conditions do
not worsen, Argentina is also expected to achieve a positive growth rate in
1998. Before the outbreak of global market turmoil in October, Argentina won
plaudits for its skillful debt management, which included lengthening its debt
maturity and gaining broader access to world credit markets. Though turbulence
in Asia could

INDUSTRY DIVERSIFICATION ON 12/31/97
(Percent of Total Net Assets)
<TABLE>
<S> <C>
Finance 27.8%
Services 13.8%
Materials 13.8%
Energy 10.6%
Consumer Goods 8.6%
Multi-Industry 8.4%
Capital Equipment 2.8%
</TABLE>

10 LARGEST POSITIONS ON 12/31/97
(Percent of Total Net Assets)
<TABLE>
<S> <C>
Telmex-Telefonos de Mexico SA 3.0%
Centrais Electricas
Braileiras SA 2.4%
Cemex SA 2.3%
HSBC Holdings Pk. 1.8%
Telebras-Telecomunicacoes
Brasileiras SA 1.8%
Banco Comercial Portugues SA 1.7%
Grupo Financiero Banamex
Accival SA 1.5%
Akbank 1.4%
Cifra SA 1.3%
Investimentos Itau SA 1.2%
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKETS SERIES
letter continued

Total Return Index Comparison(1)
$5,000,000 Investment: 05/03/93-12/31/97

TIFI-Emerging Mkts IFC Investable MSCI World

<S> <C> <C> <C>
5/3/93 $5,000,000.00 $5,000,000.00 $5,000,000.00
5/31/93 $5,010,000.00 $5,105,123.25 $5,116,064.50
6/30/93 $5,030,000.00 $5,249,919.50 $5,073,963.50
7/31/93 $5,040,000.00 $5,413,646.06 $5,179,304.44
8/31/93 $5,415,000.00 $5,853,472.02 $5,417,573.16
9/30/93 $5,590,000.00 $6,088,690.15 $5,318,339.47
10/31/93 $5,840,000.00 $6,613,702.35 $5,465,762.25
11/30/93 $6,040,000.00 $7,032,987.22 $5,157,438.61
12/31/93 $6,646,548.18 $8,234,453.50 $5,410,687.92
1/31/94 $6,726,990.52 $8,290,438.65 $5,768,451.28
2/28/94 $6,596,271.72 $8,076,365.42 $5,694,730.47
3/31/94 $6,256,977.66 $7,260,151.76 $5,450,175.95
4/30/94 $5,912,184.73 $7,122,001.24 $5,619,615.38
5/31/94 $5,917,225.21 $7,290,158.31 $5,635,042.46
6/30/94 $5,775,281.65 $7,030,371.34 $5,620,027.33
7/31/94 $5,993,312.48 $7,536,050.28 $5,728,185.88
8/31/94 $6,485,149.46 $8,500,687.30 $5,901,393.63
9/30/94 $6,556,136.24 $8,714,760.27 $5,747,432.16
10/31/94 $6,373,598.80 $8,428,044.66 $5,912,171.96
11/30/94 $6,130,215.55 $8,104,407.76 $5,656,594.68
12/31/94 $5,889,310.18 $7,232,373.46 $5,712,406.21
1/31/95 $5,458,513.19 $6,278,495.72 $5,627,731.21
2/28/95 $5,342,933.50 $6,197,145.25 $5,710,871.20
3/31/95 $5,516,644.64 $6,183,250.01 $5,987,234.54
4/30/95 $5,706,147.70 $6,441,709.85 $6,197,393.65
5/31/95 $5,895,650.76 $6,681,985.63 $6,251,280.67
6/30/95 $5,937,762.55 $6,721,449.44 $6,250,923.10
7/31/95 $6,211,489.19 $6,929,814.37 $6,564,910.71
8/31/95 $6,043,042.03 $6,744,095.34 $6,419,839.31
9/30/95 $5,995,666.26 $6,692,840.21 $6,608,078.00
10/31/95 $5,779,843.33 $6,438,365.04 $6,505,269.52
11/30/95 $5,742,995.51 $6,406,178.36 $6,732,380.19
12/31/95 $5,817,153.11 $6,629,071.73 $6,930,469.02
1/31/96 $6,374,517.55 $7,189,323.11 $7,057,076.22
2/29/96 $6,271,467.47 $7,022,660.22 $7,101,352.17
3/31/96 $6,347,419.50 $7,123,583.56 $7,220,823.19
4/30/96 $6,515,598.99 $7,411,478.21 $7,391,922.03
5/31/96 $6,624,101.89 $7,345,736.91 $7,399,639.42
6/30/96 $6,634,952.18 $7,431,977.34 $7,438,384.23
7/31/96 $6,331,144,06 $6,944,692.30 $7,176,865.51
8/31/96 $6,461,347.54 $7,160,004.85 $7,260,727.18
9/30/96 $6,580,700.73 $7,265,960.75 $7,546,351.99
10/31/96 $6,564,425.29 $7,109,742.59 $7,600,396.70
11/30/96 $6,776,005.94 $7,214,897.81 $8,027,663.65
12/31/96 $6,914,453.20 $7,246,464.51 $7,900,465.33
1/31/97 $7,425,431.29 $7,758,769.24 $7,997,034.29
2/28/97 $7,708,340.22 $8,138,172.27 $8,090,378.08
3/31/97 $7,552,631.75 $7,937,314.04 $7,931,741.94
4/30/97 $7,625,137.02 $7,802,205.07 $8,192,393.26
5/31/97 $7,987,331.02 $8,066,573.43 $8,700,244.63
6/30/97 $8,277,271.14 $8,414,242.74 $9,135,256.86
7/31/97 $8,656,042.81 $8,495,860.89 $9,557,305.73
8/31/97 $7,887,359.41 $7,411,789.04 $8,919,833.43
9/30/97 $8,254,990.49 $7,652,672.19 $9,405,964.36
10/31/97 $6,717,624.21 $6,394,572.88 $8,912,151.23
11/30/97 $6,221,878.96 $6,091,470.13 $9,071,678.74
12/31/97 $6,131,436.15 $6,170,050.09 $9,183,260.38

</TABLE>

Periods ended 12/31/97

<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE-YEAR (05/03/93)
<S> <C> <C>
Average Annual Total Return(1),(2) -11.3% 4.5%
Cumulative Total Return(1),(3) -11.3% 22.6%
</TABLE>

(1) The Investment Manager and Fund Administrator have agreed in advance to
waive a portion of their respective fees in order to limit the total
expenses of the Fund to 1.6% of average net assets through April 30, 1998.
If these fee waivers are insufficient to so limit the Fund's expenses, the
Fund Administrator has agreed to make certain payments to reduce the Fund's
expenses. After April 30, 1998, these agreements may end at any time upon
notice to the Board of Directors. These voluntary agreements did not result
in any fee waivers for the Fund for the fiscal year ended December 31,
1997. Past expense waivers by the Fund's manager increased the Fund's total
returns.

(2) Average annual total return represents the average annual change in value
of an investment over the indicated periods.

(3) Cumulative total return represents the change in value of an investment
over the indicated periods.

(4) Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.

lower growth by a couple of percentage points in 1998, we believe the region as
a whole is now much better equipped to deal with external shocks.

This discussion reflects our views and opinions as of December 31, 1997,
the end of the reporting period. However, market and economic conditions are
changing constantly, which may affect our strategies and portfolio holdings.
Although historic performance is no guarantee of future results, these insights
may help you understand our investment and management philosophy. It should be
remembered that investing in foreign securities involves special risks related
to market and currency volatility, and economic, social, political, and other
factors in the countries where the Fund is invested. Emerging markets involve
heightened risks related to the same factors, in addition to those associated
with the relatively small size and lesser liquidity of these markets. While
short-term volatility can be disconcerting, declines of as much as 40% to 50%
are not unusual in emerging markets. For example, the Hong Kong market has
increased 1,268% in the last 15 years, but has suffered five declines of more
than 20% during that time.(1) These special risks and other considerations are
discussed in the Fund's prospectus.

To conclude, we firmly believe that the current emerging market
difficulties present an unusual opportunity to purchase stocks that were
previously overvalued. Despite near term economic woes in much of Asia, we
believe that this period will be seen as an unparalleled opportunity for
investors to enter what have been and will be dynamic economies. We are
confident in Asia for a number of reasons: a strong work ethic, a young and
educated population, a desire to succeed, a high savings rate, low government
debt relative to government budgets, and lastly, a large and growing consumer
market. Just as the Mexican market rallied strongly since the Mexico crisis in
1994, we believe that many securities in Southeast Asia have the potential to
recover and add value to the portfolio over the long term. Now is not a time
for long-term investors to panic, but rather a time to maintain a rational
approach to investing in emerging markets at valuations we believe are
attractive.

Best regards,
/s/ Donald F. Reed
- ----------------------------------
Donald F. Reed, C.F.A., C.I.C.
President
Templeton Institutional Funds, Inc.

/s/ J. Mark Mobius
- -------------------------
J. Mark Mobius, Ph.D.
Managing Director
Templeton Asset Management Ltd.

(1) Source: Bloomberg. Based on quarterly percentage price change over the 15
years ended December 31, 1997.

For the most current portfolio information, please call 1-800-362-6243.

<PAGE>
................................................................................

The following are Dr. Mobius's thoughts regarding a recent visit to Hong Kong
with the emerging markets research team.

COUNTRY_________________________________________________________________________
FOCUS HONG KONG, China -- As another roller-coaster year in the emerging
markets draws to a close, I have arrived back in Hong Kong -- one of
my favorite cities -- to oversee our move to new and efficient
premises on the 39th floor of Exchange Square.

In contrast to many investors in Hong Kong, we are
optimistic. Every day, the business section of the South China
Morning Post carries news of more financial sector layoffs. In
contrast, with more and more emerging markets crashing, we are
working harder to research the newly emerged bargains all over the
world and particularly in Asia.

Things have certainly changed from my last visit. Then --
about a month after the hand-over of Hong Kong from the United
Kingdom to China -- the market was in a "Red-Chip" inspired boom,
and, economically and politically, it was pretty much business as
usual. Now, as a result of the Asian currency crisis, Hong Kong
property prices have fallen, property agents are closing shop all
over town, and the retail sector is groaning from the collapse in the
number of tourists visiting Hong Kong.

In December 1997, the Hong Kong market was down more than
30% from its all time high on August 7, 1997. The combination of
lower property and equity market prices is having a profound effect
on wealth in the territory, likely causing one of its leanest
Christmas seasons of recent years. There are now "pre-sale" sales and
hotels are operating at occupancy rates in the low 70 percent range
rather than the high 90 percent range where they are accustomed to
being.

While there has been nothing like the spectacular corporate
failures of Korea and Japan, there have been several important
"occurrences" in Hong Kong. In November, the Japanese department
store Yaohan was forced to close under the burden of local and
Japanese-based debt, resulting in more than 2,000 layoffs. In another
case, a rumor surrounding the poor financial position of the Bank of
East Asia resulted in a major run on the bank and other small Hong
Kong banks. The case was serious enough that the Hong Kong Monetary
Authority needed to step in and provide liquidity to the banking
system.

The run on the banking system was quickly followed by a run
on cake shops and video outlets that were then part of the Yaohan
Group.

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKETS SERIES
country focus continued.........................................................

There were queues of people outside the St. Honore cake shops, desperate to
redeem their cake coupons before baking halted for good (which had not occurred
by year end).

Tung Chee Hwa, the new Hong Kong Chief Executive, received some of the
blame for the sudden reversal in Hong Kong's fortunes, and his ratings have
been plummeting. This was mirrored, unfortunately, by a well-publicized
incident when he fell down while accepting a flag from a student. Ironically,
he was attending a meeting to oversee the carrying out of democratic elections
scheduled for May 1998. An ominous omen perhaps.

Compared to other places in the region, Hong Kong has escaped much of
the worst effects of current crisis. However, that does not

[Graphic of a world globe with a pointer showing Hong Kong]

[Graphic of a map of China showing China, Tai Pang Wan (Mirs Bay), Lak Ma Chau,
Fanling, Yuen Long, Tai Po, Hoi Ha, Sai Kung, Tsuen Wan, Kowloon, Kwun Tong,
Tai O, Victoria (Hong Kong Island) and the South China Sea]

<PAGE>
mean that Hong Kong is immune from the contagion. The Hong Kong dollar is
currently more than 30% overvalued in purchasing power parity terms, providing
a juicy one-way bet for speculators and arbitrageurs alike. They will have a
tough time, however. Hong Kong is flush with foreign exchange and the Hong Kong
Monetary Authority follows a strict currency board system which has proven to
be successful in other parts of the world. Times have definitely changed in Hong
Kong. Cash-strapped yuppies have to make do with Chardonnay rather than
Champagne, and a bottle of Chianti seems to do just fine now rather than
Chateau Lafite-Rothschild.

As a bottom-up, value investor, I love crashes. They give us the
opportunity to pick up what we believe are quality assets at bargain basement
prices. I'm sure that I will be back in Hong Kong soon to see what I can find.*

* This letter reflects the strategies employed for the Fund during the past year
and includes our opinions as of the close of the period. However, market and
economic conditions are changing constantly, which may affect our strategies
and portfolio holdings.

<PAGE>

TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Highlights

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993+
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $12.45 $10.75 $11.21 $13.22 $10.00
----------------------------------------------------------
Income from investment operations:
Net investment income...................................... .18 .15 .19 .17 .04
Net realized and unrealized gain (loss).................... (1.60) 1.86 (.34) (1.65) 3.25
----------------------------------------------------------
Total from investment operations............................ (1.42) 2.01 (.15) (1.48) 3.29
----------------------------------------------------------
Less distributions from:
Net investment income...................................... (.18) (.15) (.17) (.17) (.04)
Net realized gains......................................... (.48) (.16) (.14) (.36) (.03)
----------------------------------------------------------
Total distributions......................................... (.66) (.31) (.31) (.53) (.07)
----------------------------------------------------------
Net asset value, end of year................................ $10.37 $12.45 $10.75 $11.21 $13.22
==========================================================
Total return*............................................... (11.32)% 18.86% (1.23)% (11.39)% 32.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)............................. $1,923,881 $1,565,537 $798,515 $582,878 $422,433
Ratios to average net assets:
Expenses................................................... 1.57% 1.56% 1.52% 1.60% 1.60%**
Expenses, excluding waiver and payments by affiliate....... 1.57% 1.56% 1.52% 1.66% 1.60%**
Net investment income...................................... 1.42% 1.56% 2.00% 1.59% 0.91%**
Portfolio turnover rate..................................... 24.72% 7.92% 13.47% 12.51% 9.42%
Average commission rate paid***............................. $.0019 $.0019 -- -- --
</TABLE>

*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+For the period May 3, 1993 (commencement of operations) to December 31, 1993.
See Notes to Financial Statements.
8

<PAGE>

TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES 86.0%
ARGENTINA 5.3%
Astra Cia Argentina de Petroleo SA................... Energy Sources 323,730 $ 566,635
Atanor Cia Nacional Para la Industria Quimica SA,
D.................................................. Chemicals 1,894,877 2,615,427
Banco de Galicia y Buenos Aires SA, B................ Banking 2,469,686 15,808,994
Banco Frances del Rio de la Plata SA................. Banking 518,570 4,813,244
*Buenos Aires Embotelladora SA, ADR.................. Beverages & Tobacco 375,300 3,753
Capex SA, A.......................................... Utilities Electrical & Gas 105,205 699,746
Central Costanera SA, B.............................. Utilities Electrical & Gas 387,028 1,006,464
+Garovaglio Y Zorraquin SA........................... Chemicals 1,257,372 3,898,594
Juan Minetti SA...................................... Building Materials & Components 182,195 568,556
Juan Minetti SA, conv., 12/31/05..................... Building Materials & Components 50,000 50,010
Molinos Rio de Plata SA, B........................... Food & Household Products 3,535,286 8,486,299
Nobleza Piccardo Sdad Industrial Comercial y
Financial.......................................... Beverages & Tobacco 158,277 712,382
Perez Companc SA, B.................................. Energy Sources 3,134,994 22,388,111
Quilmes Industrial SA................................ Beverages & Tobacco 3,000 32,250
Quilmes Industrial SA, ADR........................... Beverages & Tobacco 628,000 8,595,750
Renault Argentina SA................................. Automobiles 401,860 562,711
*Sevel Argentina SA, C............................... Automobiles 634,772 584,101
Siderar, A........................................... Metals & Mining 70,447 299,457
Sociedad Comercial del Plata Cadelplata Come......... Multi-Industry 5,814,130 9,188,071
Transportadora de Gas del Sur SA, ADR B.............. Energy Sources 17,500 195,781
Transportadora de Gas del Sur SA, B.................. Energy Sources 361,773 821,381
YPF Sociedad Anonima, ADR............................ Energy Sources 579,366 19,807,075
*Zanella Hermanos SA................................. Automobiles 743,582 74,372
--------------
101,779,164
--------------
BRAZIL 11.0%
Aracruz Celulose SA, ADR............................. Forest Products & Paper 986,100 14,175,188
Banco Bradesco SA.................................... Banking 963,538,423 9,583,152
*Banco Bradesco SA, rts. ............................ Banking 41,196,251 151,341
Banco Bradesco SA, pfd............................... Banking 689,704,897 6,797,862
*Banco Bradesco SA, pfd. rts......................... Banking 29,488,451 105,689
Banco do Brasil SA................................... Banking 922,450,792 5,951,029
*Banco do Brasil SA, wts., A......................... Banking 190,208,236 325,521
*Banco do Brasil SA, wts., B......................... Banking 285,312,354 498,507
*Banco do Brasil SA, wts., C......................... Banking 424,220,591 828,638
Banco do Brazil SA, pfd.............................. Banking 435,910,390 3,222,311
*Banco do Estado de Sao Paulo SA, pfd. .............. Banking 118,487,530 4,830,592
Brasmotor SA, pfd. .................................. Multi-Industry 44,908,000 4,426,217
Centrais Eletricas Brasileiras SA.................... Utilities Electrical & Gas 410,060,000 20,391,855
Centrais Eletricas Brasileiras SA, B, pfd............ Utilities Electrical & Gas 522,621,060 26,691,815
*Cia Vale do Rio Doce, pfd. ......................... Metals & Mining 282,631 5,685,288
Companhia Siderurgica Nacional Sid Nacional.......... Metals & Mining 350,736,000 9,742,230
Copene-Petroquimica do Nordeste SA, A, pfd........... Chemicals 15,725,700 4,790,769
Duratex SA, pfd...................................... Forest Products & Paper 191,931,900 7,566,869
Investimentos Itau SA, pfd........................... Multi-Industry 30,540,704 23,807,547
*Mannesmann SA....................................... Machinery & Engineering 18,494,720 2,170,878
*Mannesmann SA, pfd.................................. Machinery & Engineering 1,670,650 209,570
Marcopolo SA, pfd.................................... Automobiles 3,915,800 463,138
Petrobras-Petroleo Brasileiro SA, pfd................ Energy Sources 86,310,666 20,184,655
Telebras-Telecomunicacoes Brasileiras SA............. Telecommunications 303,867,531 30,902,706
Telebras-Telecomunicacoes Brasileiras SA, pfd........ Telecommunications 27,331,968 3,117,566
*Unibanco Uniao de Bancos Brasileiros SA, unit....... Banking 74,125,584 5,047,753
--------------
211,668,686
--------------
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
CHILE 0.2%
Antofagasta Holdings Plc. ........................... Metals & Mining 178,518 $ 967,530
Empresa Nacional de Electricidad SA, ADR............. Electrical & Electronics 111,700 1,975,694
--------------
2,943,224
--------------
CHINA 1.4%
China First Pencil Co. Ltd., B....................... Recreation & Other Consumer Goods 835,882 158,818
China Southern Glass Co. Ltd., B..................... Building Materials & Components 5,999,521 1,687,825
Chiwan Wharf Holdings Ltd., B........................ Transportation 4,651,700 1,464,724
Guangdong Electric Power Development Co Ltd., B,
144A............................................... Utilities Electrical & Gas 788,400 465,979
Guangshen Railway Co. Ltd., ADR...................... Transportation 400,000 5,375,000
*Luoyang Glass Co. Ltd., H........................... Misc Materials & Commodities 4,425,000 399,729
Shandong Huaneng Power Development Co. Ltd., ADR..... Utilities Electrical & Gas 348,900 2,398,688
*Shanggone Co. Ltd., B............................... Machinery & Engineering 1,114,800 98,102
Shanghai Chlor-Alkali Chemical Co. Ltd., B........... Chemicals 5,074,100 872,745
*Shanghai Dazhong Taxi Shareholding Co. Ltd., B...... Transportation 1,818,900 1,360,537
*Shanghai Erfangji Textile Machinery Co. Ltd., B..... Machinery & Engineering 3,558,340 270,434
*Shanghai Jin Jiang Tower Co. Ltd., B................ Leisure & Tourism 4,277,640 795,641
Shanghai Jinqiao Export Processing Zone Development,
B.................................................. Real Estate 1,976,170 770,706
*Shanghai Lujiaxui Finance & Trade Zn Dev Stock Co
Ltd, B............................................. Real Estate 5,008,440 3,906,583
Shanghai New Asia Group Co. Ltd., B.................. Food & Household Products 2,205,190 595,401
Shanghai Petrochemical Co. Ltd., H................... Chemicals 4,244,000 662,697
*Shanghai Refrigerator Compressor Co. Ltd., B........ Industrial Components 1,047,240 291,133
*Shanghai Rubber Belt Co. Ltd., B.................... Industrial Components 47,150 6,978
*Shanghai Shangling Electric Appliance, B............ Appliances & Household Durables 1,988,650 409,662
*Shanghai Steel Tube Co. Ltd., B..................... Machinery & Engineering 2,202,540 189,418
Shanghai Tyre & Rubber Co. Ltd., B................... Industrial Components 3,325,100 831,275
*Shanghai Vacuum Electron Devices Co. Ltd., B........ Appliances & Household Durables 2,903,434 435,515
*Shanghai Wingsung Co. Ltd., B....................... Recreation & Other Consumer Goods 238,050 39,040
Shanghai Yaohua Pilkington Glass, B.................. Building Materials & Components 4,930,200 680,368
*Shanghai Zhenhua Port Machinery Co. Ltd., B......... Machinery & Engineering 220,000 151,360
*Shenzhen China Bicycles Co. Ltd., B................. Recreation & Other Consumer Goods 1,707,000 279,764
*Shenzhen Properties & Resources Development Ltd.,
B.................................................. Real Estate 1,873,516 362,663
Shenzhen Vanke Co. Ltd., B........................... Real Estate 3,297,512 1,914,931
--------------
26,875,716
--------------
COLOMBIA 3.1%
Banco Ganadero SA, ADR C............................. Banking 114,200 2,740,800
Banco Industrial Colombiano SA....................... Banking 358,705 1,104,346
Bavaria SA........................................... Beverages & Tobacco 99,286 1,018,396
Cementos Argos SA.................................... Building Materials & Components 2,645,080 15,503,496
Cia Colombiana de Tabacos SA......................... Beverages & Tobacco 2,097,040 6,064,782
Compania Nacional de Chocolates SA................... Food & Household Products 2,539,988 17,434,075
Compania Suramericana de Seguros SA.................. Insurance 809,938 15,303,652
Promigas SA.......................................... Utilities Electrical & Gas 111,551 589,307
--------------
59,758,854
--------------
CZECH REPUBLIC 1.4%
*CEZ AS.............................................. Utilities Electrical & Gas 365,280 11,987,301
Elektrarny Opatovice AS.............................. Energy Sources 8,001 927,659
Komercni Banka AS.................................... Banking 9,822 370,604
Komercni Banka AS, GDR............................... Banking 27,000 330,750
*Leciva AS........................................... Health & Personal Care 800 48,575
*SPT Telecom AS...................................... Telecommunications 50,330 5,384,288
Tabak AS............................................. Beverages & Tobacco 17,104 3,906,829
*Unipetrol, fgn...................................... Chemicals 1,275,736 3,669,410
--------------
26,625,416
--------------
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
ECUADOR 0.1%
La Cemento Nacional SA, GDR.......................... Multi-Industry 5,000 $ 1,040,000
La Cemento Nacional CA, GDR, 144A.................... Multi-Industry 3,946 820,768
--------------
1,860,768
--------------
EGYPT 0.3%
Commercial International Bank Ltd.................... Banking 197,350 3,982,381
Eastern Tobacco Co. ................................. Beverages & Tobacco 82,560 1,917,139
--------------
5,899,520
--------------
GHANA 0.3%
Ashanti Goldfields Co. Ltd., GDR..................... Metals & Mining 650,720 4,880,400
--------------
GREECE 3.5%
Alpha Credit Bank.................................... Banking 405,204 23,661,287
Alpha Leasing SA..................................... Financial Services 153,320 3,024,809
Delta Dairy SA....................................... Food & Household Products 460,634 5,225,441
Delta Dairy SA, pfd. ................................ Food & Household Products 929 8,344
Ergo Bank SA......................................... Banking 164,438 8,504,315
Etba Leasing......................................... Financial Services 131,092 1,085,313
Fourlis Brothers Corp. SA............................ Appliances & Household Durables 98,120 637,771
Hellas Can Sa Packaging Manufacturers................ Metals & Mining 146,980 2,123,016
Hellenic Telecommunications Organizations............ Telecommunications 174,054 3,568,766
Hellenic Telecommunications Organizations, 144A...... Telecommunications 591,150 12,120,814
*National Bank of Greece SA.......................... Banking 34,514 3,039,202
Titan Cement Co. .................................... Building Materials & Components 99,840 4,554,969
X. Benrubi & Son SA.................................. Food & Household Products 112,780 266,603
--------------
67,820,650
--------------
HONG KONG 7.5%
CDL Hotel International Ltd. ........................ Leisure & Tourism 3,290,000 997,742
Cheung Kong Holdings Ltd............................. Real Estate 3,585,000 23,478,997
Cross Harbour Tunnel Co. Ltd......................... Transportation 425,010 723,981
Dairy Farm International Holdings Ltd................ Merchandising 5,242,064 5,661,429
Goldlion Holdings Ltd................................ Textiles & Apparel 51,000 16,947
Great Wall Electronic International Ltd. ............ Electrical & Electronics 980,108 75,889
Hang Lung Development Co. Ltd. ...................... Real Estate 9,126,000 12,836,934
Hong Kong & Shanghai Hotels Ltd...................... Leisure & Tourism 2,074,000 1,712,944
Hong Kong Electric Holdings Ltd...................... Utilities Electrical & Gas 1,519,900 5,776,365
Hopewell Holdings Ltd................................ Construction & Housing 5,994,000 1,492,892
HSBC Holdings Plc.................................... Banking 1,388,125 34,214,979
IMC Holdings Ltd..................................... Transportation 120,000 30,972
Jardine International Motor Holdings Ltd. ........... Automobiles 536,000 290,515
Jardine Matheson Holdings Ltd........................ Multi-Industry 399,812 2,039,041
Jardine Strategic Holdings Ltd....................... Multi-Industry 922,750 2,436,060
Joyce Boutique Holdings Ltd.......................... Merchandising 862,000 36,709
K Wah International Holdings Ltd..................... Building Materials & Components 10,223,124 1,794,225
*Lai Fung Holdings Ltd. ............................. Real Estate 130,420 45,022
Lai Sun Development Co. Ltd.......................... Real Estate 6,621,000 2,178,804
Lai Sun Garment International Ltd.................... Multi-Industry 1,730,000 1,077,204
*Lai Sun Hotels International Ltd., wts.............. Leisure & Tourism 421,262 1,631
Laws International Holdings Ltd. .................... Textiles & Apparel 4,174,000 576,356
New World Development Co. Ltd........................ Real Estate 5,601,133 19,371,579
Semi-Tech Co. Ltd. .................................. Appliances & Household Durables 8,452,633 1,385,320
*Semi-Tech Co. Ltd., wts. ........................... Appliances & Household Durables 194,636 7,033
Sun Hung Kai & Co. Ltd. ............................. Financial Services 2,377,800 411,182
*Sun Hung Kai & Co. Ltd, wts. ....................... Financial Services 786,960 26,912
Sun Hung Kai Properties Ltd. ........................ Real Estate 2,147,000 14,961,672
Swire Pacific Ltd., A................................ Multi-Industry 342,000 1,875,726
Swire Pacific Ltd., B................................ Multi-Industry 1,696,500 1,718,612
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
HONG KONG (CONT.)
Tingyi (Cayman Islands) Holding Corp................. Food & Household Products 966,000 $ 125,908
Tungtex (Holdings) Co. Ltd........................... Textiles & Apparel 752,000 80,547
Wheelock and Company Ltd. ........................... Multi-Industry 3,217,000 3,757,111
*Wo Kee Hong Holdings Ltd. .......................... Merchandising 17,820,400 988,872
Yue Yuen Industrial (Holdings) Ltd. ................. Recreation & Other Consumer Goods 1,051,400 2,225,185
--------------
144,431,297
--------------
HUNGARY 0.9%
Egis RT.............................................. Multi-Industry 29,000 1,817,425
Egis RT, certificates................................ Multi-Industry 2,350 147,274
Fotex First Hung-Amer Photo Co., 12.00%, conv.,
5/11/00............................................ Multi-Industry 16,000** 16,000
*Fotex First Hungarian-American Photo Service Co. ... Multi-Industry 108,832 122,556
*Fotex First Hungarian-American Photo Service Co.
certificates....................................... Multi-Industry 1,784,000 1,949,032
*Ibusz RT............................................ Leisure & Tourism 47,725 253,527
Inter-Europa Bank RT................................. Banking 2,816 259,202
OTP Bank, GDR........................................ Banking 67,000 2,540,975
Pick Szeged RT....................................... Food & Household Products 10,000 798,061
Pick Szeged RT, GDR.................................. Food & Household Products 10,910 870,683
Tiszai Vegyi Kombinat RT............................. Chemicals 86,176 1,447,202
Tiszai Vegyi Kombinat RT, GDR, 144A.................. Chemicals 272,000 4,651,200
Tiszai Vegyi Kombinat RT, GDR, Reg S................. Chemicals 157,000 2,684,700
--------------
17,557,837
--------------
INDIA 3.2%
*Andhra Valley Power Supply Co. Ltd. ................ Utilities Electrical & Gas 35,950 73,138
Arvind Mills Ltd. ................................... Textiles & Apparel 741,550 1,669,433
*Bajaj Auto Ltd. .................................... Automobiles 118,600 1,830,434
Bank of Baroda....................................... Banking 297,900 839,744
Bharat Petroleum Corp. Ltd. ......................... Energy Sources 25,200 267,589
Bombay Dyeing & Manufacturing Co. Ltd. .............. Chemicals 55,200 139,760
Bses Ltd. ........................................... Utilities Electrical & Gas 23,900 104,258
Cochin Refineries Ltd. .............................. Energy Sources 101,850 441,696
Grasim Industries Ltd................................ Multi-Industry 287,850 2,562,746
Great Eastern Shipping Co. Ltd. ..................... Transportation 1,525,200 1,789,776
Gujarat Ambuja Cements Ltd. ......................... Building Materials & Components 464,100 3,267,643
Gujarat Industries Power Ltd. ....................... Energy Equipment & Services 89,000 59,598
Gujarat Narmada Valley Fertilizers Co. Ltd. ......... Chemicals 1,017,000 577,251
Gujarat Narmada Valley Fertilizers Co. Ltd., ADR..... Chemicals 329,000 493,500
Hindalco Industries Inc. ............................ Metals & Mining 140,025 2,654,045
*Hindustan Organic Chemicals Ltd. ................... Chemicals 51,800 19,029
Hindustan Petroleum Corp. Ltd. ...................... Energy Sources 186,200 2,301,375
India Cements Ltd. .................................. Building Materials & Components 439,400 751,015
India Cements Ltd., GDR.............................. Building Materials & Components 265,658 504,750
Indian Aluminium Co. Ltd. ........................... Metals & Mining 153,600 288,980
Indian Petrochemicals Corp. Ltd. .................... Chemicals 2,223,100 4,012,355
Indian Rayon & Industries Ltd. ...................... Multi-Industry 169,950 803,144
Indian Rayon & Industries Ltd., GDR.................. Multi-Industry 83,499 354,871
Indo Gulf Fertilisers & Chemicals Corp. Ltd. ........ Chemicals 1,262,700 1,183,781
Indo Gulf Fertilisers & Chemicals Corp. Ltd., GDR.... Chemicals 28,700 25,543
Industrial Credit & Inv. Corp. of India.............. Financial Services 1,522,000 2,970,230
Industrial Development Bank of India................. Banking 1,219,500 2,877,647
ITC Bhadrachalam Paperboards Ltd. ................... Forest Products & Paper 96,700 85,723
Larsen and Toubro Ltd. .............................. Multi-Industry 1,078,450 5,577,952
Madras Cements Ltd. ................................. Building Materials & Components 2,715 316,865
*Mahanagar Telephone Nigam Ltd....................... Telecommunications 402,600 2,649,765
National Aluminium Co. Ltd. ......................... Metals & Mining 1,823,200 1,372,051
Oriental Bank of Commerce............................ Banking 1,857,600 3,044,663
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
INDIA (CONT.)
Reliance Industries Ltd. ............................ Chemicals 377,600 $ 1,594,204
Shipping Corporation of India Ltd. .................. Transportation 624,100 716,441
State Bank of India.................................. Banking 74,400 461,204
Steel Authority of India Ltd. ....................... Metals & Mining 2,558,800 636,436
Steel Authority of India Ltd., GDR, 144A............. Metals & Mining 62,000 198,400
Steel Authority of India Ltd., GDR, Reg S............ Metals & Mining 23,000 73,600
Sterlite Industries Ltd. ............................ Metals & Mining 108,100 547,394
Tamil Nadu Newsprint & Papers Ltd. .................. Forest Products & Paper 23,100 13,554
Tata Chemicals Ltd. ................................. Chemicals 303,850 1,154,940
Tata Engineering & Locomotive Co. Telco.............. Machinery & Engineering 1,006,950 7,609,922
Tata Hydro-Electric Power Co......................... Utilities Electrical & Gas 60,000 114,413
Tata Iron & Steel Co. Ltd............................ Metals & Mining 526,400 1,802,786
Thermax Ltd.......................................... Energy Equipment & Services 7,300 32,403
Wockhardt............................................ Health & Personal Care 27,900 131,493
--------------
60,997,540
--------------
INDONESIA 2.3%
Asia Pulp & Paper Co. Ltd., ADR...................... Forest Products & Paper 295,500 2,973,469
PT Bank Dagang Nasional Indonesia, fgn............... Banking 10,607,000 674,991
*PT Bank Dagang Nasional Indonesia, wts.............. Banking 576,500 5,346
PT Bank Danamon, fgn. ............................... Banking 12,302,000 782,855
*PT Bank International Indonesia, fgn. .............. Banking 30,293,000 1,790,041
PT Bank PDFCI, fgn................................... Banking 360,500 114,705
PT Barito Pacific Timber TBK......................... Forest Products & Paper 23,941,500 6,855,975
PT BBL Dharmala Finance, fgn......................... Financial Services 2,596,000 755,200
PT BDNI Capital Corporation, fgn..................... Financial Services 1,462,000 239,236
+PT Charoen Pokphand Indonesia....................... Food & Household Products 14,686,500 801,082
PT Ciputra Dev....................................... Real Estate 8,149,500 370,432
PT Dharmala Intiland TBK............................. Real Estate 2,397,800 555,854
PT Gadjah Tunggal.................................... Automobiles 39,947,000 3,813,123
PT Hanjaya Mandala Sampoerna......................... Beverages & Tobacco 967,500 730,023
PT Indah Kiat Pulp & Paper Corp...................... Forest Products & Paper 13,656,000 2,420,836
*PT Indah Kiat Pulp & Paper Corp. TBK, wts. ......... Forest Products & Paper 519,200 14,160
PT Indocement Tunggal Prakarsa....................... Building Materials & Components 6,021,000 1,970,509
PT Indofoods Sukses Makmur........................... Food & Household Products 1,678,870 549,448
PT Indosat........................................... Telecommunications 249,500 462,709
PT Inter-Pacific Bank, fgn........................... Banking 589,500 166,132
PT Jakarta International Hotel & Development......... Real Estate 3,170,000 619,591
PT Japfa Comfeed Indonesia........................... Food & Household Products 1,661,000 135,900
PT Kalbe Farma....................................... Health & Personal Care 1,789,500 317,230
PT Lippo Life Insurance TBK.......................... Insurance 5,684,500 206,709
PT Metrodata Electronic.............................. Electrical & Electronics 45,000 16,364
PT Modern Photo Film Co. ............................ Multi-Industry 167,000 48,582
PT Multibreeder Adirama Indonesia TBK................ Food & Household Products 221,250 7,040
PT Pakuwon Jati...................................... Real Estate 7,320,500 598,950
PT Semen Cibinong, loc............................... Building Materials & Components 15,864,000 721,091
PT Semen Gresik...................................... Building Materials & Components 4,811,500 2,821,289
PT Sinar Mas Agro Resources & Technology Corp........ Food & Household Products 4,428,600 382,470
PT Sinar Mas Multi Artha, fgn. ...................... Financial Services 11,520,600 1,413,892
*PT Sinar Mas Multi Artha, wts., fgn................. Financial Services 864,045 10,997
PT Sumalindo Lestari Jaya TBK........................ Forest Products & Paper 2,472,000 348,327
PT Summarecon Agung.................................. Real Estate 1,829,902 116,448
PT Tambang Timah (Persero)........................... Metals & Mining 4,300,000 4,612,727
PT Tempo Scan Pacific................................ Health & Personal Care 2,033,000 157,095
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
INDONESIA (CONT.)
PT Tjiwi Kimia TBK................................... Forest Products & Paper 9,339,014 $ 2,292,303
*PT Tjiwi Kimia TBK, wts............................. Forest Products & Paper 621,945 36,186
PT Ultra Jaya Milk................................... Food & Household Products 3,254,300 591,691
PT Unggul Indah Corp. ............................... Chemicals 5,874,000 1,415,100
PT United Tractors................................... Machinery & Engineering 3,617,000 427,464
--------------
43,343,572
--------------
ISRAEL 0.8%
Bank Hapoalim BM..................................... Banking 1,403,334 3,365,338
Clal Industries Ltd. ................................ Multi-Industry 821,948 4,620,164
Discount Investment Corp. ........................... Multi-Industry 31,477 879,325
First International Bank of Israel................... Banking 1,036 759,522
Koor Industries Ltd.................................. Multi-Industry 46,337 5,130,668
--------------
14,755,017
--------------
JORDAN
*Jordan Cement Factories Ltd. ....................... Building Materials & Components 158,750 675,961
--------------
KAZAKHSTAN 0.1%
*Kazkommertsbank, ADR, 144A.......................... Banking 46,646 979,566
--------------
MALAYSIA 2.2%
AMMB Holdings Bhd. .................................. Banking 683,000 447,782
Berjaya Singer Bhd................................... Appliances & Household Durables 2,189,000 697,869
Berjaya Singer Bhd, fgn. ............................ Appliances & Household Durables 540,000 172,156
Boustead Holdings Bhd., fgn. ........................ Food & Household Products 1,100,000 910,657
Cement Industries of Malaysia Bhd. .................. Building Materials & Components 146,000 85,584
Federal Flour Mills Bhd. ............................ Food & Household Products 1,070,500 853,207
Genting Berhad....................................... Leisure & Tourism 1,942,000 4,868,106
Hong Leong Industries Bhd. .......................... Multi-Industry 2,338,000 2,380,378
*Hong Leong Industries Bhd., wts., fgn. ............. Multi-Industry 221,250 20,478
Hong Leong Properties Bhd. .......................... Real Estate 1,432,000 261,401
Hong Leong Properties Bhd., fgn. .................... Real Estate 1,882,000 343,545
Island & Peninsula Bhd., fgn. ....................... Real Estate 1,747,000 1,167,811
Kian Joo Can Factory Bhd. ........................... Industrial Components 809,000 719,666
Leader Universal Holdings Bhd. ...................... Industrial Components 8,844,000 2,728,577
Malayawata Steel Bhd., fgn. ......................... Metals & Mining 1,705,500 416,564
Malaysian Airline System Bhd. ....................... Transportation 2,602,000 2,087,219
Malaysian International Shipping Corp., fgn. ........ Transportation 1,857,333 2,721,892
MBF Capital Bhd. .................................... Financial Services 6,163,000 1,433,993
MBF Capital Bhd., fgn. .............................. Financial Services 7,409,000 1,723,909
Oriental Holdings Bhd., fgn. ........................ Automobiles 989,760 1,211,276
Perlis Plantations Bhd., fgn. ....................... Multi-Industry 1,969,250 2,784,645
Perusahaan Otomobil Nasional Bhd., fgn. ............. Automobiles 517,000 505,103
Public Bank Bhd. .................................... Banking 648,400 201,713
Public Bank Bhd., fgn................................ Banking 4,178,400 1,439,531
*Public Bank Bhd., fgn., rts. ....................... Banking 696,800 35,816
Public Finance Bhd., fgn. ........................... Financial Services 1,916,000 527,091
*Renong Bhd. ........................................ Multi-Industry 12,369,000 5,724,180
*Renong Bhd., wts. .................................. Multi-Industry 32,750 4,210
Renong, 4.00%, conv., 5/22/01........................ Multi-Industry 52,400** 5,524
Resorts World Bhd. .................................. Leisure & Tourism 3,243,000 5,461,280
Shangri-La Hotels (Malaysia) Bhd. ................... Leisure & Tourism 2,858,000 778,887
YTL Corp. Berhad..................................... Multi-Industry 366,000 494,022
--------------
43,214,072
--------------
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
MEXICO 11.9%
Alfa SA de CV, A..................................... Multi-Industry 15,774 $ 106,913
*Altos Hornos de Mexico SA........................... Metals & Mining 2,728,000 6,760,424
*Cemex SA, B......................................... Building Materials & Components 8,410,875 44,917,751
*Cifra SA de CV...................................... Merchandising 597,284 1,472,765
Cifra SA, C.......................................... Merchandising 11,547,602 25,898,221
Coca Cola Femsa SA de CV, ADR........................ Beverages & Tobacco 98,700 5,724,600
Cydea SA de CV....................................... Chemicals 486,231 1,355,579
DESC SA de CV DESC, A................................ Multi-Industry 82,000 714,280
DESC SA de CV DESC, B................................ Multi-Industry 492,544 4,705,426
DESC SA de CV DESC, C................................ Multi-Industry 351,462 3,309,722
Fomento Economico Mexicano SA de CV, B............... Beverages & Tobacco 750,000 5,994,052
*Grupo Financiero Banamex Accival SA, B.............. Banking 3,153,000 9,434,973
*Grupo Financiero Banamex Accival SA, L.............. Banking 7,572,518 19,516,557
*Grupo Financiero Bancomer SA de CV, B............... Banking 11,797,934 7,601,667
*Grupo Financiero Bancomer SA de CV, L............... Banking 24,196,553 9,624,055
*Grupo Financiero Serfin SA de CV, B................. Banking 15,216,114 3,695,382
Panamerican Beverages Inc., A........................ Food & Household Products 208,100 6,789,263
Telmex-Telefonos de Mexico SA, L, ADR................ Telecommunications 1,037,100 58,142,419
Vitro SA............................................. Food & Household Products 2,932,692 12,918,307
--------------
228,682,356
--------------
PAKISTAN 0.8%
*Bank of Punjab...................................... Banking 594,236 253,191
*DG Khan Cement Co. ................................. Building Materials & Components 1,096,400 204,301
Engro Chemical Pakistan Ltd. ........................ Chemicals 661,815 1,716,725
Fauji Fertilizer Co. Ltd. ........................... Chemicals 357,500 684,438
*Khadim Ali Shah Bukhari & Co. Ltd. ................. Financial Services 219,120 96,599
National Development Leasing Corp. .................. Financial Services 272,869 37,514
*Pakistan Electron Ltd. ............................. Appliances & Household Durables 110,000 13,123
*Pakistan International Airlines Corp. .............. Transportation 911,300 140,818
Pakistan Telecommunications Corp. PTC................ Telecommunications 10,000 690,000
Pakistan Telecommunications Corp., PTC, A............ Telecommunications 16,303,600 12,318,654
*Union Bank Ltd. .................................... Banking 530,878 128,479
--------------
16,283,842
--------------
PERU 0.6%
Telefonica Del Peru SA, ADR B........................ Telecommunications 513,300 11,966,306
--------------
PHILIPPINES 0.8%
*A Soriano Corp. .................................... Multi-Industry 43,767,500 1,707,473
Ayala Corp., B....................................... Multi-Industry 1,357,800 528,033
*Belle Corp. ........................................ Real Estate 37,726,000 1,453,150
Filinvest Development Corp. ......................... Real Estate 8,615,000 723,235
*Keppel Philippine Holdings Inc., B.................. Machinery & Engineering 948,750 57,159
Metro Pacific Corp. MDI.............................. Multi-Industry 19,184,050 530,522
*Philex Mining Corp., B.............................. Metals & Mining 19,380,915 478,541
Philippine Commercial International Bank Inc. ....... Banking 654,950 1,859,735
Philippine Long Distance Telephone Co., ADR.......... Telecommunications 120,810 2,718,225
*Philippine National Bank............................ Banking 519,263 1,141,096
RFM Corp. ........................................... Food & Household Products 20,844,100 3,396,816
RFM Corporation, 10.00%, conv., pfd. ................ Food & Household Products 3,834,927** 443,147
Sime Darby Pilipinas Inc. ........................... Industrial Components 956,400 720,252
*Southeast Asia Cement Holdings Inc. ................ Building Materials & Components 12,348,000 161,591
--------------
15,918,975
--------------
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
POLAND 1.2%
Bank Przemyslowo-Handlowy SA......................... Banking 53,751 $ 2,790,477
Big Bank Gdanski SA, G............................... Banking 7,739,414 7,574,746
*Big Bank Gdanski SA, GDR............................ Banking 73,867 1,126,467
*Farm Food SA........................................ Food & Household Products 53,452 454,911
*Huta Olawa SA....................................... Metals & Mining 20,221 73,427
*Impexmetal SA, A.................................... Metals & Mining 174,337 1,394,696
Mostostal Export SA.................................. Construction & Housing 690,615 1,743,680
*Polifarb Cieszyn Wroclaw SA......................... Chemicals 254,863 1,207,436
*Polifarb Cieszyn Wroclaw SA, D...................... Chemicals 101,662 406,648
*Raciborska Fabryka Kotlow SA........................ Energy Equipment & Services 97,732 260,619
*+Rolimpex SA........................................ Wholesale & International Trade 1,187,587 2,695,233
Warta SA............................................. Insurance 120,000 1,426,383
Wielkopolski Bank Kredytowy SA....................... Banking 248,622 1,248,400
Zaklady Cementowo Wapiennicze Gorazdze Chorula....... Building Materials & Components 42,550 1,050,170
--------------
23,453,293
--------------
PORTUGAL 4.3%
Banco Comercial Portugues SA......................... Banking 1,643,372 33,608,542
Banco Espirito Santo e Comercial de Lisboa........... Banking 737,455 21,945,347
Banco Totta & Acores SA.............................. Banking 253,149 4,970,826
BPI Socieda de Gestora de Participacoes Socias SA.... Banking 523,083 12,718,264
Cel-Cat Fabrica Nacional de Conductores Electricos
SA................................................. Electronic Components & Instruments 6,672 90,555
Compta-Equipamentos e Servicos de Informatica SA..... Business & Public Services 69,740 738,892
Espirito Santo Financial Group SA, ADR............... Banking 291,220 5,915,406
Portucel Industrial Empresa Product de Celulose SA... Forest Products & Paper 232,700 1,419,843
*Sociedade Portuguesa de Celulose SA................. Forest Products & Paper 33,810 955,240
--------------
82,362,915
--------------
RUSSIA 3.3%
*Aeroflot............................................ Transportation 14,800 1,814,480
*Cheliabenergo....................................... Telecommunications 1,860,000 985,800
GUM Trade House...................................... Merchandising 550,000 1,526,250
Irkutskenergo........................................ Utilities Electrical & Gas 23,928,000 4,737,744
*JSC Chernogorneft................................... Energy Sources 3,000 34,275
*Kamaz............................................... Automobiles 891,980 1,337,970
Krasnoyarsk Aluminum Plant........................... Metals & Mining 24,086 361,290
Lukoil-Holdings...................................... Energy Sources 118,000 2,716,360
Lukoil Holdings, pfd. ............................... Energy Sources 23,000 362,250
*Megionneftegaz...................................... Energy Sources 117,000 608,400
Mosenergo............................................ Utilities Electrical & Gas 2,856,000 3,627,120
Norilsk Nickel....................................... Metals & Mining 229,000 1,431,250
*Norilsk Nickel, rts. ............................... Metals & Mining 114,500 11,450
*Novorosissk Sea Shipping............................ Transportation 1,010,000 292,900
*Noyabrskneftegaz.................................... Energy Sources 56,959 387,321
Primorsk Sea Shipping................................ Transportation 67,800 254,250
*Purneftegaz......................................... Energy Sources 636,000 5,037,120
Rao Gazprom, ADR, 144A............................... Energy Sources 70,000 1,676,500
Red October.......................................... Food & Household Products 67,000 1,172,500
*Rostelekom.......................................... Telecommunications 2,511,000 8,914,050
Rostelekom, pfd. .................................... Telecommunications 2,195,200 5,114,816
*Saint Petersburg City Telephone Network, pfd., A.... Telecommunications 285,000 249,375
*St. Petersburg Intercity International Telephone.... Telecommunications 143,970 320,333
*St. Petersburg MMT, pfd. ........................... Telecommunications 152,100 236,516
*Tyumen Aviatrans.................................... Telecommunications 1,930,000 151,505
Unified Energy System................................ Utilities Electrical & Gas 63,010,000 19,054,224
*Unified Energy System, pfd. ........................ Utilities Electrical & Gas 4,930,000 1,062,415
*Uralmash Zavody..................................... Machinery & Engineering 27,684 252,617
--------------
63,731,081
--------------
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
SINGAPORE 3.0%
Acer Computer International Ltd. .................... Electrical & Electronics 1,210,000 $ 1,113,200
*Acer Computer International Ltd., wts. ............. Electrical & Electronics 114,800 13,202
*Acma Ltd. .......................................... Electrical & Electronics 1,628,600 1,120,840
Acma Ltd., fgn., wts. ............................... Electrical & Electronics 83,150 5,673
British American Tobacco Co. Ltd. ................... Beverages & Tobacco 44,000 131,961
Chemical Industries (Far East) Ltd. ................. Chemicals 611,000 906,259
*Chemical Industries (Far East) Ltd., wts. .......... Chemicals 184,800 38,923
Cycle & Carriage Ltd. ............................... Wholesale & International Trade 644,000 2,655,473
Delgro Corp. ........................................ Transportation 415,200 507,453
First Capital Corp. Ltd. ............................ Real Estate 1,529,000 1,415,153
First Capital Corp. Ltd., fgn. ...................... Real Estate 1,852,000 1,714,103
Fraser and Neave Ltd., fgn. ......................... Beverages & Tobacco 786,000 3,404,212
GP Batteries International Ltd. ..................... Electrical & Electronics 36,000 93,551
*GP Batteries International Ltd., wts. .............. Electrical & Electronics 9,250 7,573
Hai Sun Hup Group Ltd. .............................. Transportation 3,986,000 1,608,116
*Hai Sun Hup Group Ltd., wts. ....................... Transportation 872,400 69,875
Hinds Hotels International Ltd. ..................... Leisure & Tourism 244,000 209,908
Hinds Hotels International Ltd., fgn. ............... Leisure & Tourism 170,000 146,247
Hong Leong Finance Ltd. ............................. Financial Services 200,000 213,586
Hour Glass Ltd. ..................................... Merchandising 320,000 123,406
Inchcape Bhd., fgn. ................................. Wholesale & International Trade 1,458,000 2,240,415
*Inchcape Marketing Services, fgn. .................. Broadcasting & Publishing 1,458,000 432,513
Isetan (Singapore) Ltd., fgn. ....................... Merchandising 68,000 101,667
Jaya Holdings Ltd. .................................. Transportation 748,000 175,295
*Jaya Holdings Ltd., wts. ........................... Transportation 75,240 2,567
Jaya Holdings Ltd., 3.00%, conv., 8/31/98............ Transportation 80,400** 19,080
Jurong Shipyard Ltd., fgn. .......................... Machinery & Engineering 1,900,000 9,018,096
Keppel Corp. Ltd. ................................... Transportation 1,748,000 5,019,472
MCL Land Ltd. ....................................... Real Estate 4,880,000 2,822,901
Metro Holdings Ltd., fgn. ........................... Wholesale & International Trade 755,000 936,191
Natsteel Ltd. ....................................... Metals & Mining 954,000 1,290,489
Natsteel Ltd., fgn. ................................. Metals & Mining 1,489,000 2,014,192
Neptune Orient Lines Ltd. ........................... Transportation 3,821,000 1,507,544
Osprey Maritime Ltd. ................................ Transportation 1,041,000 833,788
*Osprey Maritime Ltd., conv., pfd. .................. Transportation 179,280 81,902
Overseas Union Enterprise Ltd. ...................... Leisure & Tourism 607,000 1,454,927
Prima Ltd. .......................................... Food & Household Products 100,000 183,922
Republic Hotels & Resorts Ltd. ...................... Leisure & Tourism 659,000 340,154
Robinson & Co. Ltd. ................................. Merchandising 61,200 217,858
*SBS Bus Service Ltd., fgn. ......................... Transportation 207,600 75,133
Sembawang Corp. Ltd. ................................ Multi-Industry 2,898,000 6,189,736
Singapore Petroleum Company, fgn. ................... Chemicals 49,000 32,124
TIBS Holdings Ltd. .................................. Transportation 156,000 84,687
Times Publishing Ltd. ............................... Broadcasting & Publishing 116,000 201,649
United Industrial Corp. ............................. Real Estate 817,000 319,917
United Industrial Corporation Ltd., fgn. ............ Real Estate 11,169,000 4,373,503
United Overseas Land Ltd. ........................... Real Estate 2,053,000 1,729,611
Van Der Horst Ltd. .................................. Machinery & Engineering 824,000 315,325
WBL Corp. Ltd. ...................................... Multi-Industry 581,000 537,740
--------------
58,051,112
--------------
SLOVAK REPUBLIC 0.4%
Nafta Gbely AS....................................... Utilities Electrical & Gas 99,331 3,515,625
Slovakofarma AS...................................... Health & Personal Care 348 48,380
Slovnaft AS.......................................... Chemicals 106,971 2,859,056
Vychodoslovenske Zeleziarne AS....................... Metals & Mining 69,977 1,373,159
--------------
7,796,220
--------------
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
SOUTH AFRICA 3.5%
Aeci Ltd. ........................................... Chemicals 304,000 $ 949,512
Alpha Ltd. .......................................... Building Materials & Components 96,000 1,065,242
Anglo American Industrial Corp. Ltd. ................ Multi-Industry 413,707 10,031,321
Anglovaal Industried Ltd. ........................... Multi-Industry 1,463,370 2,706,325
Bonnita Holdings Ltd. ............................... Food & Household Products 197,000 50,601
BTR Dunlop Ltd. ..................................... Industrial Components 1,573,400 484,969
CG Smith Ltd. ....................................... Multi-Industry 803,000 3,300,113
Del Monte Royal Foods Ltd. .......................... Food & Household Products 4,463,450 2,934,972
Edgars Stores Ltd. .................................. Textiles & Apparel 313,924 5,354,093
Engen Ltd. .......................................... Energy Sources 2,035,541 10,352,335
First National Bank Holdings Ltd. ................... Banking 126,400 1,123,354
Foodcorp Ltd. ....................................... Food & Household Products 46,783 240,332
Kersaf Investments Ltd. ............................. Leisure & Tourism 384,800 2,016,316
Malbak Ltd. ......................................... Multi-Industry 2,156,025 2,104,412
McCarthy Retail Ltd. ................................ Appliances & Household Durables 620,428 1,274,896
McCarthy Retail Ltd., zero, conv., 9/30/03........... Appliances & Household Durables 72,000** 140,553
Palabora Mining Co. Ltd. ............................ Metals & Mining 296,200 3,037,264
Polifin Ltd. ........................................ Chemicals 67,900 97,668
*Rainbow Chicken Ltd. ............................... Food & Household Products 344,716 14,875
Rembrandt Group Ltd. ................................ Multi-Industry 14,770 107,744
Reunert Ltd. ........................................ Electrical & Electronics 2,763,800 4,486,596
Sappi Ltd. .......................................... Forest Products & Paper 795,260 4,003,672
South African Breweries Ltd.......................... Beverages & Tobacco 108,095 2,665,447
South African Iron & Steel Industrial Corp. Ltd. .... Metals & Mining 24,473,452 7,241,708
Sun International (South Africa) Ltd. ............... Leisure & Tourism 4,578,428 1,881,610
Toyota South Africa Limited.......................... Automobiles 73,500 381,357
Voltex Holdings Ltd. ................................ Electrical & Electronics 327,894 168,444
--------------
68,215,731
--------------
SOUTH KOREA 1.2%
Asia Cement Co. Ltd. ................................ Building Materials & Components 91,810 441,446
Boram Bank Co. Ltd. ................................. Banking 712,349 1,735,694
BYC Co. Ltd. ........................................ Textiles & Apparel 7,180 315,581
Central Banking Corp. ............................... Financial Services 213,784 103,424
Cho Hung Bank Co. Ltd. .............................. Banking 300,000 613,274
Cho Hung Bank Co. Ltd., GDR.......................... Banking 240,000 456,000
Cho Hung Bank Co. Ltd., GDR 144A..................... Banking 700,000 1,330,000
Dae Duck Electronics Co. Ltd. ....................... Electrical & Electronics 836 23,502
Daegu Bank Co. Ltd. ................................. Banking 439,542 990,590
Daewoo Electric Components Co. Ltd. ................. Electronic Components & Instruments 290,000 611,652
Daewoo Electronics Co. .............................. Electrical & Electronics 627,000 1,659,053
*Dongbu Steel Co. Ltd., fgn. ........................ Metals & Mining 116,000 325,758
Dongkuk Steel Mill Co. Ltd. ......................... Metals & Mining 136,960 541,780
Hae In Corp. Ltd. ................................... Merchandising 5,500 102,050
Hana Bank............................................ Banking 119,091 662,553
Hana Bank, GDR....................................... Banking 436,838 2,566,423
Hankook Cosmetics Co. Ltd. .......................... Health & Personal Care 14,940 60,157
*Hotel Shilla Co. ................................... Leisure & Tourism 216,490 455,331
*Korea Express Co. Ltd. ............................. Transportation 304,000 1,192,684
Kyong Nam Bank....................................... Banking 365,750 809,009
Kyung Dong Boiler Co. Ltd. .......................... Energy Equipment & Services 27,573 157,874
LG Electronics Inc. ................................. Electrical & Electronics 193,000 1,463,156
LG Industrial Systems Ltd. .......................... Electrical & Electronics 268,000 1,051,445
Moon Bae Steel Co. Ltd. ............................. Metals & Mining 9,000 116,283
Saehan Precision Co. Ltd. ........................... Electrical & Electronics 46,814 365,950
Samsung Display Devices Ltd. ........................ Electrical & Electronics 35,520 667,441
Samsung Electronics Co. Ltd. ........................ Multi-Industry 508 11,524
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
SOUTH KOREA (CONT.)
*Samsung Heavy Industries Co. Ltd. .................. Machinery & Engineering 704,000 $ 1,561,676
*Seah Steel Corp. ................................... Metals & Mining 16,160 75,318
Shin Poong Paper Manufacturing Co. Ltd. ............. Forest Products & Paper 12,760 71,516
Ssangyong Oil Refining Co. Ltd. ..................... Energy Equipment & Services 318,660 1,347,960
Tong Yang Merchant Bank.............................. Financial Services 228,830 452,260
--------------
22,338,364
--------------
SRI LANKA 0.1%
Aitken Spence & Co. Ltd. ............................ Multi-Industry 45,300 102,704
Associated Motorways Ltd. ........................... Automobiles 39,132 25,349
*Ceylon Holiday Resorts Inc. ........................ Leisure & Tourism 108,300 53,054
*Lanka Walltile Ltd. ................................ Building Materials & Components 9,000 2,769
National Develpoment Bank of Sri Lanka............... Banking 280,000 1,041,781
United Motor Lanka Ltd. ............................. Automobiles 74,400 54,219
--------------
1,279,876
--------------
THAILAND 4.6%
Advanced Info Service Ltd., fgn. .................... Telecommunications 617,800 3,036,197
American Standard Sanitaryware Public Co. Ltd.,
fgn................................................ Building Materials & Components 180,200 885,598
Asia Credit Public Co. Ltd. ......................... Financial Services 1,484,000 325,021
Asia Credit Public Co. Ltd., fgn. ................... Financial Services 203,900 44,658
*Asia Fiber Public Co. Ltd., fgn. ................... Textiles & Apparel 450,200 54,832
Ayudhya Insurance Public Co. Ltd., fgn. ............. Insurance 186,800 714,470
Bangkok Bank Public Co. Ltd.......................... Banking 7,902,600 14,521,872
Bangkok Bank Public Co. Ltd., fgn.................... Banking 15,500 39,744
Bangkok Insurance Public Co. Ltd. BKI................ Insurance 85,000 490,385
Bangkok Insurance Public Co. Ltd. BKI, fgn. ......... Insurance 4,900 40,833
Bank of Ayudhya Public Co. Ltd....................... Banking 4,750,000 2,029,915
Bank of Ayudhya Public Co. Ltd., fgn................. Banking 2,148,000 895,000
Banpu Public Co. Ltd................................. Energy Sources 549,200 1,525,556
Charoen Pokphand Feedmill Public Co. Ltd............. Food & Household Products 2,429,400 2,958,885
Chareon Pokphand Feedmill Public Co. Ltd., fgn. ..... Food & Household Products 459,500 1,138,932
Dusit Thani Public Company Ltd....................... Leisure & Tourism 136,000 103,162
First Bangkok City Bank Public Co. Ltd............... Banking 105,370 21,389
First Bangkok City Bank Public Co. Ltd., fgn......... Banking 5,302,900 1,065,112
*First Bangkok City Bank Public Co. Ltd., Share
Entitlement........................................ Banking 5,440,130 1,104,300
Hana Microelectronics Co. Ltd. ...................... Electrical & Electronics 229,569 463,553
Hana Microelectronics Co. Ltd., fgn. ................ Electrical & Electronics 786,662 1,802,767
*Hana Microelectronics Co. Ltd., SEC................. Electrical & Electronics 229,569 463,553
Hua Thai Manufacturing Public Co. Ltd. .............. Textiles & Apparel 125,100 104,250
Industrial Finance Corp. of Thailand................. Banking 3,684,220 511,697
Industrial Finance Corp. of Thailand, fgn. .......... Banking 3,310,580 523,468
Italian-Thai Development Public Co. Ltd. ............ Construction & Housing 602,000 176,870
Italian-Thai Development Public Co. Ltd., fgn. ...... Construction & Housing 64,500 20,673
Jasmine International Public Co. Ltd................. Telecommunications 521,000 102,419
Jasmine International Public Co. Ltd., fgn........... Telecommunications 4,140,000 884,615
*Karat Sanitaryware Public Co. Ltd., fgn. ........... Building Materials & Components 234,750 50,160
Kian Gwan (Thailand) Public Co. Ltd., fgn. .......... Real Estate 104,000 123,333
Land and House Public Co. Ltd. ...................... Multi-Industry 1,856,200 356,962
Land and House Public Co. Ltd., fgn. ................ Multi-Industry 1,851,982 379,894
*Land and House Public Co. Ltd., Share Entitlement
Certificate........................................ Multi-Industry 728,800 142,116
National Petrochemical Public Company Ltd., fgn. .... Chemicals 343,200 187,000
Phatra Thanakit Public Co. Ltd....................... Multi-Industry 5,065,313 2,435,247
Phatra Thanakit Public Co. Ltd., fgn................. Multi-Industry 1,865,100 1,066,056
Regional Container Lines Public Co. Ltd. ............ Transportation 124,800 101,333
Regional Container Lines Public Co. Ltd., fgn. ...... Transportation 471,100 382,517
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
THAILAND (CONT.)
*Royal Ceramic Industry Public Co. Ltd., fgn. ....... Building Materials & Components 167,400 $ 5,365
Saha Pathanapibul Public Co. Ltd., fgn............... Food & Household Products 593,100 570,288
Saha Union Public Co. Ltd............................ Multi-Industry 4,694,600 2,783,657
Saha Union Public Co. Ltd., fgn...................... Multi-Industry 1,074,300 740,303
Sanyo Universal Electric Public Co Ltd., fgn......... Appliances & Household Durables 521,537 114,226
Sanyo Universal Electric Public Co. Ltd. ............ Appliances & Household Durables 54,363 11,906
Serm Suk Public Co. Ltd. ............................ Food & Household Products 361,500 2,008,333
Serm Suk Public Co. Ltd., fgn. ...................... Food & Household Products 4,300 30,321
Siam Cement Public Co. Ltd........................... Building Materials & Components 638,200 3,272,821
Siam Cement Public Co. Ltd., fgn..................... Building Materials & Components 357,000 2,898,718
Siam City Bank Public Co. Ltd., fgn. ................ Banking 9,825,300 682,313
Siam Commercial Bank................................. Banking 1,052,354 1,099,710
Siam Commercial Bank Ltd., fgn. ..................... Banking 4,812,832 5,656,106
Siam Commercial Bank Ltd., loc....................... Banking 4,680 4,800
*Siam Makro Public Company Ltd., fgn. ............... Merchandising 1,635,000 2,008,814
*Sino-Thai Engineering & Construction Public Co. .... Construction & Housing 10,100 1,295
*Sino-Thai Engineering & Construction Public Co.,
fgn. .............................................. Construction & Housing 894,800 114,718
Thai Airways International Public Co. Ltd., fgn. .... Transportation 1,747,400 1,997,562
Thai Asahi Glass Public Co. Ltd. .................... Building Materials & Components 94,910 21,801
Thai Asahi Glass Public Co. Ltd., fgn. .............. Building Materials & Components 32,000 7,350
*Thai Engine Manufacturing Public Company Ltd. ...... Machinery & Engineering 405,000 692,308
Thai Farmers Bank Public Co. Ltd..................... Banking 11,533,600 14,786,667
Thai Farmers Bank Public Co. Ltd., fgn............... Banking 36,600 68,429
Thai Investments and Securities Ltd. ................ Financial Services 1,457,200 467,051
Thai Military Bank Ltd., fgn. ....................... Banking 11,631,700 2,485,406
Thai Petrochemical Industry Public Co. Ltd., fgn. ... Chemicals 5,459,960 536,663
Thai Plastic and Chemical Co. Ltd., fgn. ............ Chemicals 2,200 4,266
Thai Rayon Public Co. Ltd. .......................... Textiles & Apparel 33,546 45,158
Thai Rayon Public Co. Ltd., fgn. .................... Textiles & Apparel 38,214 51,442
*Thai Telephone & Telecommunication Public Co.
Ltd.,fgn........................................... Telecommunications 2,021,400 172,769
Thai Wacoal Public Co. Ltd., fgn. ................... Textiles & Apparel 236,550 454,904
Thai Wah Public Co. Ltd., fgn........................ Multi-Industry 8,450 587
Tipco Asphalt Public Co. Ltd......................... Building Materials & Components 877,200 693,513
Tipco Asphalt Public Co. Ltd., fgn................... Building Materials & Components 557,000 452,265
Total Access Communication Public Co. Ltd. .......... Telecommunications 1,007,800 342,652
United Communications Industry Public Co. Ltd.,
fgn................................................ Multi-Industry 2,514,400 1,047,667
United Communications Industry Public Co. Ltd.,
loc................................................ Multi-Industry 586,200 237,987
United Motor Works (Siam) Public Co. Ltd. ........... Machinery & Engineering 2,100 1,043
--------------
87,845,528
--------------
TURKEY 5.6%
Akbank............................................... Banking 312,457,245 27,514,329
Alarko Sanayii ve Ticaret SA......................... Appliances & Household Durables 2,839,999 270,639
*Anadolu Anonim Turk Sigorta Sirketi, br............. Insurance 5,559,000 177,030
*Anadolu Anonim Turk Sigorta Sirketi, new............ Insurance 5,504,000 175,278
Arcelik AS........................................... Appliances & Household Durables 65,291,427 6,143,222
Beko Elektronik AS................................... Appliances & Household Durables 37,355,489 2,298,106
Borusan AS........................................... Industrial Components 4,777,000 223,580
Cimentas Izmir Cimento Fabrikasi Turk AS............. Building Materials & Components 12,530,450 1,375,478
Cimsa Cimento Sanayi ve Ticaret AS................... Building Materials & Components 23,805,000 1,292,189
Erciyas Biracilik.................................... Food & Household Products 32,527,000 4,551,426
Eregli Demir ve Celik Fabrikalari AS................. Metals & Mining 56,398,000 8,708,014
Finansbank........................................... Banking 113,027,481 2,154,203
Izocam Ticaret ve Sanayii AS, br..................... Building Materials & Components 12,102,388 420,445
Kartonsan............................................ Forest Products & Paper 20,318,250 1,249,977
</TABLE>

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)

<TABLE>
<CAPTION>
SHARES/
INDUSTRY PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM SECURITIES (CONT.)
TURKEY (CONT.)
Koc Holding AS....................................... Multi-Industry 31,613,591 $ 7,398,114
Marshall Boya ve Vernik Sanayii AS................... Industrial Components 7,031,568 983,911
*Netas Northern Electric Telekomunic Asyon AS........ Electrical & Electronics 2,480,000 897,467
Petkim Petrokimya Holding AS......................... Chemicals 3,063,000 1,662,666
*Sabanci Holdings AS................................. Multi-Industry 101,670,000 6,254,729
*Sabanci Holdings AS, ADR............................ Multi-Industry 915,500 13,961,375
Sasa Suni Ve Sentetik Elyaf Sanayi AS................ Chemicals 5,600,000 303,981
Tat Konserve Sanayii AS.............................. Food & Household Products 16,780,827 793,496
Tekstil Bankasi AS, br. ............................. Banking 2,539,341 41,046
Tofas Turk Otomobil Fabrikasi AS..................... Automobiles 79,982,125 4,534,572
Turk Demir Dokum, br. ............................... Appliances & Household Durables 19,371,323 1,074,886
Turkiye Garanti Bankasi AS........................... Banking 262,478,345 12,981,438
Vakif Finansal Kiralama AS........................... Financial Services 28,421,824 363,415
--------------
107,805,012
--------------
VENEZUELA 1.1%
*Ceramica Carabobo CA, A............................. Building Materials & Components 334,200 251,826
Ceramica Carabobo CA, A, ADR......................... Building Materials & Components 287,149 216,372
*Ceramica Carabobo CA, B............................. Building Materials & Components 1,130,264 896,501
Corporacion Industrial Carabobo Saca SIC, B.......... Building Materials & Components 8,779,431 400,410
Electricidad de Caracas SAICA SACA................... Utilities Electrical & Gas 9,858,476 11,827,044
*Industrias Ventane IVE.............................. Utilities Electrical & Gas 1,120,000 127,147
*International Briquettes Holdings................... Metals & Mining 39 580
*Manufacturera de Aparatos Domesticos SA............. Appliances & Household Durables 180,613 143,258
Mavesa SA, ADR....................................... Food & Household Products 592,812 3,779,177
Siderurgica Venezolana Sivensa Saica Svs., ADR, A.... Metals & Mining 202,630 847,807
Siderurgica Venezolana Sivensa Saica Svs., ADR, B.... Metals & Mining 6,211 28,943
Siderurgica Venezolana Sivensa Saica Svs., ADR, B,
new, 144A.......................................... Metals & Mining 11,966 55,761
Venezolana de Cementos-Vencemos, #1.................. Building Materials & Components 1,089,634 1,760,959
Venezolana de Cementos-Vencemos, #2.................. Building Materials & Components 845,996 1,355,472
--------------
21,691,257
--------------
ZIMBABWE
Delta Corp........................................... Multi-Industry 600 404
Meikles Africa Ltd. ................................. Multi-Industry 115,000 103,500
TA Holdings.......................................... Multi-Industry 25,000 3,100
Zimbabwe Sun Ltd..................................... Multi-Industry 2,685,627 419,855
--------------
526,859
--------------
TOTAL LONG TERM SECURITIES (COST
$1,920,797,659).............................. 1,654,015,987
--------------
SHORT TERM INVESTMENTS (COST $252,884,041) 13.1%
U.S. Treasury Bills, 4.86% to 5.39%
with maturities to 4/30/98......................... 254,585,000 252,974,588
--------------
TOTAL INVESTMENTS (COST $2,173,681,700)99.1%... 1,906,990,575
OTHER ASSETS, LESS LIABILITIES 0.9%........... 16,890,655
--------------
TOTAL NET ASSETS 100.0%....................... $1,923,881,230
==============
</TABLE>

*Non-income producing.
**Securities traded in U.S. dollars.
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in affiliated companies at December
31, 1997, were $7,394,909.
See Notes to Financial Statements.
21

<PAGE>

TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Statements

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997

<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost
$2,173,681,700).............................................. $1,906,990,575
Cash.......................................................... 1,868,230
Receivables:
Investment securities sold................................... 13,400,121
Capital shares sold.......................................... 5,703,719
Dividends and interest....................................... 3,759,158
Organization costs............................................ 5,550
--------------
Total assets.............................................. 1,931,727,353
--------------
Liabilities:
Payables:
Investment securities purchased.............................. 515,846
Capital shares redeemed...................................... 627,007
To affiliates................................................ 2,118,310
Distributions to shareholders................................. 237,162
Other liabilities............................................. 4,347,798
--------------
Total liabilities......................................... 7,846,123
--------------
Net assets, at value........................................... $1,923,881,230
==============
Net assets consist of:
Undistributed net investment income........................... $ 1,568,894
Net unrealized depreciation................................... (267,356,010)
Accumulated net realized loss................................. (47,878,968)
Capital shares................................................ 2,237,547,314
--------------
Net assets, at value........................................... $1,923,881,230
==============
Net asset value per share ($1,923,881,230 divided by 185,527,984
shares outstanding).......................................... $10.37
=====
</TABLE>

See Notes to Financial Statements.
22

<PAGE>

TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Statements (continued)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $3,182,400)
Dividends.................................................. $50,908,822
Interest................................................... 10,650,963
-----------
Total investment income................................ $ 61,559,785
Expenses:
Management fees (Note 3)................................... 25,766,850
Administrative fees (Note 3)............................... 1,751,904
Transfer agent fees (Note 3)............................... 8,100
Custodian fees............................................. 4,210,895
Reports to shareholders.................................... 5,400
Registration and filing fees............................... 234,078
Professional fees (Note 3)................................. 99,140
Directors' fees and expenses............................... 59,500
Amortization of organization costs......................... 1,424
Other...................................................... 203,732
-----------
Total expenses......................................... 32,341,023
--------------
Net investment income.................................. 29,218,762
--------------
Realized and unrealized gain (loss):
Net realized gain from:
Investments............................................... 30,585,561
Foreign currency transactions............................. 739,667
-----------
Net realized gain...................................... 31,325,228
Net unrealized depreciation on investments............. (373,187,334)
--------------
Net realized and unrealized loss............................ (341,862,106)
--------------
Net decrease in net assets resulting from operations........ $ (312,643,344)
==============
</TABLE>

See Notes to Financial Statements.
23

<PAGE>

TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 29,218,762 $ 19,617,150
Net realized gain from investments and foreign currency
transactions............................................ 31,325,228 19,339,283
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies...................................... (373,187,334) 154,324,968
--------------------------------
Net increase (decrease) in net assets resulting from
operations............................................. (312,643,344) 193,281,401
Distributions to shareholders from:
Net investment income...................................... (29,706,898) (18,840,261)
Net realized gains......................................... (80,352,717) (18,732,279)
Capital share transactions (Note 2)......................... 781,047,570 611,312,694
--------------------------------
Net increase in net assets.............................. 358,344,611 767,021,555
Net assets:
Beginning of year.......................................... 1,565,536,619 798,515,064
--------------------------------
End of year................................................ $1,923,881,230 $1,565,536,619
================================
Undistributed net investment income included in net assets:
End of year................................................ $ 1,568,894 $ 865,476
================================
</TABLE>

See Notes to Financial Statements.
24

<PAGE>

TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Emerging Markets Series (the Fund) is a separate, diversified series of
Templeton Institutional Funds, Inc. (the Company), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks to achieve long-term capital growth by investing in securities of issuers
of countries having emerging markets. The following summarizes the Fund's
significant accounting policies.

a. SECURITY VALUATION:

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.

b. FOREIGN CURRENCY TRANSLATION:

Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.

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.

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, 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 currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.

The Brazilian government has exercised and may continue to exercise substantial
influence over the exchange of Brazilian currency. Under current Brazilian law,
whenever there occurs a serious imbalance of Brazil's balance of payments or
serious reasons to foresee the imminence of such an imbalance, Brazil's National
Monetary Council may, for a limited period, impose restrictions on foreign
capital remittances abroad. Exchange control regulations may restrict
repatriation of investment income, capital, or the proceeds of securities sales
by foreign investors. The Fund has investments in Brazilian companies with a
value of approximately $212 million as of December 31, 1997.

c. INCOME TAXES:

No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

d. 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.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.

Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e. ORGANIZATION COSTS:

Organization costs are amortized on a straight line basis over five years.

f. 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.

2. CAPITAL STOCK

At December 31, 1997, there were 700 million shares authorized ($0.01 par
value), of which 225 million have been classified as Fund shares. Transactions
in the Fund's shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................. 74,259,980 $1,000,379,973 53,130,712 $630,783,063
Shares issued on reinvestment of distributions.............. 10,166,940 103,837,009 2,750,716 33,001,287
Shares redeemed............................................. (24,610,709) (323,169,412) (4,431,413) (52,471,656)
-----------------------------------------------------------------
Net increase................................................ 59,816,211 $ 781,047,570 51,450,015 $611,312,694
=================================================================
</TABLE>

3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Certain officers of the Company are also officers or directors of Templeton
Asset Management Ltd. (TAML), Franklin Templeton Services, Inc. (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors), and Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent, respectively.

The Fund pays an investment management fee to TAML of 1.25% per year of the
average daily net assets of the Fund. The Fund pays its allocated share of an
administrative fee to FT Services based on the Company's aggregate average daily
net assets as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>

TAML and FT Services have agreed in advance to limit total expenses of the Fund
to an annual rate of 1.60% of average net assets through May 1, 1998. For the
year ended December 31, 1997, no reimbursement was necessary under the
agreement.

Included in professional fees are legal fees of $21,172 that were paid to a law
firm in which a partner is an officer of the Fund.

<PAGE>
TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
Notes to Financial Statements (continued)

4. INCOME TAXES

At December 31, 1997, the net unrealized depreciation based on the cost of
investments for income tax purposes of $2,220,954,728 was as follows:

<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 359,108,215
Unrealized depreciation..................................... (673,072,368)
--------------
Net unrealized depreciation................................. $ (313,964,153)
==============
</TABLE>

Net investment income and net realized capital losses differ for financial
statement and tax purposes primarily due to differing treatments of passive
foreign investment companies and wash sales.

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended December 31, 1997, aggregated $1,001,987,982 and $448,539,080
respectively.

<PAGE>

TEMPLETON INSTITUTIONAL FUNDS, INC.
EMERGING MARKETS SERIES
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton Institutional Funds, Inc. - Emerging Markets Series

We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Emerging Markets Series of Templeton
Institutional Funds, Inc. as of December 31, 1997, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
the four years in the period then ended and the period May 3, 1993 (commencement
of operations) to December 31, 1993. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Emerging Markets Series of Templeton Institutional Funds, Inc. as of December
31, 1997, the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles.

/s/ McGladrey & Pullen, LLP

New York, New York
January 30, 1998

<PAGE>
This report must be preceded or accompanied by the current prospectus of the
Templeton Institutional Funds, Inc., which contains more complete information
including risk factors, charges, and expenses.

Investors should be aware that the value of investments made for the Fund may
go up as well as down and that the Investment Manager may make errors in
selecting the securities for the Fund's portfolio. Investing in developing
markets involves special considerations, which may include risks related to
market and currency volatility, adverse social and political developments, and
the relatively small size and lesser liquidity of these markets. These special
considerations are discussed in the Fund's prospectus. The Fund is designed for
the aggressive portion of a well-diversified portfolio. The Fund and Fund
investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept the risk of such losses should not
invest in shares of the Fund.

Principal Underwriter:
FRANKLIN TEMPLETON
DISTRIBUTORS, INC.
700 Central Avenue
St. Petersburg, Florida 33701-3628

Institutional Services: 1-800-321-8563
Fund Information: 1-800-362-6243

ZT456 A 12/97

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<PAGE>