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 private, 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, the level of our revenues also depends 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 nine months ended June 30, 2009, the global financial crisis continued and the economy remained in a recession. The continued challenges in the global financial markets, evidenced by 16% and 19% decreases in the MSCI World and S&P 500 indexes during the nine month period, have negatively 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 nine months ended June 30, 2009.

There have been signs of improving credit conditions in 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. During the most recent quarter, the MSCI World and S&P 500 indexes increased by 21% and 16%, indicating an improvement in market conditions. Our results of operations improved relative to the prior quarter consistent with the positive market performance.

Our total assets under management at June 30, 2009 were $451.2 billion, 15% higher than they were at March 31, 2009, 11% below the level at September 30, 2008 and 22% below the level at June 30, 2008. Simple monthly average assets under management for the three and nine months ended June 30, 2009 decreased 29% and 32% from the same periods in the prior fiscal year. Market appreciation of $54.7 billion during the three months ended June 30, 2009 accounted for 91% of the increase in total

During fiscal year 2009, we have taken steps to manage our business and our cost structure to respond to the market conditions and resulting decrease in revenue, including reducing expenditures in areas such as travel and entertainment, advertising, and contractor and professional fees, and deferring non-business critical initiatives and hiring. We have also announced reductions to our global workforce of approximately 10%. The severance costs related to these workforce reductions amounted to $0.1 million and $36.8 million for the three and nine months ended June 30, 2009. We continue to assess and implement cost reduction measures as we adapt to the unprecedented changes affecting our industry.

Challenging and volatile 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                       Nine Months Ended
                                       June 30,                                 June 30,
(dollar amounts in
millions, except per share                                  Percent                                  Percent
data)                            2009           2008        Change        2009           2008        Change
Operating Income              $     326.2    $     532.2      (39)%    $     817.9    $   1,687.0      (52)%
Net Income                          297.7          403.3      (26)%          529.4        1,287.7      (59)%
Earnings Per Share
Basic                         $      1.30    $      1.72      (24)%    $      2.29    $      5.42      (58)%
Diluted                              1.29           1.71      (25)%           2.28           5.38      (58)%
Operating Margin1                     30%            35%                       28%            36%

1 Defined as operating income divided by total operating revenues.

Operating income decreased 39% and 52% during the three and nine months ended June 30, 2009 as compared to the same periods in the prior fiscal year. Adverse market conditions led to 29% and 37% decreases in operating revenues as we experienced 29% and 32% 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, which contributed to 24% and 29% decreases in operating expenses for the three and nine months ended June 30, 2009, as compared to the same periods in the prior fiscal year.

Net income decreased 26% for the three months ended June 30, 2009, resulting from a $206.0 million decline in operating income, partially offset by a $66.1 million increase in non-operating income. Net income decreased 59% for the nine months ended June 30, 2009, primarily due to an $869.1 million decline in operating income.

ASSETS UNDER MANAGEMENT

Assets under management by investment objective were as follows:



                                                         June 30,         June 30,     Percent
(dollar amounts in billions)                               2009             2008       Change
Equity
Global/international                                   $      153.1     $      233.7     (34)%
Domestic (U.S.)                                                56.7             82.5     (31)%

Total equity                                                  209.8            316.2     (34)%

Hybrid                                                         85.8            109.5     (22)%
Fixed-Income
Tax-free                                                       62.4             61.6        1%
Taxable
Global/international                                           50.2             54.3      (8)%
Domestic (U.S.)                                                35.5             31.6       12%

Total fixed-income                                            148.1            147.5        0%
Cash Management1                                                7.5              7.0        7%

Total                                                  $      451.2     $      580.2     (22)%

Simple Monthly Average for the Three-Month Period2     $      428.0     $      602.9     (29)%

Simple Monthly Average for the Nine-Month Period2      $      424.6     $      622.3     (32)%

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

2 Investment management fees from approximately 51% of our assets under management at June 30, 2009 were calculated using daily average assets under management.

Assets under management at June 30, 2009 were 22% lower than they were at June 30, 2008, primarily due to market depreciation of $98.8 billion and negative net flows of $26.3 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 29% and 32% during the three and nine months ended June 30, 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 nine months ended June 30, 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.

                                          Nine Months Ended
                                               June 30,
                                          2009         2008
                     Equity                   47%          58%
                     Hybrid                   19%          18%
                     Fixed-income             32%          23%
                     Cash management           2%           1%

                     Total                   100%         100%

                                      June 30,     Percent     June 30,     Percent
      (dollar amounts in billions)      2009       of Total      2008       of Total
      United States                  $     339.2        75%   $     425.0        73%
      Europe1                               44.6        10%          64.5        11%
      Asia-Pacific2                         41.0         9%          49.2         9%
      Canada                                26.4         6%          41.5         7%

      Total                          $     451.2       100%   $     580.2       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 75% of our assets under management at June 30, 2009 originated from our U.S. sales region. In addition, approximately 70% of our operating revenues originated from our U.S. operations in the three and nine months ended June 30, 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                           Nine Months Ended
                                           June 30,                Percent              June 30,                Percent
(dollar amounts in billions)        2009             2008          Change        2009             2008          Change
Beginning assets under
management                       $     391.1      $     591.1        (34)%    $     507.3      $     645.9        (21)%
Long-term sales                         27.9             42.8        (35)%           75.5            131.5        (43)%
Long-term redemptions                  (22.4 )          (41.0 )      (45)%          (92.3 )         (131.3 )      (30)%
Net cash management                      0.5             (0.6 )         NM           (0.9 )           (0.5 )        80%

Net new flows                            6.0              1.2         400%          (17.7 )           (0.3 )         NM
Reinvested distributions                 2.7              4.0        (33)%           11.7             25.7        (54)%

Net flows                                8.7              5.2          67%           (6.0 )           25.4           NM
Distributions                           (3.3 )           (4.7 )      (30)%          (14.8 )          (31.2 )      (53)%
Appreciation (depreciation)
and other                               54.7            (11.4 )         NM          (35.3 )          (59.9 )      (41)%

Ending Assets Under
Management                       $     451.2      $     580.2        (22)%    $     451.2      $     580.2        (22)%

Assets under management increased during the three months ended June 30, 2009, resulting from $54.7 billion of appreciation, primarily in our equity products, and $6.0 billion of positive net new flows, primarily in our fixed-income products. Net new flows improved mainly because our long-term redemptions decreased to their lowest level during fiscal years 2009 and 2008. Assets under management decreased during the nine months ended June 30, 2009, reflecting the market downturn and decline in asset values, which resulted in $35.3 billion of depreciation and $17.7 billion of negative net new flows. The market depreciation and negative net new flows resulted primarily from our equity products.

Investment Management Fee Rate

For the nine months ended June 30, 2009, our effective investment management fee rate (investment management fees divided by simple monthly average assets under management) decreased to 0.559% from 0.613% for the nine months ended June 30, 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 June 30, 2009. Generally, investment management fees earned on equity products are higher than fees earned on fixed-income products.