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Top 10 Countries Based on Equity Investments as of 8/31/11

% of Total

Net Assets

China

20.6%

Brazil

17.2%

Thailand

10.0%

India

9.9%

Indonesia

8.5%

Russia

7.1%

Hong Kong

5.9%

South Korea

5.8%

Turkey

5.8%

Mexico

2.0%

Annual Report

domestic product ratios and larger foreign reserves than many developed countries. In this environment, the MSCI Emerging Markets Index, which measures stock market performance in global emerging markets, returned +9.40% in U.S. dollar terms for the 12 months ended August 31, 2011, partly due to stronger local currencies.1

On a regional basis, Eastern Europe was the best performing region in the reporting period, as bargain hunters searched for undervalued stocks trading at attractive valuations due to widespread panic selling rather than a deterioration of fundamentals. Resource-rich countries such as Russia and South Africa also outperformed due to higher commodity prices. Turkey, however, lagged its peers because of growth concerns and a weak lira. Higher commodity prices and stronger local currencies supported equity prices in Latin America. In Asia, with the exception of China and India, which suffered from inflationary concerns, key regional markets recorded double-digit returns in U.S. dollar terms.

Investment Strategy

Our investment strategy employs a fundamental, value-oriented, long-term approach. We focus on the market price of a company’s securities relative to our evaluation of the company’s long-term earnings, asset value and cash flow potential. As we look for investments, we focus on specific companies and undertake in-depth research to construct an action list from which we make our buy decisions. Before we make a purchase, we look at the company’s potential for earnings and growth over a five-year horizon. During our analysis, we also consider the company’s position in its sector, the economic framework and political environment.

Performance Overview

Templeton Emerging Markets Fund delivered cumulative total returns of +10.17% based on market price and +12.56% based on net asset value for the 12 months under review.

Manager’s Discussion

During the 12-month reporting period, top contributors to the Fund’s absolute performance included Brilliance China Automotive Holdings, a major Chinese

1. Source: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index and an index is not representative of the Fund’s portfolio.

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