Forward-Looking Statements

In this section, we discuss and analyze the results of operations and financial condition of the Company. In addition to historical information, we also make statements relating to the future, called "forward-looking" statements, which are provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will", "may", "could", "expect", "believe", "anticipate", "intend", or other similar words. Moreover, statements that speculate about future events are forward-looking statements. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause the actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. You should carefully review the Risk Factors section set forth below and in any more recent filings with the SEC, each of which describes these risks, uncertainties and other important factors in more detail. While forward-looking statements are our best prediction at the time that they are made, you should not rely on them. If a circumstance occurs after the date of this Form 10-Q that causes any of our forward-looking statements to be inaccurate, we do not have an obligation, and we undertake no obligation, to announce publicly the change to our expectations, or to make any revisions to our forward-looking statements, unless required by law.

The following discussion should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2008 filed with the SEC, and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

Overview

We are a global investment management company and derive the majority of our operating revenues and net income from providing investment management and related services to our retail mutual funds, and to institutional, high net-worth, and separately-managed accounts and other investment products. Our services include fund administration, shareholder services, transfer agency, underwriting, distribution, custodial, trustee and other fiduciary services. Our sponsored investment products and investment management and related services are distributed or marketed to the public globally under six distinct brand names:
Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust and Darby.

We offer a broad range of sponsored investment products under equity, hybrid, fixed-income and cash management categories that meet a wide variety of specific investment needs of individual and institutional investors.

The level of our revenues depends largely on the level and relative mix of assets under management. As noted in the Risk Factors section set forth below, the amount and mix of our assets under management are subject to significant fluctuations and could negatively impact our revenues and income. To a lesser degree, our revenues also depend on the level of mutual fund sales and the number of mutual fund shareholder accounts. The fees charged for our services are based on contracts with our sponsored investment products or our clients. These arrangements could change in the future.

Our secondary business is banking/finance. Our banking/finance group offers retail banking and consumer lending services and private banking services to high net-worth clients. Our consumer lending and retail banking activities include automobile lending related to the purchase, securitization, and servicing of retail installment sales contracts originated by independent automobile dealerships, consumer credit and debit cards, real estate equity lines, and home equity/mortgage lending.

During the three and six months ended March 31, 2009, the global financial crisis continued and the economy remained in a recession. The ongoing turmoil in the global financial markets, evidenced by 12% and 11% decreases in the MSCI World and S&P 500 indexes during the quarter and a 31% decrease in both indexes during the six months ended March 31, 2009, has impacted the entire asset management industry. The unprecedented downturn in the markets has significantly affected our assets under management, fee revenues and non-operating income, all of which decreased sharply during the three and six months ended March 31, 2009. We expect that the market conditions will continue to put pressure on our financial results throughout fiscal year 2009.

There have recently been some signs of improving credit conditions within the capital markets, including improved credit availability and tightening of credit spreads. Governments and central banks around the world have been focused on improving liquidity in the capital markets. In January 2009, the U.S. government announced the largest economic stimulus package in history. In April 2009, the G-20 countries met in a summit to address the economic crisis and have decided to coordinate their actions to support the global economy. Our business may benefit from these efforts to the extent they are successful.

Our total assets under management at March 31, 2009 were $391.1 billion, 6% lower than they were at December 31, 2008, 23% below the level at September 30, 2008 and 34% below the level at March 31, 2008. Simple monthly average assets under management for the three and six months ended March 31, 2009 decreased 35% and 34% from the same periods in the prior fiscal year. Market depreciation of $19.0 billion and $90.0 billion during the three and six months ended March 31, 2009 accounted for 76% and 77% of the decreases in total assets under management. Long-term sales activity continued to slow and long-term redemptions remained at elevated levels during the three and six months ended March 31, 2009 as investor demand continued to shift to lower risk investments, resulting in negative net flows of $3.6 billion and $14.7 billion.

Challenging market conditions remain in the forecast for the foreseeable future. As we confront the challenges of this economic environment, we expect to continue to focus on the investment performance of our sponsored investment products and to provide high quality customer service to our clients. While we are focused on reducing costs, we will also seek to attract, retain and develop employees and invest strategically in systems and technology that will provide secure, stable environments and economies of scale. We will continue to protect and further our brand recognition while developing and maintaining broker/dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the Risk Factors section set forth below.

RESULTS OF OPERATIONS



                                      Three Months Ended                     Six Months Ended
(dollar amounts in millions,               March 31,           Percent           March 31,           Percent
except per share data)                2009          2008       Change       2009          2008       Change
Operating Income                   $     223.3   $     519.1     (57)%   $     491.7   $   1,154.8     (57)%
Net Income                               110.8         366.1     (70)%         231.7         884.4     (74)%
Earnings Per Share
Basic                              $      0.48   $      1.55     (69)%   $      1.00   $      3.70     (73)%
Diluted                                   0.48          1.54     (69)%          1.00          3.67     (73)%
Operating Margin1                          24%           35%                     26%           36%

1 Defined as operating income divided by total operating revenues.

Operating income decreased 57% during the three and six months ended March 31, 2009 as compared to the same periods in the prior fiscal year. Adverse market conditions led to 39% and 41% decreases in operating revenues as we experienced 35% and 34% decreases in our simple monthly average assets under management and a higher proportion of fixed-income assets under management during these periods. As described above, we have taken actions to reduce our operating expenses in response to the market conditions and resulting revenue decreases, contributing to 30% and 32% decreases in operating expenses for the three and six months ended March 31, 2009, as compared to the same periods in the prior fiscal year.

Net income decreased 70% and 74% for the three and six months ended March 31, 2009, resulting from $295.8 million and $663.1 million declines in operating income and $45.8 million and $202.2 million declines in non-operating income. Other income (expenses), net was significantly impacted by lower investment valuations during both periods, resulting in losses of $45.4 million and $128.1 million as compared to income of $0.4 million and $74.1 million in the same periods in the prior fiscal year. Non-operating losses for the three months ended March 31, 2009 resulted primarily from net losses on our trading investments, other-than-temporary impairments in fair value of our available-for-sale investments and net losses from equity method investees resulting from the investees' investment losses, partially offset by a decrease in net losses from our consolidated investment products. Net losses from equity method investees, other-than-temporary impairments of our available-for-sale investments, net losses on our trading investments and lower interest income were the primary causes of the non-operating losses in the six months ended March 31, 2009.

ASSETS UNDER MANAGEMENT

Assets under management by investment objective were as follows:



                                                        March 31,        March 31,     Percent
(dollar amounts in billions)                               2009             2008       Change
Equity
Global/international                                   $      124.7     $      243.4     (49)%
Domestic (U.S.)                                                48.5             84.8     (43)%

Total equity                                                  173.2            328.2     (47)%

Hybrid                                                         75.0            109.8     (32)%
Fixed-Income
Tax-free                                                       59.3             59.6      (1)%
Taxable
Global/international                                           43.0             54.5     (21)%
Domestic (U.S.)                                                32.5             31.5        3%

Total fixed-income                                            134.8            145.6      (7)%
Cash Management1                                                8.1              7.5        8%

Total                                                  $      391.1     $      591.1     (34)%

Simple Monthly Average for the Three-Month Period2     $      396.6     $      610.2     (35)%

Simple Monthly Average for the Six-Month Period2       $      417.9     $      629.0     (34)%

1 Includes both U.S.-registered money market funds and foreign funds with similar investment objectives.

2 Investment management fees from approximately 50% of our assets under management at March 31, 2009 were calculated using daily average assets under management.

Assets under management at March 31, 2009 were 34% lower than they were at March 31, 2008, primarily due to market depreciation of $164.9 billion and negative net flows of $31.1 billion during the twelve-month period. The reductions occurred predominantly in equity products as market volatility led to significant valuation decreases and a shift in investor demand to lower risk investments. Simple monthly average assets under management, which are generally more indicative of trends in revenue for providing investment management and fund administration services than the year over year change in ending assets under management, decreased by 35% and 34% during the three and six months ended March 31, 2009, as compared to the same periods in the prior fiscal year.

The simple monthly average mix of assets under management is shown below. The change in mix for the six months ended March 31, 2009 as compared to the same period in the prior fiscal year reflects an investor shift to lower risk investments during the prior twelve months.

                                           Six Months Ended
                                              March 31,
                                          2009         2008
                     Equity                   47%          59%
                     Hybrid                   19%          18%
                     Fixed-income             32%          22%
                     Cash management           2%           1%

                     Total                   100%         100%

                                      March 31,    Percent     March 31,    Percent
      (dollar amounts in billions)      2009       of Total      2008       of Total
      United States                  $     297.5        76%   $     438.6        74%
      Europe1                               37.2         9%          62.1        11%
      Asia-Pacific2                         34.2         9%          47.7         8%
      Canada                                22.2         6%          42.7         7%

      Total                          $     391.1       100%   $     591.1       100%

1 Europe sales region includes Middle East and Africa.

2 Asia-Pacific sales region includes Latin America.

As shown in the table above, approximately 76% of our assets under management at March 31, 2009 originated from our U.S. sales region. In addition, approximately 71% and 70% of our operating revenues originated from our U.S. operations in the three and six months ended March 31, 2009. Due to the global nature of our business operations, investment management and related services may be performed in locations unrelated to the sales region.

Components of the change in our assets under management were as follows:

                                        Three Months Ended                         Six Months Ended
                                             March 31,              Percent            March 31,              Percent
(dollar amounts in billions)           2009            2008         Change       2009            2008         Change
Beginning assets under management   $     416.2     $     643.7       (35)%   $     507.3     $     645.9       (21)%
Long-term sales                            19.8            41.1       (52)%          47.6            88.7       (46)%
Long-term redemptions                     (24.8 )         (47.7 )     (48)%         (69.9 )         (90.3 )     (23)%
Net cash management                        (0.5 )           0.5          NM          (1.4 )           0.1          NM

Net new flows                              (5.5 )          (6.1 )     (10)%         (23.7 )          (1.5 )        NM
Reinvested distributions                    1.9             2.2       (14)%           9.0            21.7       (59)%

Net flows                                  (3.6 )          (3.9 )      (8)%         (14.7 )          20.2          NM
Distributions                              (2.5 )          (3.4 )     (26)%         (11.5 )         (26.5 )     (57)%
Depreciation and other                    (19.0 )         (45.3 )     (58)%         (90.0 )         (48.5 )       86%

Ending Assets Under Management      $     391.1     $     591.1       (34)%   $     391.1     $     591.1       (34)%

Assets under management decreased during the three and six months ended March 31, 2009 as the ongoing market downturn continued and asset values eroded, resulting in $19.0 billion and $90.0 billion of depreciation in our products. Long-term sales continued to slow and long-term redemptions remained at elevated levels during the three and six months ended March 31, 2009, resulting in negative net flows of $5.5 billion and $23.7 billion for the periods. The market depreciation and net outflows predominantly resulted from our equity products.

Investment Management Fee Rate

For the six months ended March 31, 2009, our effective investment management fee rate (investment management fees divided by simple monthly average assets under management) decreased to 0.552% from 0.616% for the six months ended March 31, 2008. The decrease was primarily due to a shift in the mix of assets under management from equity products towards fixed-income products. This shift mainly resulted from depreciation and net outflows of equity products during the twelve months ended March 31, 2009. Generally, investment management fees earned on equity products are higher than fees earned on fixed-income products.