templeton russia and east european fund annual reportstrong economic data from emerging market...

Templeton Russia and East European Fund, Inc.

MARCH 31, 2011

ANNUAL REPORT

I NTERNAT IONAL

MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS

Not part of the annual report

Franklin Templeton InvestmentsGain From Our Perspective®

Franklin Templeton’s distinct multi-manager structure combines thespecialized expertise of three world-class investment management groups—Franklin, Templeton and Mutual Series.

Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success.

Franklin. Founded in 1947, Franklin is a recognized leader in fixed income investingand also brings expertise in growth- and value-style U.S. equity investing.

Templeton. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry’s oldest global fund. Today, withoffices in over 25 countries, Templeton offers investors a truly global perspective.

Mutual Series. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities.

Because our management groups work independently and adhere to differentinvestment approaches, Franklin, Templeton and Mutual Series funds typicallyhave distinct portfolios. That’s why our funds can be used to build trulydiversified allocation plans covering every major asset class.

At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable,accurate and personal service that has helped us become one of the most trustednames in financial services.

TRUE DIVERSIFICATION

RELIABILITY YOU CAN TRUST

SPECIALIZED EXPERTISE

Annual Report | 1

ContentsAnnual Report

Templeton Russia andEast European Fund, Inc. . . . . 1

Performance Summary . . . . . . 5

Important Notice toShareholders . . . . . . . . . . . . . . 6

Financial Highlights andStatement of Investments . . . 7

Financial Statements . . . . . . . 10

Notes to FinancialStatements . . . . . . . . . . . . . . . 13

Report of IndependentRegistered PublicAccounting Firm . . . . . . . . . . . 21

Tax Designation . . . . . . . . . . . 22

Annual Meeting ofShareholders . . . . . . . . . . . . . . 23

Dividend Reinvestment andCash Purchase Plan . . . . . . . . 24

Board Members andOfficers . . . . . . . . . . . . . . . . . 27

Shareholder Information . . . . . 32

Dear Shareholder:

We are pleased to bring you Templeton Russia and East European Fund’sannual report for the fiscal year ended March 31, 2011.

Economic and Market Overview

The Russian economy grew 4.0% in 2010, reversing a decline of 7.8% in2009, as the government’s stimulus measures, coupled with higher oil pricesand lower interest rates, supported the domestic economy.1 After reducing thekey benchmark interest rate 50 basis points (0.50%) to a record-low 7.75% inthe beginning of the reporting period, the central bank unexpectedly raised itsbenchmark interest rate for the first time in more than two years in the firstquarter of 2011. Inflationary concerns and the possibility of greater capitalinflows resulting from higher oil prices led the bank to adopt these tighteningmeasures. The central bank increased the benchmark refinancing rate to 8.0%and raised the reserve requirements for liabilities. Russia’s federal budgetdeficit narrowed to about 4% of gross domestic product in 2010, from 5.9%in 2009, largely due to higher oil prices, the country’s economic recovery andcontrolled expenditures.2

1. Source: Federal Service of State Statistics, Russia.

2. Source: PRIME-TASS News Agency, “Russia’s Putin Calls for Implementing Tough Budget Policy,” 3/10/11; “KudrinSees Russia’s Budget Deficit at 4.1%-4.2% of GDP in 2010,” 12/29/11.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’sStatement of Investments (SOI). The SOI begins on page 8.

Annual Report

Templeton Russia and East European Fund, Inc.Your Fund’s Goal and Main Investments: Templeton Russia and East European Fund seeks long-term capital

appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in investments that are tied

economically to Russia or East European countries.

Markets started the reporting period on a positive note but quickly movedlower. Greece’s financial woes and worries that other countries in theEuropean Union (EU) may have similar problems triggered a sell-off in May.Strong economic data from emerging market economies and better-than-expected corporate results, however, led investors to adopt a more positive view.Higher commodity prices and emerging market currencies further supportedequity prices. This uptrend continued until November 2010 when concerns ofa wider debt crisis in the eurozone resurfaced after Ireland became the secondEU country to accept emergency financial aid. Expectations grew that Portugaland Spain could also require financial support, leading investors to adopt amore cautious view.

The correction in equity prices was, however, short-lived as investors focused onthe long-term opportunities and prospects of the wider emerging market assetclass. While unrest in the Middle East and North Africa in 2011 disrupted theuptrend in equity prices in many markets globally, financial markets in EasternEurope were little affected by the turmoil. The Morgan Stanley CapitalInternational Emerging Markets Eastern European Index, which tracks EasternEuropean stock performance, returned +25.31% for the 12-month period.3

Eastern European markets generated the best performance by emerging marketregion in the reporting period, as bargain hunters searched for undervaluedstocks trading at attractive valuations. Russia was the best performing marketin the region as higher commodity prices benefited the resource-rich country.

Investment Strategy

Our investment strategy employs a company-specific, value-oriented, long-term approach. We focus on the market price of a company’s securitiesrelative to our evaluation of the company’s long-term earnings, asset valueand cash flow potential. As we look for investments, we consider specificcompanies in the context of their sector and country. We perform in-depthresearch to construct an Action List from which we construct the portfolio.Our emphasis is on value and not attempting to match or beat an index.During our analysis, we also consider a company’s position in its sector, theeconomic framework and political environment.

2 | Annual Report

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

Portfolio BreakdownBased on Total Net Assets as of 3/31/11

Wireless Telecommunication Services

Chemicals

IT Services

Electric Utilities

Food Products

Metals & Mining

Commercial Banks

Pharmaceuticals

Oil, Gas & Consumable Fuels

Road & Rail

Independent Power Producers & Energy Traders

Energy Equipment & Services

Media

Beverages

Short-Term Investments & Other Net Assets

20.7%

0.4%

16.3%

1.0%

1.4%

1.7%

3.7%

3.9%

5.2%

5.3%

6.6%

7.7%

8.3%

8.5%

9.3%

Annual Report | 3

Performance Overview

Templeton Russia and East European Fund posted cumulative total returnsof +17.76% based on market price and +18.54% based on net asset valuefor the 12 months ended March 31, 2011. In line with our long-term invest-ment strategy, we are pleased with our long-term results. For the 10-yearperiod ended March 31, 2011, the Fund delivered cumulative total returnsof +917.20% in market price terms and +831.71% in net asset value terms.You can find more of the Fund’s performance data in the PerformanceSummary on page 5.

Manager’s Discussion

During the 12-month reporting period, most of the Fund’s key contributorsto absolute performance were based in Russia and included steel producerSeverstal; one of the country’s largest rail transportation companies, GlobaltransInvestment; and major bank Sberbank (Savings Bank of Russia). Severstal was abeneficiary of high commodity prices due to its fully integrated business modeland its own iron ore and coking coal deposits. Russia’s economic recoverysupported Globaltrans, as transportation volumes returned to pre-crisis levels.Sberbank also benefited from the country’s strong economic recovery and risingconsumer confidence.

Major detractors from Fund performance included Russian telecommunica-tions operators VimpelCom, VolgaTelecom and Sibirtelecom. VimpelCom’sperformance was hurt by the announcement of its acquisition of WindTelecom from Egyptian billionaire Naguib Sawiris in mid-2010. The dealwas approved in March 2011, and the company traded at a significantdiscount to its global and emerging market peers. The Fund reduced itsexposure to VimpelCom during the reporting period. In addition we soldour positions in VolgaTelecom and Sibirtelecom as they reached their targetprices and valuations became expensive, in our view.

The Fund added three new companies to the portfolio. These included Russiancompanies KTK, the country’s largest thermal coal producer, and OGK-5(Fifth Power Generation), a thermal wholesale power generating company.We initiated exposure to Egypt with our investment in Orascom Telecom, thelargest mobile telephone operator in the Middle East and North Africa.The company was trading at distressed valuations after unrest in Egypt inJanuary 2011, although an insignificant part of its assets is located in theregion. Orascom Telecom will soon become part of Russia’s mobile operatorVimpelCom, after VimpelCom completes its acquisition of Wind Telecom.Additionally, we increased our investment in the Fund’s existing holdings inUkrainian agricultural companies MHP and Agroton Public. We also addedto our position in Russian broadcasting company CTC Media.

Top 10 Equity Holdings3/31/11

Company % of TotalSector/Industry, Country Net Assets

Severstal (Cherepovets Mk Severstal) 12.0%Metals & Mining, Russia

Sberbank RF 9.3%Commercial Banks, Russia

Mechel OAO 8.4%Metals & Mining, Russia

Globaltrans Investment PLC, GDR, Reg S 6.6%Road & Rail, Russia

CTC Media Inc. 5.3%Media, U.S.

Synergy Co. 5.2%Beverages, Russia

MHP SA, GDR & 144A 5.1%Food Products, Ukraine

Veropharm 5.1%Pharmaceuticals, Russia

Agroton Public Ltd. 3.3%Food Products, Ukraine

Gazprom 3.2%Oil, Gas & Consumable Fuels, Russia

4 | Annual Report

Conversely, we sold selective stocks as they reached sale price targets and weinvested in more attractively valued stocks in our investment universe. TheFund sold Ukrainian producer and marketer of edible oil Kernel Holding,Russian power generation company RusHydro and Russian nickel producerYuzhuralnickel (South-Ural Nickel Factory). We also reduced the Fund’sholdings in major Russian mobile services provider Mobile TeleSystemsbecause of what we viewed as limited growth potential resulting fromRussian mobile telephone market saturation.

Thank you for your continued participation in Templeton Russia and EastEuropean Fund. We look forward to serving your future investment needs.

Sincerely,

Mark MobiusExecutive ChairmanTempleton Emerging Markets Group

The foregoing information reflects our analysis, opinions and portfolio holdings as of March 31, 2011, the end ofthe reporting period. The way we implement our main investment strategies and the resulting portfolio holdingsmay change depending on factors such as market and economic conditions. These opinions may not be reliedupon as investment advice or an offer for a particular security. The information is not a complete analysis ofevery aspect of any market, country, industry, security or the Fund. Statements of fact are from sources consid-ered reliable, but the investment manager makes no representation or warranty as to their completeness oraccuracy. Although historical performance is no guarantee of future results, these insights may help you under-stand our investment management philosophy.

Annual Report | 5

Performance Summary as of 3/31/11

Price Information

Symbol: TRF Change 3/31/11 3/31/10

Net Asset Value (NAV) +$3.63 $24.38 $20.75

Market Price (NYSE) +$3.52 $23.96 $20.44

Performance

1-Year 5-Year 10-Year

Cumulative Total Return1

Based on change in NAV2 +18.54% +32.81% +831.71%

Based on change in market price3 +17.76% -1.63% +917.20%

Average Annual Total Return1

Based on change in NAV2 +18.54% +5.84% +25.01%

Based on change in market price3 +17.76% -0.33% +26.11%

Performance data represent past performance, which does not guarantee future results. Investment return and principalvalue will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ fromfigures shown.

Endnotes

Special risks are associated with foreign investing including currency volatility, economic instability, and social and political developments ofcountries where the Fund invests. Emerging markets involve heightened risks related to the same factors, in addition to those associated withtheir relatively small size and lesser liquidity. Investments in Russian and East European securities involve significant additional risks, includingpolitical and social uncertainty (for example, regional conflicts and risk of war), currency exchange rate volatility, pervasiveness of corruptionand crime in the Russian and East European economic systems, delays in settling portfolio transactions, and risk of loss arising out of thesystem of share registration and custody used in Russia and East European countries. Also, as a nondiversified investment company investingin Russia and East European countries, the Fund may invest in a relatively small number of issuers and, as a result, be subject to greater riskof loss with respect to its portfolio securities. The manager applies various techniques and analyses in making investment decisions for theFund, but there can be no guarantee that these decisions will produce the desired results.

1. Total return calculations represent the cumulative and average annual changes in value of an investment over the periods indicated.

2. Assumes reinvestment of distributions based on net asset value.

3. Assumes reinvestment of distributions based on the dividend reinvestment and cash purchase plan.

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’sportfolio, adjusted for operating expenses. Capital gain distributions are net profits realized fromthe sale of portfolio securities. Total return reflects reinvestment of the Fund’s dividends and capi-tal gain distributions, if any, and any unrealized gains or losses. Total returns do not reflect anysales charges paid at inception or brokerage commissions paid on secondary market purchases.The performance table does not reflect any taxes that a shareholder would pay on Fund dividends,capital gain distributions, if any, or any realized gains on the sale of Fund shares.

6 | Annual Report

Share Repurchase Program

The Fund’s Board previously authorized management to implement an open-market share repurchase program pursuant to which the Fund may purchaseFund shares, from time to time, in open-market transactions, at the discretionof management. This authorization remains in effect.

Important Notice to Shareholders

Templeton Russia and East European Fund, Inc.Financial Highlights

Year Ended March 31,2011 2010 2009 2008 2007

Year Ended March 31,Per share operating performance(for a share outstanding throughout the year)

Net asset value, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $20.75 $ 7.48 $60.37 $67.48 $60.92

Income from investment operations:

Net investment income (loss)a . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.11) (0.08) 0.23 (0.11) (0.24)

Net realized and unrealized gains (losses) . . . . . . . . . . . . . . . . . . . 3.85 13.35 (43.91) 2.90 20.90

Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . 3.74 13.27 (43.68) 2.79 20.66

Less distributions from:

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (0.24) (0.50) (0.95)

Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.11) — (8.95) (9.40) (13.15)

Tax return of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (0.02) — —

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.11) — (9.21) (9.90) (14.10)

Net asset value, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24.38 $20.75 $ 7.48 $60.37 $67.48

Market value, end of yearb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23.96 $20.44 $ 8.90 $57.15 $70.41

Total return (based on market value per share) . . . . . . . . . . . . . . . . . . 17.76% 129.66% (65.07)% (6.78)% 14.07%

Ratios to average net assets

Expenses before expense reduction . . . . . . . . . . . . . . . . . . . . . . . . 1.79% 1.80% 1.82% 1.73% 1.85%

Expenses net expense reduction . . . . . . . . . . . . . . . . . . . . . . . . . . 1.79%c 1.80% 1.82% 1.73% 1.84%

Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.55)% (0.55)% 0.69% (0.17)% (0.39)%

Supplemental data

Net assets, end of year (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,055 $119,216 $42,953 $331,860 $368,832

Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.81% 19.14% 30.83% 10.26% 8.36%

aBased on average daily shares outstanding.bBased on the last sale on the New York Stock Exchange.cNet of a one-time 0.04% affiliated fee waiver, the ratio of expenses net of expense reduction was 1.75%.

Annual Report | The accompanying notes are an integral part of these financial statements. | 7

Templeton Russia and East European Fund, Inc.Statement of Investments, March 31, 2011

8 | Annual Report

Country Shares Value

Common Stocks 82.0%Beverages 5.2%

aSynergy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 184,334 $ 7,267,556

Chemicals 1.7%bUralkali, GDR, Reg S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 56,600 2,348,051

Commercial Banks 9.3%Sberbank RF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 3,460,833 13,005,810

Electric Utilities 0.4%aFifth Power Generation Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 6,500,001 610,405

Energy Equipment & Services 2.0%a,bIntegra Group Holdings, GDR, Reg S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 182,000 626,990aOAO TMK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 319,195 1,667,093aOAO TMK, GDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 26,161 549,643

2,843,726

Food Products 8.5%aAgroton Public Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ukraine 361,070 4,691,780aMHP SA, GDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ukraine 303,950 5,764,412

a,cMHP SA, GDR, 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ukraine 76,380 1,448,547

11,904,739

Independent Power Producers & Energy Traders 1.4%aOGK-4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 17,330,000 1,688,323aTGC-5 JSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 517,838,822 287,758

1,976,081

IT Services 1.0%aArmada OAO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 89,775 1,341,905

Media 5.3%CTC Media Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 314,279 7,407,556

Metals & Mining 20.7%Cherepovets Mk Severstal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 858,370 16,827,469

a,bKazakhGold Group Ltd., GDR, Reg S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kazakhstan 66,647 161,819Mechel OAO, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 383,105 11,795,803Vsmpo-Avisma Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 1,400 172,271

28,957,362

Oil, Gas & Consumable Fuels 8.3%Gazprom, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 138,600 4,482,324

aKuzbasskaya Toplivnaya Kompaniya OAO . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 125,000 984,771dLUKOIL Holdings, ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 48,350 3,451,707Rosneft Oil Co., GDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 302,950 2,768,963

11,687,765

Templeton Russia and East European Fund, Inc.Statement of Investments, March 31, 2011 (continued)


Country Shares Value

Common Stocks (continued)Pharmaceuticals 7.7%Egis Nyrt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary 34,331 $ 3,649,567

aVeropharm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 159,412 7,135,499

10,785,066

Road & Rail 6.6%bGlobaltrans Investment PLC, GDR, Reg S . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 504,250 9,275,679

Wireless Telecommunication Services 3.9%Mobile TeleSystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 150,600 1,374,378

a,bOrascom Telecom Holding SAE, GDR, Reg S . . . . . . . . . . . . . . . . . . . . . . . . . Egypt 170,000 626,875VimpelCom Ltd., ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia 244,100 3,446,692

5,447,945

Total Common Stocks (Cost $57,322,575) . . . . . . . . . . . . . . . . . . . 114,859,646

Principal Amount*

Convertible Bonds (Cost $2,000,000) 1.7%Energy Equipment & Services 1.7%

bTMK Bonds SA, cvt., senior bond, Reg S, 5.25%, 2/11/15 . . . . . . . . . . . . . . Russia 2,000,000 2,335,000

Total Investments before Short Term Investments(Cost $59,322,575) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,194,646

Shares

Short Term Investments (Cost $22,698,575) 16.2%Money Market Funds 16.2%

a,e Institutional Fiduciary Trust Money Market Portfolio . . . . . . . . . . . . . . . . . . . . United States 22,698,575 22,698,575

Total Investments (Cost $82,021,150) 99.9% . . . . . . . . . . . . . . . . 139,893,221Other Assets, less Liabilities 0.1% . . . . . . . . . . . . . . . . . . . . . . . . . . 161,789

Net Assets 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,055,010

See Abbreviations on page 20.

*The principal amount is stated in U.S. dollars unless otherwise indicated.aNon-income producing.bSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such asecurity cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from regis-tration. These securities have been deemed liquid under guidelines approved by the Fund’s Board of Directors. At March 31, 2011, the aggregate value of these securities was$15,374,414, representing 10.98% of net assets.cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or ina public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Fund’s Board of Directors. At March 31, 2011,the value of this security was $1,448,547, representing 1.03% of net assets.dAt March 31, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading this security for a limited or extendedperiod of time due to ownership limits and/or potential possession of material non-public information.eSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.

10 | The accompanying notes are an integral part of these financial statements. | Annual Report

Templeton Russia and East European Fund, Inc.Financial Statements

Statement of Assets and LiabilitiesMarch 31, 2011

Assets:Investments in securities:Cost - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,322,575Cost - Sweep Money Fund (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,698,575

Total cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,021,150

Value - Unaffiliated issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $117,194,646Value - Sweep Money Fund (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,698,575

Total value of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,893,221Receivables:Investment securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,069Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,839

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,672

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,346,801

Liabilities:Payables:Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,160Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,253Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,877Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,701

Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,800

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,791

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,055,010

Net assets consist of:Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,661,611Distributions in excess of net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (681,304)Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,872,071Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (797,368)

Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,055,010

Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,745,174

Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24.38


Templeton Russia and East European Fund, Inc.Financial Statements (continued)

Statement of Operationsfor the year ended March 31, 2011

Investment income:Dividends (net of foreign taxes of $201,605) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,346,996Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000

Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,451,996

Expenses:Management fees (Note 3a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484,370Administrative fees (Note 3b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241,779Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,704Custodian fees (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,439Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,630Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,640Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,414Directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,827Federal tax (Note 3c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,202

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,169,005Expense reductions (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)Expenses waived/paid by affiliates (Note 3c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,000)

Net expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,118,977

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (666,981)

Realized and unrealized gains (losses):Net realized gain (loss) from:Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,755)Foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,618

Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,863

Net change in unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,076,773

Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,109,636

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,442,655

12 | The accompanying notes are an integral part of these financial statements. | Annual Report

Templeton Russia and East European Fund, Inc.Financial Statements (continued)

Statements of Changes in Net Assets

Year Ended March 31,2011 2010

Increase (decrease) in net assets:Operations:Net investment income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (666,981) $ (466,390)Net realized gain (loss) from investments and foreign currency transactions . . . . . . . . . . . . . . . . 32,863 4,968,759Net change in unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . . . . . . 22,076,773 71,760,466

Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . 21,442,655 76,262,835

Distributions to shareholders from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (603,243) —

Net increase (decrease) in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,839,412 76,262,835Net assets:Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,215,598 42,952,763

End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,055,010 $119,215,598

Distributions in excess of net investment income included in net assets end of year . . . . . . . . . . . . $ (681,304) $ (681,304)

Annual Report | 13

Templeton Russia and East European Fund, Inc.Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Templeton Russia and East European Fund, Inc. (Fund) is registered under the InvestmentCompany Act of 1940, as amended, (1940 Act) as a closed-end investment company.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in securities and other financial instruments are carried at fair valuedaily. Fair value is the price that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants on the measurement date. Under proceduresapproved by the Fund’s Board of Directors, the Fund may utilize independent pricing services,quotations from securities and financial instrument dealers, and other market sources to determinefair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valuedat the last quoted sale price or the official closing price of the day, respectively. Foreign equitysecurities are valued as of the close of trading on the foreign stock exchange on which the securityis primarily traded, or the NYSE, whichever is earlier. The value is then converted into its U.S.dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day thatthe value of the security is determined. Over-the-counter securities are valued within the range ofthe most recent quoted bid and ask prices. Securities that trade in multiple markets or on multipleexchanges are valued according to the broadest and most representative market. Certain equitysecurities are valued based upon fundamental characteristics or relationships to similar securities.Investments in open-end mutual funds are valued at the closing net asset value.

Debt securities generally trade in the over-the-counter market rather than on a securities exchange.The Fund’s pricing services use multiple valuation techniques to determine fair value. In instanceswhere sufficient market activity exists, the pricing services may utilize a market-based approachthrough which quotes from market makers are used to determine fair value. In instances wheresufficient market activity may not exist or is limited, the pricing services also utilize proprietaryvaluation models which may consider market characteristics such as benchmark yield curves,option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timingof principal repayments, underlying collateral, and other unique security features in order toestimate the relevant cash flows, which are then discounted to calculate the fair value.

14 | Annual Report

Templeton Russia and East European Fund, Inc.Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

a. Financial Instrument Valuation (continued)

The Fund has procedures to determine the fair value of securities and other financial instrumentsfor which market prices are not readily available or which may not be reliably priced. Underthese procedures, the Fund primarily employs a market-based approach which may use relatedor comparable assets or liabilities, recent transactions, market multiples, book values, and otherrelevant information for the investment to determine the fair value of the investment. The Fundmay also use an income-based valuation approach in which the anticipated future cash flows ofthe investment are discounted to calculate fair value. Discounts may also be applied due to thenature or duration of any restrictions on the disposition of the investments. Due to the inherentuncertainty of valuations of such investments, the fair values may differ significantly from thevalues that would have been used had an active market existed.

Trading in securities on foreign securities stock exchanges and over-the-counter markets may becompleted before the daily close of business on the NYSE. Occasionally, events occur betweenthe time at which trading in a foreign security is completed and the close of the NYSE that mightcall into question the reliability of the value of a portfolio security held by the Fund. As a result,differences may arise between the value of the Fund’s portfolio securities as determined at theforeign market close and the latest indications of value at the close of the NYSE. In order tominimize the potential for these differences, the investment manager monitors price movementsfollowing the close of trading in foreign stock markets through a series of country specific marketproxies (such as baskets of American Depository Receipts, futures contracts and exchangetraded funds). These price movements are measured against established trigger thresholds foreach specific market proxy to assist in determining if an event has occurred that may call intoquestion the reliability of the values of the foreign securities held by the Fund. If such an eventoccurs, the securities may be valued using fair value procedures, which may include the use ofindependent pricing services.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translatedinto U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the dateof valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactionsdenominated in a foreign currency. Purchases and sales of securities, income and expense itemsdenominated in foreign currencies are translated into U.S. dollars at the exchange rate in effecton the transaction date. Portfolio securities and assets and liabilities denominated in foreigncurrencies contain risks that those currencies will decline in value relative to the U.S. dollar.Occasionally, events may impact the availability or reliability of foreign exchange rates used toconvert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will bevalued at fair value using procedures established and approved by the Fund’s Board of Directors.

Annual Report | 15



b. Foreign Currency Translation (continued)

The Fund does not separately report the effect of changes in foreign exchange rates from changesin market prices on securities held. Such changes are included in net realized and unrealized gainor loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gainsor losses realized between the trade and settlement dates on securities transactions and thedifference between the recorded amounts of dividends, interest, and foreign withholding taxesand the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreignexchange gains and losses arise from changes in foreign exchange rates on foreign denominatedassets and liabilities other than investments in securities held at the end of the reporting period.

c. Income Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal RevenueCode. The Fund intends to distribute to shareholders substantially all of its taxable income andnet realized gains to relieve it from federal income and excise taxes. As a result, no provision forU.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returnsin certain other jurisdictions. The Fund records a provision for taxes in its financial statementsincluding penalties and interest, if any, for a tax position taken on a tax return (or expected tobe taken) when it fails to meet the more likely than not (a greater than 50% probability) thresholdand based on the technical merits, the tax position may not be sustained upon examination bythe tax authorities. As of March 31, 2011, and for all open tax years, the Fund has determinedthat no additional provision for income tax is required in the Fund’s financial statements. Opentax years are those that remain subject to examination and are based on each tax jurisdictionstatute of limitation. The Fund is not aware of any tax position for which it is reasonablypossible that the total amounts of unrecognized tax effects will significantly change in the nexttwelve months.

The Fund may be subject to foreign taxation related to income received, capital gains on thesale of securities and certain foreign currency transactions in the foreign jurisdictions in whichit invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist inthe foreign markets in which the Fund invests. When a capital gain tax is determined to applythe Fund records an estimated deferred tax liability for unrealized gains on these securities inan amount that would be payable if the securities were disposed of on the valuation date.

16 | Annual Report



d. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on securitytransactions are determined on a specific identification basis. Interest income and estimatedexpenses are accrued daily. Amortization of premium and accretion of discount on debt securitiesare included in interest income. Dividend income is recorded on the ex-dividend date except thatcertain dividends from foreign securities are recognized as soon as the Fund is notified of theex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and aredetermined according to income tax regulations (tax basis). Distributable earnings determinedon a tax basis may differ from earnings recorded in accordance with accounting principlesgenerally accepted in the United States of America. These differences may be permanent ortemporary. Permanent differences are reclassified among capital accounts to reflect their taxcharacter. These reclassifications have no impact on net assets or the results of operations.Temporary differences are not reclassified, as they may reverse in subsequent periods.

e. Accounting Estimates

The preparation of financial statements in accordance with accounting principles generallyaccepted in the United States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of the financial statementsand the amounts of income and expenses during the reporting period. Actual results could differfrom those estimates.

f. Guarantees and Indemnifications

Under the Fund’s organizational documents, its officers and directors are indemnified by theFund against certain liabilities arising out of the performance of their duties to the Fund.Additionally, in the normal course of business, the Fund enters into contracts with serviceproviders that contain general indemnification clauses. The Fund’s maximum exposure underthese arrangements is unknown as this would involve future claims that may be made againstthe Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.

2. CAPITAL STOCK

At March 31, 2011, there were 100 million shares authorized ($0.01 par value). During theyears ended March 31, 2011 and March 31, 2010 there were no shares issued; all reinvesteddistributions were satisfied with previously issued shares purchased in the open market.

The Fund’s Board of Directors previously authorized an open-market share repurchase programpursuant to which the Fund may purchase, from time to time, Fund shares in open-markettransactions, at the discretion of management. This authorization remains in effect. During theyears ended March 31, 2011 and March 31, 2010, there were no shares repurchased.

Annual Report | 17


3. TRANSACTIONS WITH AFFILIATES

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referredto as Franklin Templeton Investments. Certain officers and directors of the Fund are also officersand/or directors of the following subsidiaries:

Subsidiary AffiliationTempleton Asset Management Ltd. (TAML) Investment managerFranklin Templeton Services, LLC (FT Services) Administrative manager

a. Management Fees

The Fund pays an investment management fee to TAML based on the average weekly net assetsof the Fund as follows:

Annualized Fee Rate Net Assets

1.250% Up to and including $1 billion1.200% Over $1 billion, up to and including $5 billion1.150% Over $5 billion, up to and including $10 billion1.100% Over $10 billion, up to and including $15 billion1.050% Over $15 billion, up to and including $20 billion1.000% In excess of $20 billion

Effective May 1, 2011, the Fund will pay fees based on the average weekly net assets of theFund as follows:

Annualized Fee Rate Net Assets

1.100% Up to and including $1 billion1.050% Over $1 billion, up to and including $5 billion1.000% Over $5 billion, up to and including $10 billion0.950% Over $10 billion, up to and including $15 billion0.900% Over $15 billion, up to and including $20 billion0.850% In excess of $20 billion

b. Administrative Fees

The Fund pays an administrative fee to FT Services of 0.20% per year of the average weekly netassets of the Fund.

c. Waiver and Expense Reimbursements

For the year ended March 31, 2011, the Fund incurred a Federal tax of $50,000, which will bereimbursed by an affiliate of the investment manager. This amount is included in the Statementof Operations.

18 | Annual Report


4. EXPENSE OFFSET ARRANGEMENT

The Fund has entered into an arrangement with its custodian whereby credits realized as a resultof uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses.During the year ended March 31, 2011, the custodian fees were reduced as noted in the Statementof Operations.

5. INCOME TAXES

For tax purposes, capital losses may be carried over to offset future capital gains, if any. AtMarch 31, 2011, the Fund had tax basis capital losses of $88,755 expiring in 2019.

The tax character of distributions paid during the years ended March 31, 2011 and 2010, wasas follows:

2011 2010

Distributions paid from long term capital gain . . . . . . . . $603,243 $—

At March 31, 2011, the cost of investments and net unrealized appreciation (depreciation) forincome tax purposes were as follows:

Cost of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83,411,068

Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,887,842Unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,405,689)Net unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . $56,482,153

Net investment income (loss) and net realized gains (losses) differ for financial statement and taxpurposes primarily due to differing treatment of foreign currency transactions.

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments (excluding short term securities) for the year ended March 31,2011, aggregated $11,526,936 and $29,004,836, respectively.

7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO

The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep MoneyFund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of theinvestment manager). Management fees paid by the Fund are reduced on assets invested in theSweep Money Fund, in an amount not to exceed the management and administrative fees paidby the Sweep Money Fund.

Annual Report | 19


8. CONCENTRATION OF RISK

Investing in equity securities of Russian companies may include certain risks not typically associatedwith investing in countries with more developed securities markets, such as political, economicand legal uncertainties, delays in settling portfolio transactions and the risk of loss from Russia’sunderdeveloped systems of securities registration and transfer. At March 31, 2011 the Fund had66.7% of its net assets invested in Russia.

9. FAIR VALUE MEASUREMENTS

The Fund follows a fair value hierarchy that distinguishes between market data obtained fromindependent sources (observable inputs) and the Fund’s own market assumptions (unobservableinputs). These inputs are used in determining the value of the Fund’s investments and are sum-marized in the following fair value hierarchy:

• Level 1 – quoted prices in active markets for identical securities• Level 2 – other significant observable inputs (including quoted prices for similar securities,interest rates, prepayment speed, credit risk, etc.)

• Level 3 – significant unobservable inputs (including the Fund’s own assumptions in deter-mining the fair value of investments)

The inputs or methodology used for valuing securities are not an indication of the risk associ-ated with investing in those securities.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policyof recognizing the transfers as of the date of the underlying event which caused the movement.

The following is a summary of the inputs used as of March 31, 2011, in valuing the Fund’s assetsand liabilities carried at fair value:

Level 1 Level 2 Level 3 Total

Assets:Investments in Securities:Equity Securities:a

Food Products . . . . . . . . . . . . . . . . . . . . $ 10,456,192 $1,448,547 $— $ 11,904,739Other Equity Investmentsb . . . . . . . . . . . . 102,954,907 — — 102,954,907

Convertible Bonds . . . . . . . . . . . . . . . . . . . — 2,335,000 — 2,335,000Short Term Investments . . . . . . . . . . . . . . . 22,698,575 — — 22,698,575

Total Investments in Securities . . . . . . . . . $136,109,674 $3,783,547 $— $139,893,221

aIncludes common stocks as well as other equity investments.bFor detailed descriptions, see the accompanying Statement of Investments.

20 | Annual Report


10. SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through the issuance of the financial statements anddetermined that no events have occurred that require disclosure other than those already disclosedin the financial statements.

ABBREVIATIONS

Selected Portfolio

ADR - American Depository ReceiptGDR - Global Depository Receipt

Annual Report | 21

Templeton Russia and East European Fund, Inc.Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Templeton Russia and East European Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including the statement ofinvestments, and the related statements of operations and of changes in net assets and the finan-cial highlights present fairly, in all material respects, the financial position of Templeton Russiaand East European Fund, Inc. (the “Fund”) at March 31, 2011, the results of its operations forthe year then ended, the changes in its net assets for each of the two years in the period thenended and the financial highlights for each of the five years in the period then ended, in con-formity with accounting principles generally accepted in the United States of America. Thesefinancial statements and financial highlights (hereafter referred to as “financial statements”) arethe responsibility of the Fund’s management. Our responsibility is to express an opinion onthese financial statements based on our audits. We conducted our audits of these financial state-ments in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reason-able assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. We believe that ouraudits, which included confirmation of securities at March 31, 2011 by correspondence with thecustodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, CaliforniaMay 18, 2011

22 | Annual Report

Templeton Russia and East European Fund, Inc.Tax Designation (unaudited)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maxi-mum amount allowable but no less than $603,243 as a long term capital gain dividend for thefiscal year ended March 31, 2011.

Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowablebut no less than $1,135,259 as qualified dividends for purposes of the maximum rate underSection 1(h)(11) of the Code for the fiscal year ended March 31, 2011. Distributions, includingqualified dividend income, paid during calendar year 2011 will be reported to shareholders onForm 1099-DIV in January 2012. Shareholders are advised to check with their tax advisors forinformation on the treatment of these amounts on their individual income tax returns.

Annual Report | 23

Templeton Russia and East European Fund, Inc.Annual Meeting of Shareholders, August 27, 2010 (unaudited)

The Annual Meeting of Shareholders of the Fund was held at the Fund’s offices, 500 E. BrowardBoulevard, Fort Lauderdale, Florida, on August 27, 2010. The purpose of the meeting was to electfive Directors of the Fund and to ratify the selection of PricewaterhouseCoopers LLP as the inde-pendent registered public accounting firm of the Fund for the fiscal year ending March 31, 2011.At the meeting, the following persons were elected by the shareholders to serve as Directors of theFund: Edith E. Holiday, Frank A. Olson, Robert E. Wade, Charles B. Johnson and J. MichaelLuttig.* Shareholders also ratified the selection of PricewaterhouseCoopers LLP as the independ-ent registered public accounting firm of the Fund for the fiscal year ending March 31, 2011. Noother business was transacted at the meeting.

The results of the voting at the Annual Meeting are as follows:

1. The election of five Directors:

% of % ofShares Shares

% of Present % of PresentOutstanding and Outstanding and

Term Expiring 2013 For Shares Voting Withheld Shares Voting

Edith E. Holiday . . . . . . . . . . . . . 3,703,988 64.47% 89.85% 418,398 7.28% 10.15%Frank A. Olson . . . . . . . . . . . . . . 3,708,768 64.55% 89.97% 413,618 7.20% 10.03%Robert E. Wade . . . . . . . . . . . . . 3,808,239 66.29% 92.38% 314,147 5.47% 7.62%Charles B. Johnson . . . . . . . . . . . 3,716,384 64.69% 90.15% 406,002 7.07% 9.85%

Term Expiring 2011

J. Michael Luttig . . . . . . . . . . . . 3,811,825 66.35% 92.47% 310,561 5.41% 7.53%

2. The ratification of the selection of PricewaterhouseCoopers LLP as the independent registeredpublic accounting firm of the Fund for the fiscal year ending March 31, 2011:

% of % ofShares Outstanding VotedVoted Shares Shares

For . . . . . . . . . . . . . . . . . . . . . . . . . 3,867,981 67.33% 93.83%Against . . . . . . . . . . . . . . . . . . . . . . 199,464 3.47% 4.84%Abstain . . . . . . . . . . . . . . . . . . . . . . 54,943 0.96% 1.33%Total . . . . . . . . . . . . . . . . . . . . . . . . 4,122,388 71.76% 100.00%

*Harris J. Ashton, Ann Torre Bates, Frank J. Crothers, Gregory E. Johnson, David W. Niemiec, Larry D. Thompson and Constantine D. Tseretopoulosare Directors of the Fund who are currently serving and whose terms of office continued after the Annual Meeting of Shareholders.

24 | Annual Report

Templeton Russia and East European Fund, Inc.Dividend Reinvestment and Cash Purchase Plan

The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the “Plan”) with the followingfeatures:

If shares of the Fund are held in the shareholder’s name, the shareholder will automatically be aparticipant in the Plan unless he elects to withdraw. If the shares are registered in the name of abroker-dealer or other nominee (i.e., in “street name”), the broker-dealer or nominee will electto participate in the Plan on the shareholder’s behalf unless the shareholder instructs them other-wise, or unless the reinvestment service is not provided by the broker-dealer or nominee.

Participants should contact BNY Mellon Shareowner Services, P.O. Box 358015, Pittsburgh, PA15252-8015, to receive the Plan brochure.

To receive dividends or distributions in cash, the shareholder must notify The Bank of New YorkMellon (the “Plan Administrator”) at the address above or the institution in whose name the sharesare held. The Plan Administrator must receive written notice ten business days before the record datefor the distribution.

Whenever the Fund declares dividends in either cash or common stock of the Fund, if the marketprice is equal to or exceeds net asset value at the valuation date, the participant will receive thedividends entirely in new shares at a price equal to the net asset value, but not less than 95% ofthe then current market price of the Fund’s shares. If the market price is lower than net assetvalue or if dividends and/or capital gains distributions are payable only in cash, the participantwill receive shares purchased on the New York Stock Exchange or otherwise on the open market.

A participant has the option of submitting additional cash payments to the Plan Administrator, inany amounts of at least $100 each, up to a maximum of $5,000 per month, for the purchase ofFund shares for his or her account. These payments can be made by check or money order payableto The Bank of New York Mellon and sent to BNYMellon Shareowner Services, P.O. Box 382009,Pittsburgh, PA, 15252-8009, Attention: Templeton Russia and East European Fund, Inc. The PlanAdministrator will apply such payments (less a $5.00 service charge and less a pro rata share oftrading fees) to purchases of Fund shares on the open market.

The automatic reinvestment of dividends and/or capital gains does not relieve the participant ofany income tax that may be payable on dividends or distributions.

Whenever shares are purchased on the New York Stock Exchange or otherwise on the openmarket, each participant will pay a pro rata portion of trading fees. Trading fees will be deductedfrom amounts to be invested. The Plan Administrator’s fee for a sale of shares through the Planis $15.00 per transaction plus a $0.12 per share trading fee.

Annual Report | 25

The participant may withdraw from the Plan without penalty at any time by written notice tothe Plan Administrator sent to BNYMellon Shareowner Services, P.O. Box 358015, Pittsburgh, PA15252-8015. Upon withdrawal, the participant will receive, without charge, share certificatesissued in the participant’s name for all full shares held by the Plan Administrator; or, if the par-ticipant wishes, the Plan Administrator will sell the participant’s shares and send the proceedsto the participant, less a service charge of $15.00 and less trading fees of $0.12 per share. ThePlan Administrator will convert any fractional shares held at the time of withdrawal to cash atcurrent market price and send a check to the participant for the net proceeds.

Direct Deposit Service for Registered Shareholders

Cash distributions can now be electronically credited to a checking or savings account at anyfinancial institution that participates in the Automated Clearing House (“ACH”) system. TheDirect Deposit service is provided for registered shareholders at no charge. To enroll in the service,access your account online by going to www.bnymellon.com/shareowner/equityaccess or dial1-800-416-5585 (toll free) and follow the instructions. Direct Deposit will begin with the nextscheduled distribution payment date following enrollment in the service.

Templeton Russia and East European Fund, Inc.Dividend Reinvestment and Cash Purchase Plan (continued)

26 | Annual Report

Transfer AgentBNY Mellon Shareowner ServicesP.O. Box 358015Pittsburgh, PA 15252-80151-800-416-5585www.bnymellon.com/shareowner/equityaccess

Direct RegistrationIf you are a registered shareholder of the Fund, purchases of shares of the Fund can be electronicallycredited to your Fund account at BNY Mellon Shareowner Services through Direct Registration.This service provides shareholders with a convenient way to keep track of shares through bookentry transactions, electronically move book-entry shares between broker-dealers, transfer agentsand DRS eligible issuers, and eliminate the possibility of lost certificates. For additional informa-tion, please contact BNY Mellon Shareowner Services at 1-800-416-5585.

Shareholder InformationShares of Templeton Russia and East European Fund, Inc. are traded on the New York StockExchange under the symbol “TRF.” Information about the net asset value and the market priceis published each Monday in the Wall Street Journal, weekly in Barron’s and each Saturdayin The New York Times and other newspapers. Daily market prices for the Fund’s shares arepublished in “New York Stock Exchange Composite Transactions” section of newspapers.

For current information about distributions and shareholder accounts, call 1-800-416-5585.Registered shareholders can now access their Fund account on-line with Investor ServiceDirect®.For information go to BNY Mellon Shareowner Services’ web site atwww.bnymellon.com/shareowner/equityaccess and follow the instructions.

The daily closing net asset value as of the previous business day may be obtained when availableby calling Franklin Templeton Fund Information after 7 a.m. Pacific time any business day at1-800/DIAL BEN® (1-800-342-5236). The Fund’s net asset value and dividends are also listedon the NASDAQ Stock Market, Inc.’s Mutual Fund Quotation Service (“NASDAQ MFQS”).

Shareholders not receiving copies of the reports to shareholders because their shares are registeredin the name of a broker or a custodian can request that they be added to the Fund’s mailing listby writing Templeton Russia and East European Fund, Inc., 100 Fountain Parkway, P.O. Box 33030,St. Petersburg, FL 33733-8030.


Annual Report | 27

Number of Portfolios inName, Year of Birth Length of Fund Complex Overseenand Address Position Time Served by Board Member* Other Directorships Held

The name, year of birth and address of the officers and board members, as well as their affiliations, positions held withthe Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in theFranklin Templeton Investments fund complex are shown below. Generally, each board member serves a three-yearterm that continues until that person’s successor is elected and qualified.

Independent Board Members

Bar-S Foods (meat packing company)(1981-2010).

Harris J. Ashton (1932)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091

Director Since 1994 130

Principal Occupation During Past 5 Years:Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, ChiefExecutive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).

SLM Corporation (Sallie Mae), AresCapital Corporation (specialty financecompany) and Allied CapitalCorporation (financial services)(2003-2010).


Principal Occupation During Past 5 Years:Independent strategic and financial consultant; and formerly, Executive Vice President and Chief Financial Officer, NHP Incorporated(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).

Ann Torre Bates (1958)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091

Frank J. Crothers (1944)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091


Principal Occupation During Past 5 Years:Director and Vice Chairman, Caribbean Utilities Company, Ltd; director of various other private business and nonprofit organizations; andformerly, Chairman, Atlantic Equipment and Power Ltd. (1977-2003).

Fortis, Inc. (utility holding company)and AML Foods Limited (retaildistributors).

Hess Corporation (exploration andrefining of oil and gas), H.J. HeinzCompany (processed foods and alliedproducts), RTI International Metals,Inc. (manufacture and distribution oftitanium), Canadian National Railway(railroad) and White MountainsInsurance Group, Ltd. (holdingcompany).

Edith E. Holiday (1952)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091

LeadIndependentDirector

Director since1996 and LeadIndependentDirectorsince 2007

130

Principal Occupation During Past 5 Years:Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet(1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretaryfor Public Affairs and Public Liaison-United States Treasury Department (1988-1989).

Templeton Russia and East European Fund, Inc.Board Members and Officers

28 | Annual Report


El Oro Ltd (investments).Robert E. Wade (1946)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091


Principal Occupation During Past 5 Years:Attorney at law engaged in private practice (1973-2009) and member of various boards.

J. Michael Luttig (1954)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091


Principal Occupation During Past 5 Years:Executive Vice President, General Counsel and member of Executive Council, The Boeing Company; and formerly, Federal Appeals CourtJudge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).

Emeritus Corporation (assisted living)(1999-2010) and OSI Pharmaceuticals,Inc. (pharmaceutical products)(2006-2010).

David W. Niemiec (1949)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091


Hess Corporation (exploration andrefining of oil and gas).


Principal Occupation During Past 5 Years:Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer(1977-1999)); and formerly, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).

Boeing Capital Corporation (aircraftfinancing).

Frank A. Olson (1932)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091

NoneConstantine D. Tseretopoulos(1954)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091


Cbeyond, Inc. (business communica-tions provider) and The SouthernCompany (energy company).

Larry D. Thompson (1945)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091


Principal Occupation During Past 5 Years:Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and formerly, Director, Delta Airlines(aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004);Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).

Principal Occupation During Past 5 Years:Physician, Chief of Staff, owner and operator of the Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and formerly,Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).

Principal Occupation During Past 5 Years:Advisor, Saratoga Partners (private equity fund); and formerly, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg DillonRead (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief FinancialOfficer, Dillon, Read & Co. Inc. (1982-1997).

Annual Report | 29

None**Gregory E. Johnson (1961)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During Past 5 Years:Director, President and Chief Executive Officer, Franklin Resources, Inc.; and officer and/or director or trustee, as the case may be, of someof the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.

None**Charles B. Johnson (1933)One Franklin ParkwaySan Mateo, CA 94403-1906

Director,Chairman ofthe Board andVice President

Director andVice Presidentsince 1994 andChairman of theBoard since 1995

130

Principal Occupation During Past 5 Years:Chairman of the Board, Member – Office of the Chairman and Director, Franklin Resources, Inc.; and officer and/or director or trustee, asthe case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin TempletonInvestments.

Not ApplicableJames M. Davis (1952)One Franklin ParkwaySan Mateo, CA 94403-1906

ChiefComplianceOfficer andVice President– AMLCompliance

Chief ComplianceOfficer since2004 and VicePresident – AMLCompliancesince 2006

Not Applicable

Principal Occupation During Past 5 Years:Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of theinvestment companies in Franklin Templeton Investments; and formerly, Director of Compliance, Franklin Resources, Inc. (1994-2001).

Principal Occupation During Past 5 Years:Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; andformerly, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of theinvestment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).

Not ApplicableAliya S. Gordon (1973)One Franklin ParkwaySan Mateo, CA 94403-1906

Vice President Since 2009 Not Applicable

Principal Occupation During Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin TempletonInvestments; and formerly, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).

Not ApplicableLaura F. Fergerson (1962)One Franklin ParkwaySan Mateo, CA 94403-1906

Chief ExecutiveOfficer –Finance andAdministration

Since 2009 Not Applicable

Interested Board Members and Officers


30 | Annual Report


Not ApplicableRupert H. Johnson, Jr. (1940)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During Past 5 Years:Vice Chairman, Member – Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior VicePresident, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries ofFranklin Resources, Inc. and of 25 of the investment companies in Franklin Templeton Investments.

Not ApplicableSteven J. Gray (1955)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and officer of 45 ofthe investment companies in Franklin Templeton Investments.

Not ApplicableDavid P. Goss (1947)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; and officer and/or director, as the case may be, of some of the othersubsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.

Not ApplicableMark Mobius (1936)17th Floor, The Chater House8 Connaught Road CentralHong Kong

President andChief ExecutiveOfficer –InvestmentManagement

President since1994 and ChiefExecutive Officer –InvestmentManagementsince 2002

Not Applicable

Principal Occupation During Past 5 Years:Portfolio Manager of various Templeton advisory affiliates; Executive Chairman, Templeton Emerging Markets Group; and officer and/ordirector, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in FranklinTempleton Investments.

Not ApplicableMark H. Otani (1968)One Franklin ParkwaySan Mateo, CA 94403-1906

Treasurer,Chief FinancialOfficer andChiefAccountingOfficer

Since 2009 Not Applicable

Principal Occupation During Past 5 Years:Director, Global Fund Accounting Operations, Franklin Templeton Investments; and officer of 14 of the investment companies in FranklinTempleton Investments.

Annual Report | 31


Not ApplicableKaren L. Skidmore (1952)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin TempletonInvestments.

Not ApplicableRobert C. Rosselot (1960)500 East Broward Blvd.Suite 2100Fort Lauderdale, FL 33394-3091

Secretary andVice President

Secretarysince 2004 andVice Presidentsince 2009

Not Applicable

Principal Occupation During Past 5 Years:Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President andSecretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; andofficer of 45 of the investment companies in Franklin Templeton Investments.

Not ApplicableCraig S. Tyle (1960)One Franklin ParkwaySan Mateo, CA 94403-1906


Principal Occupation During Past 5 Years:General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.and of 45 of the investment companies in Franklin Templeton Investments; and formerly, Partner, Shearman & Sterling, LLP (2004-2005);and General Counsel, Investment Company Institute (ICI) (1997-2004).

*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolioshave a common investment manager or affiliated investment managers.

**Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder ofFranklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Gregory E. Johnson is considered to be an interested person ofthe Fund under the federal securities laws due to his position as officer and director of Resources.

Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson.

Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.

The Sarbanes-Oxley Act of 2002 and Rules adopted by the U.S. Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committeeincludes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at leastone such financial expert on the Audit Committee and has designated each of Ann Torre Bates and David W. Niemiec as an audit committee financial expert. The Boardbelieves that Ms. Bates and Mr. Niemiec qualify as such an expert in view of their extensive business background and experience. Ms. Bates has served as a member of theFund Audit Committee since 2008. She currently serves as a director of SLM Corporation and Ares Capital Corporation and was formerly a director of Allied CapitalCorporation from 2003 to 2010, Executive Vice President and Chief Financial Officer of NHP Incorporated and Vice President and Treasurer of US Airways, Inc. Mr. Niemiechas served as a member of the Fund Audit Committee since 2005, currently serves as an Advisor to Saratoga Partners and was formerly its Managing Director from 1998 to2001. Mr. Niemiec was formerly a director of Emeritus Corporation from 1999 to 2010 and OSI Pharmaceuticals, Inc. from 2006 to 2010, Managing Director of SBC WarburgDillon Read from 1997 to 1998, and was Vice Chairman from 1991 to 1997 and Chief Financial Officer from 1982 to 1997 of Dillon, Read & Co. Inc. As a result of such back-ground and experience, the Board believes that Ms. Bates and Mr. Niemiec have each acquired an understanding of generally accepted accounting principles and financialstatements, the general application of such principles in connection with the accounting estimates, accruals and reserves, and analyzing and evaluating financial state-ments that present a breadth and level of complexity of accounting issues generally comparable to those of the Fund, as well as an understanding of internal controls andprocedures for financial reporting and an understanding of audit committee functions. Ms. Bates and Mr. Niemiec are independent Board members as that term is definedunder the applicable U.S. Securities and Exchange Commission Rules and Releases or the listing standards applicable to the Fund.

32 | Annual Report

Templeton Russia and East European Fund, Inc.Shareholder Information

Board Review of Investment Management Agreement

At a meeting held March 1, 2011, the Board of Directors (Board), including a majority of non-interested or independent Directors, approved renewal of the investment management agreementfor Templeton Russia and East European Fund, Inc. (Fund). In reaching this decision, the Boardtook into account information furnished throughout the year at regular Board meetings, as wellas information prepared specifically in connection with the annual renewal review process.Information furnished and discussed throughout the year included reports on the Fund, the shareprice premium or discount to net asset value, the results of investment performance and relatedfinancial information for the Fund, as well as periodic reports on expenses, legal, compliance, pric-ing, brokerage commissions and execution and other services provided by the Investment Manager(Manager) and its affiliates. Information furnished specifically in connection with the renewalprocess included a report prepared by Lipper Inc. (Lipper), an independent organization, as well asadditional material, including a Fund profitability analysis prepared by management. The Lipperreport compared the Fund’s investment performance and expenses with those of other fundsdeemed comparable to the Fund as selected by Lipper. The Fund profitability analysis discussed theprofitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as onan individual fund-by-fund basis. Additional material accompanying such profitability analysisincluded information on a fund-by-fund basis listing portfolio managers and other accounts theymanage, as well as information on management fees charged by the Manager and its affiliates toU.S. funds and other accounts, including management’s explanation of differences where relevant.Such material also included a memorandum prepared by management describing project initiativesand capital investments relating to the services provided to the Fund by the Franklin TempletonInvestments organization, as well as a memorandum relating to economies of scale.

In considering such materials, the independent Directors received assistance and advice from andmet separately with independent counsel. In approving continuance of the investment managementagreement for the Fund, the Board, including a majority of independent Directors, determined thatthe management fee structure was fair and reasonable and that continuance of the investmentmanagement agreement was in the best interests of the Fund and its shareholders. While attentionwas given to all information furnished, the following discusses some primary factors relevant tothe Board’s decision.

NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the natureand quality of the overall services provided by the Manager and its affiliates to the Fund and itsshareholders. In addition to investment performance and expenses discussed below, the Board’sopinion was based, in part, upon periodic reports furnished it showing that the investment policiesand restrictions for the Fund were consistently complied with as well as other reports periodicallyfurnished the Board covering matters such as the compliance of portfolio managers and othermanagement personnel with the code of ethics adopted throughout the Franklin Templeton fundcomplex, the adherence to fair value pricing procedures established by the Board, and the accuracyof net asset value calculations. Favorable consideration was given to management’s continuous

Annual Report | 33

Templeton Russia and East European Fund, Inc.Shareholder Information (continued)

Board Review of Investment Management Agreement (continued)

efforts and expenditures in establishing back-up systems and recovery procedures to function inthe event of a natural disaster, it being noted that such systems and procedures had functionedsmoothly during the Florida hurricanes and blackouts experienced in previous years. Among otherfactors taken into account by the Board were the Manager’s best execution trading policies, includ-ing a favorable report by an independent portfolio trading analytical firm. Consideration was alsogiven to the experience of the Fund’s portfolio management team, the number of accounts man-aged and general method of compensation. In this latter respect, the Board noted that a primaryfactor in management’s determination of the level of a portfolio manager’s bonus compensationwas the relative investment performance of the funds he or she managed and that a portion of suchbonus was required to be invested in a predesignated list of funds within such person’s fund man-agement area so as to be aligned with the interests of shareholders. Particular attention was givento management’s conservative approach and diligent risk management procedures, including con-tinuous monitoring of counterparty credit risk and attention given to derivatives and othercomplex instruments. The Board also took into account, among other things, the strong financialposition of the Manager’s parent company and its commitment to the fund business as evidencedby its subsidization of money market funds.

INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment per-formance of the Fund in view of its importance to shareholders. While consideration was given toperformance reports and discussions with portfolio managers at Board meetings during the year,particular attention in assessing performance was given to the Lipper reports furnished for theagreement renewals. The Lipper report prepared for the Fund showed its investment performanceduring 2010 and the previous 10 years ended December 31, 2010, within a Lipper performanceuniverse consisting of the Fund and all other non-leveraged, closed-end, emerging markets funds asselected by Lipper. Such report considers total return on a net asset value basis without regard tomarket discounts or premiums to accurately reflect investment performance. The Lipper reportshowed the Fund’s total return for 2010 to be in the highest or best performing quintile within itsperformance universe and its total return performance on an annualized basis to also be in thehighest performing quintile of such universe for the previous 10-year period, but in the lowest andsecond-lowest performing quintile of such universe for the previous three- and five-year periods,respectively. In evaluating such performance, the Board took into consideration the particularlybad performance in 2008 of the stock markets in Russia and the Eastern European countries asmeasured by country specific stock market indices and that the Fund’s underperformance for theannualized three- and five-year periods primarily reflected such 2008 performance. In that context,the Board noted the limitations of the Lipper comparative performance analysis due to the inclu-sion in the Lipper performance universe of funds with no or limited investments in Russia andEastern Europe. The Board was satisfied with the Fund’s performance in light of such factor andthe Fund’s favorable comparative returns during 2010 and over the long term as set forth in theLipper report.

34 | Annual Report



COMPARATIVE EXPENSES. Consideration was given to a Lipper report analysis of the manage-ment fees and total expense ratio of the Fund compared with those of a group of six funds selectedby Lipper as its appropriate Lipper expense group. Lipper expense data is based upon informationtaken from each fund’s most recent annual report, which reflects historical asset levels that maybe quite different from those currently existing, particularly in a period of market volatility. Whilerecognizing such inherent limitation and the fact that expense ratios generally increase as assetsdecline and decrease as assets grow, the Board believed the independent analysis conducted byLipper to be an appropriate measure of comparative expenses. In reviewing comparative costs,Lipper provides information on the Fund’s contractual investment management fee in comparisonwith the contractual investment management fee that would have been charged by other fundswithin its Lipper expense group assuming they were similar in size to the Fund, as well as theactual total expense ratio of the Fund in comparison with those of its Lipper expense group. TheLipper contractual investment management fee analysis considers administrative fees to be part ofmanagement fees. The results of such expense comparisons showed the Fund’s contractual invest-ment management fee to be the highest in its expense group being 28 basis points above theexpense group median and its actual total expense ratio to be the second highest in its expensegroup, being approximately 15 basis points above the expense group median. While acknowledg-ing cost factors relating to the Fund’s operations, such as the quality and experience of the Fund’sportfolio managers and research staff and the Manager’s geographical presence and coverage ofmarkets in which the Fund invests, the Board believed it appropriate to reduce the Fund’s invest-ment management fee and negotiated with the Manager downward revisions in such fee asdiscussed in “Economies of Scale.”

MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized bythe Manager and its affiliates in connection with the operation of the Fund. In this respect, theBoard reviewed the Fund profitability analysis that addresses the overall profitability of FranklinTempleton’s U.S. fund business, as well as its profits in providing management and other servicesto each of the individual funds during the 12-month period ended September 30, 2010, being themost recent fiscal year-end for Franklin Resources, Inc., the Manager’s parent. In reviewing theanalysis, attention was given to the methodology followed in allocating costs to the Fund, it beingrecognized that allocation methodologies are inherently subjective and various allocation method-ologies may each be reasonable while producing different results. In this respect, the Board notedthat, while being continuously refined and reflecting changes in the Manager’s own cost account-ing, the cost allocation methodology was consistent with that followed in profitability reportpresentations made in prior years and that the Fund’s independent registered public accountingfirm had been engaged by the Manager to review the reasonableness of the allocation methodolo-gies solely for use by the Fund’s Board in reference to the profitability analysis. In reviewing anddiscussing such analysis, management discussed with the Board its belief that costs incurred inestablishing the infrastructure necessary for the type of fund operations conducted by the Managerand its affiliates may not be fully reflected in the expenses allocated to the Fund in determining itsprofitability, as well as the fact that the level of profits, to a certain extent, reflected operationalcost savings and efficiencies initiated by management. In addition, the Board considered a

Annual Report | 35



third-party study comparing the profitability of the Manager’s parent on an overall basis to otherpublicly held managers broken down to show profitability from management operations exclusiveof distribution expenses, as well as profitability including distribution expenses. The Board alsoconsidered the extent to which the Manager and its affiliates might derive ancillary benefits fromfund operations, as well as potential benefits resulting from allocation of fund brokerage and theuse of commission dollars to pay for research. Based upon its consideration of all these factors, theBoard determined that the level of profits realized by the Manager and its affiliates from providingservices to the Fund was not excessive in view of the nature, quality and extent of services provided.

ECONOMIES OF SCALE. The Board also considered whether the Manager realizes economiesof scale as the Fund grows larger and the extent to which any such benefit is shared with the Fundand its shareholders. The Fund’s current investment management fee provides a rate of 1.25% onthe first $1 billion on Fund net assets; 1.20% on the next $4 billion of Fund net assets; 1.15%on the next $5 billion of Fund net assets; 1.10% on the next $5 billion of Fund net assets; 1.05%on the next $5 billion of Fund net assets; and 1.00% on net assets in excess of $20 billion. TheBoard believed that a Manager’s ability to realize economies of scale and the sharing of such benefitis a more relevant consideration in the case of an open-end fund whose size increases as a resultof the continuous sale of its shares. A closed-end investment company such as the Fund does notcontinuously offer shares, and growth following its initial public offering will primarily result frommarket appreciation, which benefits its shareholders. While believing economies of scale to be lessof a factor in the context of a closed-end fund, the Board negotiated with management downwardrevisions in the Fund’s investment management fee effective May 1, 2011, so as to be at a rate of1.10% on the first $1 billion of Fund net assets; 1.05% on the next $4 billion of Fund net assets;1.00% on the next $5 billion of Fund net assets; 0.95% on the next $5 billion of Fund net assets;0.90% on the next $5 billion of Fund net assets; and 0.85% on Fund net assets in excess of $20billion. At the end of 2010, the Fund’s net assets were approximately $134 million, and to theextent economies of scale may be realized by the Manager and its affiliates, the Board believes thisschedule of fees provides a sharing of benefits with the Fund and its shareholders.

Proxy Voting Policies and Procedures

The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) thatthe Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders mayview the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders mayrequest copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678or by sending a written request to: Franklin Templeton Companies, LLC, 500 East BrowardBoulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund’sproxy voting records are also made available online at franklintempleton.com and posted on theU.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-monthperiod ended June 30.

36 | Annual Report


Quarterly Statement of Investments

The Fund files a complete statement of investments with the U.S. Securities and ExchangeCommission for the first and third quarters for each fiscal year on Form N-Q. Shareholders mayview the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form mayalso be viewed and copied at the Commission’s Public Reference Room in Washington, DC.Information regarding the operations of the Public Reference Room may be obtained by calling(800) SEC-0330.

Certifications

The Fund’s Chief Executive Officer – Finance and Administration is required by the New YorkStock Exchange’s Listing Standards to file annually with the Exchange a certification that she is notaware of any violation by the Fund of the Exchange’s Corporate Governance Standards applicableto the Fund. The Fund has filed such certification.

In addition, the Fund’s Chief Executive Officer – Finance and Administration and Chief FinancialOfficer and Chief Accounting Officer are required by the rules of the U.S. Securities and ExchangeCommission to provide certain certifications with respect to the Fund’s Form N-CSR and FormN-CSRS (which include the Fund’s annual and semiannual reports to shareholders) that are filedsemiannually with the Commission. The Fund has filed such certifications with its Form N-CSRSfor the six months ended September 30, 2010. Additionally, the Fund expects to file, on or aboutMay 31, 2011, such certifications with its Form N-CSR for the year ended March 31, 2011.

Franklin Templeton FundsLiterature Request. To receive a summary prospectus and/or prospectus, please call us at (800) DIAL BEN/342-5236 or

visit franklintempleton.com. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before

investing. The prospectus contains this and other information. Please carefully read a prospectus before investing. To

ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments.

These calls can be identified by the presence of a regular beeping tone.

VALUEFranklin All Cap Value FundFranklin Balance Sheet Investment FundFranklin Large Cap Value FundFranklin MicroCap Value Fund1

Franklin MidCap Value FundFranklin Small Cap Value FundMutual Beacon FundMutual Quest FundMutual Recovery Fund2

Mutual Shares Fund

BLENDFranklin Focused Core Equity FundFranklin Large Cap Equity FundFranklin Rising Dividends Fund

GROWTHFranklin DynaTech FundFranklin Flex Cap Growth FundFranklin Growth FundFranklin Growth Opportunities FundFranklin Small Cap Growth FundFranklin Small-Mid Cap Growth Fund

SECTORFranklin Biotechnology Discovery FundFranklin Global Real Estate FundFranklin Gold & Precious Metals FundFranklin Natural Resources FundFranklin Real Estate Securities FundFranklin Utilities FundMutual Financial Services Fund

GLOBALFranklin World Perspectives FundMutual Global Discovery FundTempleton Global Opportunities TrustTempleton Global Smaller Companies FundTempleton Growth FundTempleton World Fund

1. The fund is closed to new investors. Existing shareholders and select retirement plans cancontinue adding to their accounts.2. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; thereis no daily redemption. However, each quarter, pending board approval, the fund will authorizethe repurchase of 5%–25% of the outstanding number of shares. Investors may tender all ora portion of their shares during the tender period.3. Effective 5/1/10, the Franklin Templeton Target Funds changed their name to the FranklinTempleton Allocation Funds. The funds’ investment goals and principal investment strategiesremained unchanged.

4. An investment in the fund is neither insured nor guaranteed by the U.S. government or byany other entity or institution.5. For investors subject to the alternative minimum tax, a small portion of fund dividends maybe taxable. Distributions of capital gains are generally taxable.6. The fund invests primarily in insured municipal securities.7. The funds of the Franklin Templeton Variable Insurance Products Trust are gen erally availableonly through insurance company variable contracts.

AlabamaArizonaCalifornia (4 funds)ColoradoConnecticutFloridaGeorgiaKentuckyLouisianaMarylandMassachusettsMichigan

MinnesotaMissouriNew JerseyNew York (2 funds)North CarolinaOhioOregonPennsylvaniaTennesseeVirginia

INSURANCE FUNDSFranklin Templeton Variable Insurance Products Trust7

01/11 Not part of the annual report

INTERNATIONALFranklin India Growth FundFranklin International Growth FundFranklin International Small Cap Growth FundMutual European FundMutual International FundTempleton Asian Growth FundTempleton BRIC FundTempleton China World FundTempleton Developing Markets TrustTempleton Emerging Markets Small Cap FundTempleton Foreign FundTempleton Foreign Smaller Companies FundTempleton Frontier Markets Fund

HYBRIDFranklin Balanced FundFranklin Convertible Securities FundFranklin Equity Income FundFranklin Income FundTempleton Income Fund

ASSET ALLOCATIONFranklin Templeton Corefolio® Allocation FundFranklin Templeton Founding Funds Allocation FundFranklin Templeton Conservative Allocation Fund3

Franklin Templeton Growth Allocation Fund3

Franklin Templeton Moderate Allocation Fund3

Franklin Templeton 2015 Retirement Target FundFranklin Templeton 2025 Retirement Target FundFranklin Templeton 2035 Retirement Target FundFranklin Templeton 2045 Retirement Target Fund

FIXED INCOMEFranklin Adjustable U.S. Government Securities Fund4

Franklin Floating Rate Daily Access FundFranklin High Income FundFranklin Limited Maturity U.S. GovernmentSecurities Fund4

Franklin Low Duration Total Return FundFranklin Real Return FundFranklin Strategic Income FundFranklin Strategic Mortgage PortfolioFranklin Templeton Hard Currency FundFranklin Total Return FundFranklin U.S. Government Securities Fund4

Templeton Global Bond FundTempleton Global Total Return FundTempleton International Bond Fund

TAX-FREE INCOME5

NationalDouble Tax-Free Income FundFederal Tax-Free Income FundHigh Yield Tax-Free Income FundInsured Tax-Free Income Fund6

Limited-/ Intermediate-TermCalifornia Intermediate-Term Tax-Free Income FundFederal Intermediate-Term Tax-Free Income FundFederal Limited-Term Tax-Free Income FundNew York Intermediate-Term Tax-Free Income Fund

State-Specific

© 2011 Franklin Templeton Investments. All rights reserved. TLTRF A 05/11

Annual Report


Investment ManagerTempleton Asset Management Ltd.

Transfer AgentBNY Mellon Shareowner ServicesP.O. Box 358015Pittsburgh, PA 15252-8015Toll free number: (800) 416-5585Hearing Impaired phone number: (800) 231-5469Foreign Shareholders phone number: (201) 680-6578www.bnymellon.com/shareowner/equityaccess

Fund Information(800) DIAL BEN®/342-5236

VALUE BLEND GROWTH SECTOR GLOBAL INTERNAT IONAL HYBRID ASSET ALLOCAT ION F IXED INCOME TAX-FREE INCOME

Investors should be aware that the value of investments made for the Fund may go down as well as up. Like anyinvestment in securities, the value of the Fund’s portfolio will be subject to the risk of loss from market, currency,economic, political and other factors. The Fund and its investors are not protected from such losses by theinvestment manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund.

To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded andaccessed. These calls can be identified by the presence of a regular beeping tone.

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