FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark One)
[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For Quarterly Period Ended December 31, 2004
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

               For the transition period from _________ to________

                           Commission File No. 1-9318

                            FRANKLIN RESOURCES, INC.
             (Exact name of registrant as specified in its charter)

                 Delaware                                      13-2670991
       (State or other jurisdiction                          (IRS Employer
     of incorporation or organization)                     Identification No.)

                    One Franklin Parkway, San Mateo, CA 94403
                    (Address of Principal Executive Offices)
                                   (Zip Code)

                                 (650) 312-2000
              (Registrant's telephone number, including area code)

              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

YES   X    NO ____
    -----

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

YES   X    NO ____
    -----

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

Outstanding:  250,379,789  shares,  common stock,  par value $.10 per share,  at
January 31, 2005.



PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED FINANCIAL STATEMENTS.



FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED                                                                        THREE MONTHS ENDED
                                                                                    DECEMBER 31,
(in thousands, except per share data)                                             2004        2003
- -----------------------------------------------------------------------------------------------------
                                                                                    
OPERATING REVENUES
  Investment management fees                                                  $566,483    $454,508
  Underwriting and distribution fees                                           340,378     276,249
  Shareholder servicing fees                                                    63,167      61,338
  Consolidated sponsored investment products income, net                           615          26
  Other, net                                                                    15,379      17,545
- -----------------------------------------------------------------------------------------------------
  Total operating revenues                                                     986,022     809,666
- -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
  Underwriting and distribution                                                311,422     248,728
  Compensation and benefits                                                    211,507     189,204
  Information systems, technology and occupancy                                 66,805      69,648
  Advertising and promotion                                                     26,108      21,232
  Amortization of deferred sales commissions                                    31,378      22,448
  Amortization of intangible assets                                              4,411       4,402
  Other                                                                         34,307      31,144
- -----------------------------------------------------------------------------------------------------
  Total operating expenses                                                     685,938     586,806
- -----------------------------------------------------------------------------------------------------
Operating income                                                               300,084     222,860
OTHER INCOME (EXPENSES)
  Consolidated sponsored investment products gains, net                         16,163       4,000
  Investment and other income, net                                              27,389      16,191
  Interest expense                                                              (7,987)     (7,111)
- -----------------------------------------------------------------------------------------------------
     Other income, net                                                          35,565      13,080
- -----------------------------------------------------------------------------------------------------
  Income before taxes on income and cumulative effect of an accounting change  335,649     235,940
  Taxes on income                                                               95,660      68,423
- -----------------------------------------------------------------------------------------------------
  Income before cumulative effect of an accounting change, net of tax          239,989     167,517
  Cumulative effect of an accounting change, net of tax                             --       4,779
- -----------------------------------------------------------------------------------------------------
NET INCOME                                                                    $239,989    $172,296
- -----------------------------------------------------------------------------------------------------

BASIC EARNINGS PER SHARE
  Income before cumulative effect of an accounting change                        $0.96       $0.68
  Cumulative effect of an accounting change                                         --        0.02
- -----------------------------------------------------------------------------------------------------
  NET INCOME                                                                     $0.96       $0.70
- -----------------------------------------------------------------------------------------------------

DILUTED EARNINGS PER SHARE
  Income before cumulative effect of an accounting change                        $0.92       $0.65
  Cumulative effect of an accounting change                                         --        0.02
- -----------------------------------------------------------------------------------------------------
  NET INCOME                                                                     $0.92       $0.67
- -----------------------------------------------------------------------------------------------------

DIVIDENDS PER SHARE                                                             $0.100      $0.085

                  See accompanying notes to the consolidated financial statements.


                                       2
- --------------------------------------------------------------------------------





FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

                                                                     DECEMBER 31,   SEPTEMBER 30,
(in thousands)                                                               2004            2004
- ----------------------------------------------------------------------------------------------------

                                                                                 
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                            $2,912,529      $2,814,184
  Receivables                                                             432,995         406,247
  Investment securities, trading                                          236,457         257,329
  Investment securities, available-for-sale                               519,767         432,665
  Deferred taxes and other                                                143,906         133,787
- ----------------------------------------------------------------------------------------------------
    Total current assets                                                4,245,654       4,044,212
- ----------------------------------------------------------------------------------------------------

BANKING/FINANCE ASSETS
  Cash and cash equivalents                                               192,681         103,004
  Loans held for sale, net                                                 40,702          82,481
  Loans receivable, net                                                   314,258         334,676
  Investment securities, available-for-sale                               234,475         265,870
  Other                                                                    45,871          39,813
- ----------------------------------------------------------------------------------------------------
    Total banking/finance assets                                          827,987         825,844
- ----------------------------------------------------------------------------------------------------

NON-CURRENT ASSETS
  Investments, other                                                      428,869         388,819
  Deferred sales commissions                                              314,641         299,069
  Property and equipment, net                                             463,894         470,578
  Goodwill                                                              1,388,830       1,381,757
  Other intangible assets, net                                            669,120         671,500
  Receivable from banking/finance group                                     6,253          37,784
  Other                                                                   106,000         108,572
- ----------------------------------------------------------------------------------------------------
    Total non-current assets                                            3,377,607       3,358,079
- ----------------------------------------------------------------------------------------------------
    TOTAL ASSETS                                                       $8,451,248      $8,228,135
- ----------------------------------------------------------------------------------------------------

                 See accompanying notes to the consolidated financial statements.



                                       3
- --------------------------------------------------------------------------------





FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

                                                                           DECEMBER 31,    SEPTEMBER 30,
(in thousands, except share data)                                                  2004             2004
- -----------------------------------------------------------------------------------------------------------

                                                                                        
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Compensation and benefits                                                    $179,024         $284,483
  Commercial paper                                                              170,000          170,000
  Accounts payable and accrued expenses                                         195,818          249,789
  Commissions                                                                   148,838          128,341
  Income taxes                                                                  111,996           76,862
  Other                                                                          19,591           11,640
- -----------------------------------------------------------------------------------------------------------
    Total current liabilities                                                   825,267          921,115
- -----------------------------------------------------------------------------------------------------------

BANKING/FINANCE LIABILITIES
  Deposits                                                                      637,750          555,746
  Payable to parent                                                               6,253           37,784
  Other                                                                          58,250           65,187
- -----------------------------------------------------------------------------------------------------------
    Total banking/finance liabilities                                           702,253          658,717
- -----------------------------------------------------------------------------------------------------------

NON-CURRENT LIABILITIES
  Long-term debt                                                              1,215,774        1,196,409
  Deferred taxes                                                                240,904          236,126
  Other                                                                          35,148           32,895
- -----------------------------------------------------------------------------------------------------------
    Total non-current liabilities                                             1,491,826        1,465,430
- -----------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------
    Total liabilities                                                         3,019,346        3,045,262
- -----------------------------------------------------------------------------------------------------------

MINORITY INTEREST                                                                92,570           76,089

COMMITMENTS AND CONTINGENCIES (NOTE 13)

STOCKHOLDERS' EQUITY
  Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued         --               --

  Common stock, $0.10 par value, 500,000,000 shares authorized;
    250,242,679 and 249,680,498 shares issued and outstanding, for
    December 31, 2004 and September 30, 2004                                     25,024           24,968
  Capital in excess of par value                                                256,783          255,137
  Retained earnings                                                           4,966,489        4,751,504
  Deferred compensation                                                         (29,717)              --
  Accumulated other comprehensive income                                        120,753           75,175
- -----------------------------------------------------------------------------------------------------------
    Total stockholders' equity                                                5,339,332        5,106,784
- -----------------------------------------------------------------------------------------------------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $8,451,248       $8,228,135
- -----------------------------------------------------------------------------------------------------------

                       See accompanying notes to the consolidated financial statements.



                                       4
- --------------------------------------------------------------------------------





FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
                                                                              THREE MONTHS ENDED
                                                                                 DECEMBER 31,
(in thousands)                                                               2004            2003
- ----------------------------------------------------------------------------------------------------
                                                                                 
NET INCOME                                                               $239,989        $172,296

Adjustments to reconcile net income to net cash
  provided by operating activities:
Increase in receivables, prepaid expenses and other                       (18,439)         (7,978)
Advances of deferred sales commissions                                    (46,949)        (52,886)
Decrease in other current liabilities                                     (26,801)         (2,863)
Provision for governmental investigations, proceedings and actions         (3,257)             --
Increase in deferred income taxes and taxes payable                        29,667          35,036
Increase in commissions payable                                            20,498          13,551
Decrease in accrued compensation and benefits                             (57,732)        (29,302)
Originations of loans held for sale, net                                 (135,470)        (69,926)
Net proceeds from securitization of loans held for sale                   177,249              --
Net change in trading securities                                           23,169          (3,201)
Equity in net income of affiliated companies                               (8,330)         (1,884)
Depreciation and amortization                                              48,704          45,014
Net gains on disposal of assets                                            (2,407)         (3,123)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                 239,891          94,734
- ----------------------------------------------------------------------------------------------------

Purchase of investments                                                  (267,934)     (1,211,047)
Liquidation of investments                                                168,598       1,218,959
Purchase of banking/finance investments                                      (282)           (614)
Liquidation of banking/finance investments                                 30,174          19,657
Net proceeds from securitization of loans receivable                           --         179,965
Net origination of loans receivable                                        21,165         (25,006)
Net additions of property and equipment                                    (4,795)         (7,747)
Acquisition of subsidiaries, net of cash acquired                              --         (40,766)
- ----------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities                       (53,074)        133,401
- ----------------------------------------------------------------------------------------------------

Increase (decrease) in bank deposits                                       82,004            (210)
Exercise of common stock options                                           41,130          78,035
Dividends paid on common stock                                            (21,200)        (18,485)
Purchase of common stock                                                 (117,728)        (12,524)
Increase in debt                                                           26,179          30,637
Payments on debt                                                           (9,180)         (6,507)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                   1,205          70,946
- ----------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents                                     188,022         299,081
Cash and cash equivalents, beginning of period                          2,917,188       1,053,695
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                               $3,105,210      $1,352,776
- ----------------------------------------------------------------------------------------------------

                                                                      [Table continued on next page]



                                       5
- --------------------------------------------------------------------------------





                                                                      [Table continued on next page]
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
                                                                                    THREE MONTHS ENDED
                                                                                       DECEMBER 31,
(in thousands)                                                                     2004            2003
- -----------------------------------------------------------------------------------------------------------

                                                                                          
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
  Value of common stock issued, principally restricted stock                    $77,444         $42,562
  Total assets related to the consolidation of certain sponsored
    investment products and a lessor trust, net of deconsolidated assets         (6,953)        212,008
  Total liabilities related to the consolidation of certain sponsored
    investment products and a lessor trust, net of deconsolidated liabilities    (1,738)        215,197
  Fair value of subsidiary assets acquired                                           --          40,899
  Fair value of subsidiary liabilities assumed                                       --           5,778
- -----------------------------------------------------------------------------------------------------------

                 See accompanying notes to the consolidated financial statements.




                                       6
- --------------------------------------------------------------------------------



                            FRANKLIN RESOURCES, INC.
                   Notes to Consolidated Financial Statements
                                December 31, 2004
                                   (Unaudited)

1.   BASIS OF PRESENTATION
     ---------------------

     We have prepared these unaudited interim  financial  statements of Franklin
     Resources,  Inc. and its  consolidated  subsidiaries in accordance with the
     instructions  to Form  10-Q  and the  rules  and  regulations  of the  U.S.
     Securities  and  Exchange  Commission  (the  "SEC").  Under these rules and
     regulations,  we have  shortened or omitted some  information  and footnote
     disclosures  normally  included  in  financial  statements  prepared  under
     generally accepted accounting principles.  We believe that we have made all
     adjustments  necessary for a fair  statement of the financial  position and
     the results of operations for the periods shown. All adjustments are normal
     and recurring. You should read these financial statements together with our
     audited financial statements included in our Annual Report on Form 10-K for
     the year ended  September  30, 2004.  Certain  amounts for the  comparative
     prior year  periods  have been  reclassified  to  conform to the  financial
     presentation for and at the period ended December 31, 2004.

2.   NEW ACCOUNTING STANDARDS
     ------------------------

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
     Statement  of  Financial  Accounting  Standards  No.  123  (revised  2004),
     "Share-Based Payment" ("SFAS 123R"). SFAS 123R addresses the accounting for
     share-based  payment  transactions in which an enterprise receives employee
     services in exchange  for equity  instruments  of the  enterprise.  It also
     addresses  transactions  in which an entity incurs  liabilities in exchange
     for goods and services that are based on the fair value of the enterprise's
     equity  instruments  or that may be settled by the  issuance of such equity
     instruments.  SFAS 123R  requires  an entity to  recognize  the  grant-date
     fair-value of stock options and other equity-based  compensation  issued to
     employees in the income statement. The revised statement generally requires
     that an entity account for those  transactions  using the  fair-value-based
     method,  and  eliminates  the  intrinsic  value method of accounting in APB
     Opinion No. 25, "Accounting for Stock Issued to Employees".  SFAS 123R also
     requires  entities  to  disclose   information  about  the  nature  of  the
     share-based payment transactions, the method used to estimate fair value of
     goods and services received or the value of the equity instruments granted,
     and the effects of those  transactions  on the  financial  statements.  For
     public  entities that do not file as small  business  issuers,  the revised
     pronouncement  is  effective as of the  beginning  of the first  interim or
     annual  reporting period that begins after June 15, 2005 and applies to all
     awards granted after the required  effective  date and to awards  modified,
     repurchased,  or cancelled  after that date.  For entities  that  currently
     apply the  fair-value-based  method for either  recognition  or  disclosure
     under  the  original  pronouncement,   Statement  of  Financial  Accounting
     Standards No. 123 "Accounting for  Stock-Based  Compensation",  the revised
     statement also applies to the portion of  outstanding  awards for which the
     requisite  service has not yet been rendered based on the grant-date  value
     of  these  awards.  Retrospective  application  is  permitted.  We have not
     completed  our  evaluation  of the impact of  adoption  of SFAS 123R on our
     financial position and results of operation.

     In October 2004, the Emerging Issues Task Force Issue No. 04-8, "The Effect
     of  Contingently  Convertible  Debt on Diluted  Earnings per Share"  ("EITF
     04-8"), was ratified.  EITF 04-8 was effective for reporting periods ending
     after December 15, 2004 and required the  restatement  of diluted  earnings
     per share for  comparative  prior year  periods.  EITF 04-8  required us to
     include  the  potential  conversion  into  common  stock of our zero coupon
     convertible  senior  notes  (see  Note 11) in the  calculation  of  diluted
     earnings per share,  even if the conditions that must be satisfied to allow
     conversion  have not been met.  Its  adoption  resulted  in a  decrease  in
     diluted  earnings  per share of $0.02 for the quarters  ended  December 31,
     2004 and 2003 (See Note 5).

     In December 2004, the FASB issued Staff Position No. 109-2, "Accounting and
     Disclosure Guidance for the Foreign Earnings Repatriation  Provision within
     the American  Jobs  Creation  Act of 2004" ("FSP FAS 109-2").  The American
     Jobs  Creation  Act of 2004 (the  "Act") was signed into law on October 22,
     2004.  Under a  provision  of the Act, we may elect to  repatriate  certain
     earnings of our foreign-based subsidiaries at a reduced federal tax rate in
     either of our fiscal years  endings  September  30, 2005 or  September  30,
     2006.  FSP  FAS  109-2  provides  guidance  on when  an  enterprise  should
     recognize  in its  financial  statements  the effects of the  one-time  tax
     benefit of  repatriation  of foreign  earnings under the Act, and specifies
     interim


                                       7
- --------------------------------------------------------------------------------



     disclosure  requirements.  We are currently  evaluating  the effect of this
     repatriation  provision;  however,  we  do  not  expect  to  complete  this
     evaluation  until  after the U.S.  Congress or the U.S.  Department  of the
     Treasury issue additional  guidance regarding this provision.  The range of
     possible  amounts we are considering  for  repatriation is between zero and
     $1.9 billion, and the potential range of income tax associated with amounts
     subject to the reduced rate is between zero and $117.0 million.

3.   ACQUISITIONS
     ------------

     On October 1, 2003,  we  acquired  the  remaining  87.3%  interest in Darby
     Overseas Investments,  Ltd. and Darby Overseas Partners, L.P. (collectively
     "Darby")  that  we did  not  own,  for an  additional  cash  investment  of
     approximately $75.9 million. The acquisition cost was allocated to tangible
     net assets acquired ($31.3 million),  definite-lived  management  contracts
     ($3.4  million)  and  goodwill  ($41.2   million).   These   definite-lived
     intangible  assets are being amortized over the remaining  contractual life
     of the sponsored investment  products,  ranging from one to eight years, as
     of the date of purchase.  At September  30, 2003,  Darby had  approximately
     $0.9  billion  in assets  under  management  relating  to  private  equity,
     mezzanine and emerging markets fixed-income products.

4.   COMPREHENSIVE INCOME
     --------------------

     The following table computes comprehensive income.


                                                                                THREE MONTHS ENDED
                                                                                   DECEMBER 31,
     (in thousands)                                                            2004           2003
     ------------------------------------------------------------------------------------------------

                                                                                    
     Net income                                                            $239,989       $172,296
     Net unrealized gains on investments, net of tax                         18,680         17,777
     Currency translation adjustments                                        26,898         12,789
     ------------------------------------------------------------------------------------------------
     COMPREHENSIVE INCOME                                                  $285,567       $202,862
     ------------------------------------------------------------------------------------------------


5.   EARNINGS PER SHARE
     ------------------

     We computed earnings per share as follows:


                                                                                THREE MONTHS ENDED
                                                                                   DECEMBER 31,
     (in thousands, except per share data)                                     2004           2003
     ------------------------------------------------------------------------------------------------

                                                                                    
     Net income                                                            $239,989       $172,296
     Adjusted net income in accordance with EITF 04-8                       242,183        174,443
     ------------------------------------------------------------------------------------------------

     Weighted-average shares outstanding - basic                            250,418        247,758
     Incremental shares from assumed conversions:
         Common stock options                                                 4,002          2,476
         Zero coupon convertible senior notes                                 8,209          8,209
     ------------------------------------------------------------------------------------------------
     Weighted-average shares outstanding - diluted                          262,629        258,443
     ------------------------------------------------------------------------------------------------

     BASIC EARNINGS PER SHARE
     Income before cumulative effect of an accounting change                  $0.96          $0.68
     Cumulative effect of an accounting change                                   --           0.02
     ------------------------------------------------------------------------------------------------
       Net income                                                             $0.96          $0.70
     ------------------------------------------------------------------------------------------------

     DILUTED EARNINGS PER SHARE
     Income before cumulative effect of an accounting change                  $0.92          $0.65
     Cumulative effect of an accounting change                                   --           0.02
     ------------------------------------------------------------------------------------------------
       Net income                                                             $0.92          $0.67
     ------------------------------------------------------------------------------------------------


                                       8
- --------------------------------------------------------------------------------



6.   EMPLOYEE STOCK OPTION AND INVESTMENT PLANS
     ------------------------------------------

     Under our stock option plan,  we may award  options to some  employees.  In
     addition, we have a qualified,  non-compensatory  employee stock investment
     plan ("ESIP") allowing eligible participants to buy our common stock at 90%
     of its  market  value on  defined  dates and to  receive a 50% match of the
     shares purchased,  provided the employee, among other conditions, holds the
     purchased shares for a defined period. We account for these plans using the
     intrinsic value method under  Accounting  Principles  Board Opinion No. 25,
     "Accounting  for Stock Issued to  Employees"  and related  interpretations.
     Accordingly,  no  compensation  costs are recognized  with respect to stock
     options  granted  that have an exercise  price equal to the market value of
     the  underlying  stock at the date of  grant,  or with  respect  to  shares
     purchased at a discount under the ESIP.  Matching  grants  provided to ESIP
     participants,  however,  are  recognized  as expenses  during the  required
     holding period.

     If we had determined  compensation costs for our stock option plans and the
     discount available on our ESIP based upon fair values at the grant dates in
     accordance  with  the  provisions  of  Statement  of  Financial  Accounting
     Standards  No. 123,  "Accounting  for  Stock-Based  Compensation",  our net
     income and  earnings  per share  would  have been  reduced to the pro forma
     amounts  indicated below. For pro forma purposes,  the estimated fair value
     of options was calculated using the Black-Scholes  option-pricing model and
     is amortized over the options' vesting periods.



                                                                              THREE MONTHS ENDED
                                                                                  DECEMBER 31,
    (in thousands, except per share data)                                     2004           2003
    ------------------------------------------------------------------------------------------------

                                                                                   
    Net income, as reported                                               $239,989       $172,296
    Less: stock-based compensation expense determined under the fair
      value method, net of tax                                              (8,391)       (10,806)
    ------------------------------------------------------------------------------------------------
    PRO FORMA NET INCOME                                                  $231,598       $161,490
    ------------------------------------------------------------------------------------------------
    BASIC EARNINGS PER SHARE
      As reported                                                            $0.96          $0.70
      Pro forma                                                               0.92           0.65
    ------------------------------------------------------------------------------------------------

    Adjusted net income in accordance with EITF 04-8, as reported         $242,183       $174,443
    Less: stock-based compensation expense determined under the fair
      value method, net of tax                                              (8,391)       (10,806)
    ------------------------------------------------------------------------------------------------
    PRO FORMA NET INCOME                                                  $233,792       $163,637
    ------------------------------------------------------------------------------------------------
    DILUTED EARNINGS PER SHARE
      As reported                                                            $0.92          $0.67
      Pro forma                                                               0.89           0.63
    ------------------------------------------------------------------------------------------------


                                       9
- --------------------------------------------------------------------------------


7.   CONSOLIDATED SPONSORED INVESTMENT PRODUCTS
     ------------------------------------------

     The  following  tables  present the effect on our  consolidated  results of
     operations and financial position of consolidating majority-owned sponsored
     investment products.


                                                               THREE MONTHS ENDED DECEMBER 31, 2004
                                                          -------------------------------------------
                                                                           SPONSORED
                                                                  BEFORE  INVESTMENT
     (in thousands)                                        CONSOLIDATION    PRODUCTS    CONSOLIDATED
     ------------------------------------------------------------------------------------------------
                                                                                   
     OPERATING REVENUES
     Investment management fees                               $567,281         $(798)       $566,483
     Underwriting and distribution fees                        340,449           (71)        340,378
     Shareholder servicing fees                                 63,175            (8)         63,167
     Consolidated sponsored investment products income, net          0           615             615
     Other, net                                                 15,379            --          15,379
     ------------------------------------------------------------------------------------------------
     Total operating revenues                                  986,284          (262)        986,022
     ------------------------------------------------------------------------------------------------
     OPERATING EXPENSES                                        685,938             0         685,938
     ------------------------------------------------------------------------------------------------
     Operating income                                          300,346          (262)        300,084
     ------------------------------------------------------------------------------------------------
     OTHER INCOME (EXPENSES)
     Consolidated sponsored investment product gains, net           --        16,163          16,163
     Investment and other income, net                           32,263        (4,874)         27,389
     Interest expense                                           (7,984)           (3)         (7,987)
     ------------------------------------------------------------------------------------------------
     Other income, net                                          24,279        11,286          35,565
     ------------------------------------------------------------------------------------------------
     Income before taxes on income                             324,625        11,024         335,649
     Taxes on income                                            92,518         3,142          95,660
     ------------------------------------------------------------------------------------------------
     NET INCOME                                               $232,107        $7,882        $239,989
     ------------------------------------------------------------------------------------------------




                                                                     AS OF DECEMBER 31, 2004
                                                         -------------------------------------------
                                                                           SPONSORED
                                                                  BEFORE  INVESTMENT
     (in thousands)                                        CONSOLIDATION    PRODUCTS    CONSOLIDATED
     ------------------------------------------------------------------------------------------------
                                                                                 
     ASSETS
     Current assets                                         $4,125,890      $119,764      $4,245,654
     Banking/finance assets                                    827,987            --         827,987
     Non-current assets                                      3,407,649       (30,042)      3,377,607
     ------------------------------------------------------------------------------------------------
     TOTAL ASSETS                                           $8,361,526       $89,722      $8,451,248
     ------------------------------------------------------------------------------------------------
     LIABILITIES AND STOCKHOLDERS' EQUITY
     Current liabilities                                      $817,020        $8,247        $825,267
     Banking/finance liabilities                               702,253            --         702,253
     Non-current liabilities                                 1,486,828         4,998       1,491,826
     ------------------------------------------------------------------------------------------------
     TOTAL LIABILITIES                                       3,006,101        13,245       3,019,346
     Minority interest                                          17,909        74,661          92,570
     Total stockholders' equity                              5,337,516         1,816       5,339,332
     ------------------------------------------------------------------------------------------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $8,361,526       $89,722      $8,451,248
     ------------------------------------------------------------------------------------------------


                                       10
- --------------------------------------------------------------------------------



8.   CASH AND CASH EQUIVALENTS
     -------------------------

     Cash and cash equivalents consist of the following:


                                                                           DECEMBER 31,   SEPTEMBER 30,
     (in thousands)                                                                2004            2004
     -----------------------------------------------------------------    --------------- ---------------

                                                                                       
     Cash and due from banks                                                   $362,648        $341,891
     Federal funds sold and securities purchased under agreements to resell     135,053          64,029
     Money market funds, time deposits and other                              2,607,509       2,511,268
     -----------------------------------------------------------------    --------------- ---------------
     TOTAL                                                                   $3,105,210      $2,917,188
    -----------------------------------------------------------------    --------------- ---------------


     Federal Reserve Board  regulations  require reserve balances on deposits to
     be  maintained  with the  Federal  Reserve  Banks by banking  subsidiaries.
     Required  reserve balances totaled $1.9 million at December 31, 2004 and at
     September 30, 2004.

9.   SECURITIZATION OF LOANS RECEIVABLE
     ----------------------------------

     From time to time, we enter into auto loan securitization transactions with
     qualified special purpose entities and record these  transactions as sales.
     The following table shows details of auto loan securitization transactions.


                                                                               THREE MONTHS ENDED
                                                                                   DECEMBER 31,
     (in thousands)                                                            2004            2003
     -------------------------------------------------------------------------------------------------

                                                                                     
     Gross sale proceeds                                                   $178,773        $185,071
     Less: net carrying amount of loans sold                                178,105         180,838
     -------------------------------------------------------------------------------------------------
     PRE-TAX GAIN                                                              $668          $4,233
     -------------------------------------------------------------------------------------------------


     When we sell  auto  loans in a  securitization  transaction,  we  record an
     interest-only   strip  receivable.   The  interest-only   strip  receivable
     represents  our  contractual  right to  receive  interest  from the pool of
     securitized  loans after the payment of required  amounts to holders of the
     securities  and certain  other costs  associated  with the  securitization.
     Gross sales proceeds include the fair value of the interest-only strips.

     We  generally  estimate  fair value  based on the  present  value of future
     expected  cash  flows.  The  key  assumptions  used  in the  present  value
     calculations   of  our   securitization   transactions   at  the   date  of
     securitization were as follows:


                                                                               THREE MONTHS ENDED
                                                                                   DECEMBER 31,
                                                                               2004            2003
     -------------------------------------------------------------------------------------------------

                                                                                        
     Excess cash flow discount rate (annual rate)                             12.0%           12.0%
     Cumulative life loss rate                                                 3.7%            3.4%
     Pre-payment speed assumption (average monthly rate)                       1.5%            1.8%
     -------------------------------------------------------------------------------------------------


     We determined these  assumptions  using data from comparable  transactions,
     historical  information  and  management's  estimate.  Interest-only  strip
     receivables are generally restricted assets and subject to limited recourse
     provisions.


                                       11
- --------------------------------------------------------------------------------



     We generally  estimate the fair value of the  interest-only  strips at each
     period-end  based on the  present  value of  future  expected  cash  flows,
     consistent with the  methodology  used at the date of  securitization.  The
     following shows the carrying value and the sensitivity of the interest-only
     strip  receivable  to  hypothetical  adverse  changes  in the key  economic
     assumptions used to measure fair value:


                                                                      DECEMBER 31,   SEPTEMBER 30,
     (in thousands)                                                           2004            2004
     ---------------------------------------------------------------- --------------- ---------------

                                                                                     
     CARRYING AMOUNT/FAIR VALUE OF INTEREST-ONLY STRIPS                    $31,555         $31,808

     EXCESS CASH FLOW DISCOUNT RATE (ANNUAL RATE)                            12.0%           12.0%
        Impact on fair value of 10% adverse change                           $(457)          $(240)
        Impact on fair value of 20% adverse change                            (900)           (476)

     CUMULATIVE LIFE LOSS RATE                                                3.7%            3.9%
        Impact on fair value of 10% adverse change                         $(2,417)        $(2,677)
        Impact on fair value of 20% adverse change                          (4,837)         (5,354)

     PRE-PAYMENT SPEED ASSUMPTION (AVERAGE MONTHLY RATE)                      1.8%            1.8%
        Impact on fair value of 10% adverse change                         $(3,282)        $(3,479)
        Impact on fair value of 20% adverse change                          (6,540)         (6,894)
     ------------------------------------------------------------------------------------------------


     Actual future market conditions may differ  materially.  Accordingly,  this
     sensitivity  analysis  should not be  considered  our  projection of future
     events or losses.

     We  receive  annual  servicing  fees  ranging  from  1% to 2% of the  loans
     securitized  for  services  we provide to the  securitization  trusts.  The
     following  is  a  summary  of  cash  flows   received   from  and  paid  to
     securitization trusts.


                                                                              THREE MONTHS ENDED
                                                                                  DECEMBER 31,
     (in thousands)                                                           2004            2003
     ------------------------------------------------------------------------------------------------

                                                                                      
     Servicing fees received                                                $3,291          $3,089
     Other cash flows received                                               5,900           5,465
     Purchase of loans from trusts                                         (12,113)           (378)
     ------------------------------------------------------------------------------------------------


     Amounts  payable to the  trustee  related to loan  principal  and  interest
     collected  on behalf of the trusts of $39.7  million at December  31, 2004,
     and  $40.6   million  at  September   30,  2004,   are  included  in  other
     banking/finance liabilities.

     The securitized loan portfolio that we manage and the related delinquencies
     were as follows:


                                                                      DECEMBER 31,   SEPTEMBER 30,
     (in thousands)                                                           2004            2004
     ------------------------------------------------------------------------------------------------

                                                                                    
     Securitized loans held by securitization trusts                      $844,824        $768,936
     Delinquencies                                                          15,628          13,301
     ------------------------------------------------------------------------------------------------


     Net  charge-offs  on the  securitized  loan portfolio were $3.5 million and
     $5.1 million for the three months ended December 31, 2004 and 2003.


                                       12
- --------------------------------------------------------------------------------



10.  GOODWILL AND OTHER INTANGIBLE ASSETS
     ------------------------------------

     Goodwill and indefinite-lived  intangible assets,  including those acquired
     before initial application of Statements of Financial  Accounting Standards
     No.  141,  "Business   Combinations"  and  No.  142,  "Goodwill  and  Other
     Intangible  Assets",  are not  amortized  but are tested for  impairment at
     least annually.

     All of our goodwill and intangible assets, including those arising from the
     purchase of Fiduciary Trust Company  International  ("Fiduciary  Trust") in
     April  2001,  relate  to  our  investment   management  operating  segment.
     Non-amortized intangible assets represent the value of management contracts
     related  to  certain  of  our  sponsored   investment   products  that  are
     indefinite-lived.

     We  completed  our  latest  annual  impairment   testing  of  goodwill  and
     indefinite-lived  and  definite-lived  intangible assets during the quarter
     ended March 31, 2004, and we determined that there was no impairment in the
     value of these assets as of October 1, 2003.

     Intangible assets, other than goodwill were as follows:


                                                            GROSS                              NET
                                                         CARRYING       ACCUMULATED       CARRYING
     (in thousands)                                        AMOUNT      AMORTIZATION         AMOUNT
     ------------------------------------------------------------------------------------------------

                                                                                 
     BALANCE, DECEMBER 31, 2004
     Amortized intangible assets:
       Customer base                                     $233,526         $(58,719)       $174,807
       Other                                               34,933          (22,248)         12,685
     ------------------------------------------------------------------------------------------------
                                                          268,459          (80,967)        187,492

     Non-amortized intangible assets
       Management contracts                               481,628               --         481,628
     ------------------------------------------------------------------------------------------------
         TOTAL                                           $750,087         $(80,967)       $669,120
     ------------------------------------------------------------------------------------------------

     BALANCE, SEPTEMBER 30, 2004
     Amortized intangible assets
       Customer base                                     $233,205         $(54,716)       $178,489
       Other                                               34,933          (21,730)         13,203
     ------------------------------------------------------------------------------------------------
                                                          268,138          (76,446)        191,692

     Non-amortized intangible assets
       Management contracts                               479,808               --         479,808
     ------------------------------------------------------------------------------------------------
        TOTAL                                            $747,946         $(76,446)       $671,500
    ------------------------------------------------------------------------------------------------


     Estimated  amortization  expense for each of the next 5 fiscal  years is as
     follows:


                                                                        FOR THE FISCAL YEARS ENDING
     (in thousands)                                                                   SEPTEMBER 30,
     ------------------------------------------------------------------ -----------------------------

                                                                                         
     2005                                                                                   $17,039
     2006                                                                                    17,039
     2007                                                                                    17,039
     2008                                                                                    17,039
     2009                                                                                    17,039
     ------------------------------------------------------------------ -----------------------------



                                       13
- --------------------------------------------------------------------------------



     The change in the carrying value of goodwill was as follows:


     (in thousands)
     ------------------------------------------------------------------------------------------------

                                                                                     
     Goodwill as of September 30, 2004                                                  $1,381,757
     Foreign currency movements                                                              7,073
     ------------------------------------------------------------------------------------------------
     GOODWILL AS OF DECEMBER 31, 2004                                                   $1,388,830
     ------------------------------------------------------------------------------------------------


11.  DEBT
     ----

     Outstanding debt consisted of the following:


                                                                        DECEMBER 31,  SEPTEMBER 30,
     (in thousands)                                                             2004           2004
     ------------------------------------------------------------------------------------------------

                                                                                   
     CURRENT
      Federal funds purchased                                                   $250            $--
      Federal Home Loan Bank advances                                             --          6,000
      Commercial paper                                                       170,000        170,000
     ----------------------------------------------------------------- --------------- --------------
                                                                             170,250        176,000
     NON-CURRENT
      Convertible Notes (including accrued interest)                         532,599        530,120
      Medium Term Notes                                                      420,000        420,000
      Other                                                                  263,175        246,289
     ----------------------------------------------------------------- --------------- --------------
                                                                           1,215,774      1,196,409
     ----------------------------------------------------------------- --------------- --------------
     TOTAL DEBT                                                           $1,386,024     $1,372,409
     ----------------------------------------------------------------- --------------- --------------


     Federal funds purchased are included in deposits and Federal Home Loan Bank
     advances are included in other liabilities of the banking/finance operating
     segment.

     On December  31,  2003,  we  recognized  a $164.9  million  five-year  note
     facility  that  was  used to  finance  the  construction  of our  corporate
     headquarters  campus under the guidance of FIN 46-R. In September  2004, we
     purchased  the  headquarters  campus from the lessor  trust that held these
     assets,  and we issued $170.0  million of  commercial  paper to finance the
     transaction.

     In May 2001, we received  approximately $490.0 million in net proceeds from
     the sale of $877.0  million  principal  amount at maturity  of  zero-coupon
     convertible   senior  notes  due  2031  (the  "Convertible   Notes").   The
     Convertible  Notes,  which were offered to qualified  institutional  buyers
     only,  carry  an  interest  rate of  1.875%  per  annum,  with  an  initial
     conversion  premium  of  43%.  Each  of the  $1,000  (principal  amount  at
     maturity) Convertible Notes is convertible into 9.3604 shares of our common
     stock, when the price of our stock reaches certain thresholds.  To date, we
     have  repurchased  Convertible  Notes  with a face  value  of $5.9  million
     principal amount at maturity,  for their accreted value of $3.5 million, in
     cash.  We may redeem the remaining  Convertible  Notes for cash on or after
     May 11, 2006 or make additional repurchases,  at the option of the holders,
     on May 11 of 2006,  2011, 2016, 2021 and 2026. In this event, we may choose
     to pay the accreted value of the Convertible Notes in cash or shares of our
     common  stock.  The amount  that the  holders may redeem in the future will
     depend on, among other factors, the performance of our common stock.

     In April 2003,  we completed  the sale of five-year  senior notes due April
     15, 2008 totaling  $420.0  million  ("Medium Term Notes").  The Medium Term
     Notes, which were offered to qualified  institutional buyers only, carry an
     interest rate of 3.7% and are not redeemable prior to maturity by either us
     or the note holders. Interest payments are due semi-annually.

     Other long-term debt consists primarily of deferred commission  liabilities
     recognized  in  relation to U.S.  deferred  commission  assets  financed by
     Lightning  Finance  Company  Limited ("LFL") that were not sold by LFL in a
     securitization transaction as of December 31, 2004 and September 30, 2004.

                                       14
- --------------------------------------------------------------------------------



12.  PENSIONS AND OTHER POST-RETIREMENT BENEFITS
     -------------------------------------------

     Fiduciary  Trust has a  noncontributory  retirement  plan (the  "Retirement
     Plan")  covering  substantially  all its employees hired before we acquired
     it. Fiduciary Trust also maintains a nonqualified  supplementary  executive
     retirement  plan  ("SERP")  to pay  defined  benefits  in  excess of limits
     imposed by  Federal  tax law to  participants  in the  retirement  plan who
     attain age 55 and ten years of service as of the plan termination  date. In
     April 2003, the Board of Directors of Fiduciary Trust approved a resolution
     to terminate both the Retirement  Plan and the SERP as of June 30, 2003. In
     December 2003,  Fiduciary  Trust filed for approval of the Retirement  Plan
     termination with the Internal Revenue Service. As of December 31, 2004, the
     Internal Revenue Service has not approved the Retirement Plan  termination,
     and  therefore,  a  curtailment  gain  (loss) has not yet been  recorded in
     accordance  with  Statement  of  Financial  Accounting  Standards  No.  88,
     "Employers'  Accounting for Settlements and Curtailments of Defined Benefit
     Pension Plans and for Termination Benefits".

     In addition to these  pension  plans,  Fiduciary  Trust  sponsors a defined
     benefit healthcare plan that provides  post-retirement  medical benefits to
     full-time  employees who have worked ten years and attained age 55 while in
     the service of Fiduciary Trust, or have met alternate eligibility criteria.
     The defined  benefit  healthcare  plan was closed to new  entrants in April
     2003.

     The following table  summarizes the components of net periodic benefit cost
     for the  Retirement  Plan and SERP,  under  pension  benefits,  and for the
     defined healthcare plan, under other benefits.


                                                      PENSION BENEFITS            OTHER BENEFITS
                                                -----------------------------------------------------
                                                      THREE MONTHS ENDED       THREE MONTHS ENDED
                                                          DECEMBER 31,              DECEMBER 31,
     (in thousands)                                    2004          2003         2004        2003
     ------------------------------------------------------------------------------------------------

                                                                                   
     Service cost                                       $--          $242          $12          $7
     Interest cost                                      392           323          101          80
     Expected return on plan assets                    (226)         (193)          --          --
     Amortization of prior service costs                 --           (32)          64          --
     Amortization of net loss                         1,420           950           13          --
     ------------------------------------------------------------------------------------------------
     NET PERIODIC BENEFIT COST                       $1,586        $1,290         $190         $87
     ------------------------------------------------------------------------------------------------


     In the  three  months  ended  December  31,  2004,  we have  not  made  any
     contribution to the Retirement Plan. Based on our most recent valuation, we
     anticipate  that we will  contribute  an  additional  $14.4  million to the
     Retirement  Plan and an  additional  $4.2  million to the SERP,  when final
     approval of the Retirement  Plan  termination is received from the Internal
     Revenue Service.  The benefit  liability for this  anticipated  funding has
     been accrued in our financial statements as of September 30, 2004.

13.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

     GUARANTEES

     Under  Financial   Accounting   Standards  Board   Interpretation  No.  45,
     "Guarantor's   Accounting  and  Disclosure   Requirements  for  Guarantees,
     Including Indirect  Guarantees of Indebtedness of Others",  we are required
     to recognize in our financial  statements a liability for the fair value of
     any  guarantees  issued or modified after December 31, 2002 as well as make
     additional disclosures about existing guarantees.

     In  relation  to the auto  loan  securitization  transactions  that we have
     entered into with a number of qualified  special purpose  entities,  we are
     obligated to cover shortfalls in amounts due to the holders of the notes up
     to certain levels as specified under the related agreements. As of December
     31, 2004, the maximum  potential amount of future payments related to these
     obligations was $29.5 million. In addition,  our Consolidated Balance Sheet
     at December 31, 2004 included a $0.5 million  liability to reflect the fair
     value of certain additional  obligations  arising from auto  securitization
     transactions.

     At December  31, 2004,  our  banking/finance  operating  segment had issued
     financial  standby  letters  of  credit  totaling  $2.6  million  on  which
     beneficiaries would be able to draw upon in the event of non-performance by
     our customers, primarily in relation to lease and lien obligations of these
     banking customers. These standby

                                       15
- --------------------------------------------------------------------------------



     letters  of credit,  issued  prior to  January  1,  2003,  were  secured by
     marketable  securities with a fair value of $2.2 million as of December 31,
     2004 and commercial real estate.

     GOVERNMENTAL INVESTIGATIONS, PROCEEDINGS AND ACTIONS

     INVESTIGATIONS.  As part of various  investigations by a number of federal,
     state,  and foreign  regulators and  governmental  entities,  including the
     Securities  and  Exchange  Commission  ("SEC"),   the  California  Attorney
     General's  Office  ("CAGO"),  and the National  Association  of  Securities
     Dealers,  Inc.  ("NASD"),  relating to certain practices in the mutual fund
     industry,  including  late trading,  market  timing and  marketing  support
     payments to securities  dealers who sell fund shares,  Franklin  Resources,
     Inc. and certain of its  subsidiaries  (as used in this section,  together,
     the  "Company"),  as well as  certain  current  or  former  executives  and
     employees of the Company, received subpoenas and/or requests for documents,
     information  and/or  testimony.  The  Company  and  its  current  employees
     provided  documents  and  information  in  response to those  requests  and
     subpoenas.

     Franklin Templeton Investments Corp. ("FTIC"), a Company subsidiary and the
     investment manager of Franklin  Templeton's Canadian mutual funds, has been
     cooperating  with and  responding  to  requests  for  information  from the
     Ontario  Securities  Commission (the "OSC") relating to the OSC's review of
     frequent  trading  practices  within the Canadian mutual fund industry.  On
     December 10, 2004, FTIC received a letter  indicating that the staff of the
     OSC is contemplating  enforcement  proceedings against FTIC before the OSC.
     In its letter,  the OSC staff  expressed the view that,  over the period of
     February 1999 to February 2003, there were certain accounts that engaged in
     a frequent trading market timing strategy in certain funds being managed by
     FTIC.  The letter also gave FTIC the  opportunity  to respond to the issues
     raised  in  the  letter  and to  provide  the  OSC  staff  with  additional
     information  relevant  to those  matters.  The  Company  has  entered  into
     discussions with the OSC staff in an effort to resolve the issues raised in
     the OSC's  review.  The Company  cannot  predict the  likelihood of whether
     those discussions will result in a settlement or the terms or amount of any
     such  settlement.  Should a  settlement  be  reached,  the amount  could be
     material to the Company's financial results.

     On December 9, 2004, the enforcement staff of the NASD informed the Company
     that it had made a preliminary  determination  to recommend a  disciplinary
     proceeding against Franklin/Templeton Distributors, Inc. ("FTDI"), alleging
     that FTDI  violated  certain  NASD rules by the use of  directed  brokerage
     commissions to pay for sales and marketing  support.  The enforcement staff
     has since  advised the Company  that it has  determined  not to recommend a
     disciplinary proceeding against FTDI and has concluded its investigation of
     this  matter.  Separately,  FTDI has also  received a letter  from the NASD
     staff advising of its preliminary determination to recommend a disciplinary
     proceeding  against FTDI alleging  violation of certain NASD rules relating
     to FTDI's Top Producers program. The Company believes that any such charges
     are  unwarranted  and has responded with a submission as to why such action
     is not  warranted.  As of the date of this  filing,  the NASD staff has not
     taken any further action.

     SETTLEMENTS. Beginning in August 2004, the Company entered into settlements
     with certain  regulators  investigating the mutual fund industry  practices
     noted above.  The Company  believes that  settlement of each of the matters
     described  in this  section  is in the best  interest  of the  Company  and
     shareholders of the Franklin Templeton mutual funds (the "Funds").

     On August 2, 2004, Franklin Resources,  Inc. announced that its subsidiary,
     Franklin Advisers, Inc. ("Franklin Advisers") reached an agreement with the
     SEC that resolved the issues  resulting from the  previously  disclosed SEC
     investigation  into  market  timing  activity.   In  connection  with  that
     agreement,  the  SEC  issued  an  "Order  Instituting   Administrative  and
     Cease-and-Desist  Proceedings Pursuant to Sections 203(e) and 203(k) of the
     Investment  Advisers  Act  of  1940  and  Sections  9(b)  and  9(f)  of the
     Investment  Company Act of 1940,  Making  Findings  and  Imposing  Remedial
     Sanctions  and a  Cease-and-Desist  Order" (the  "Order").  The SEC's Order
     concerned the activities of a limited number of third parties that ended in
     2000  and  those  that  were  the   subject  of  the  first   Massachusetts
     administrative complaint described below.

     Under the terms of the SEC's  Order,  pursuant to which  Franklin  Advisers
     neither admitted nor denied any of the findings contained therein, Franklin
     Advisers  agreed to pay $50 million to be  distributed to  shareholders  of
     certain  of the  Funds,  of which  $20  million  was a civil  penalty.  The
     settlement and related legal and  distribution  costs of $60 million ($45.6
     million,  net of taxes)  were  recorded as a charge to income in the fiscal
     quarter ended March 31, 2004.

                                       16
- --------------------------------------------------------------------------------


     The Order required Franklin Advisers to, among other things:

     *    Enhance and periodically  review  compliance  policies and procedures,
          and establish a corporate ombudsman;
     *    Establish a new internal position whose responsibilities shall include
          compliance matters related to conflicts of interests; and
     *    Retain an  Independent  Distribution  Consultant  to develop a plan to
          distribute the $50 million settlement to Fund shareholders.

     The Order further provided that in any related investor  actions,  Franklin
     Advisers  would not benefit from any offset or reduction of any  investor's
     claim  by the  amount  of any  distribution  from the  above-described  $50
     million to such investor that is proportionately  attributable to the civil
     penalty paid by Franklin Advisers.

     On September 20, 2004, Franklin  Resources,  Inc. announced that two of its
     subsidiaries,   Franklin  Advisers  and  Franklin   Templeton   Alternative
     Strategies,  Inc.  ("FTAS"),  reached  an  agreement  with  the  Securities
     Division  of  the  Office  of  the   Secretary  of  the   Commonwealth   of
     Massachusetts (the "State of Massachusetts")  related to its administrative
     complaint  filed on February  4, 2004,  concerning  one  instance of market
     timing  that was also a  subject  of the  August 2,  2004  settlement  that
     Franklin Advisers reached with the SEC, as described above. Under the terms
     of the  settlement  consent  order  issued by the  State of  Massachusetts,
     Franklin  Advisers and FTAS  consented  to the entry of a  cease-and-desist
     order and  agreed to pay a $5 million  administrative  fine to the State of
     Massachusetts  (the  "Massachusetts  Consent Order").  The Company recorded
     this expense in the quarter  ended  September 30, 2004.  The  Massachusetts
     Consent Order  included two different  sections:  "Statements  of Fact" and
     "Violations of Massachusetts  Securities  Laws." Franklin Advisers and FTAS
     admitted the facts in the Statements of Fact.

     On  October  25,  2004,   the  State  of   Massachusetts   filed  a  second
     administrative complaint, alleging that Franklin Resources, Inc.'s Form 8-K
     filing (in which it described  the  Massachusetts  Consent Order and stated
     that "Franklin did not admit or deny engaging in any wrongdoing") failed to
     state that  Franklin  Advisers  and FTAS  admitted the  Statements  of Fact
     portion  of the  Massachusetts  Consent  Order  (the  "Second  Complaint").
     Franklin  Resources,  Inc.  reached  a second  agreement  with the State of
     Massachusetts on November 19, 2004,  resolving the Second  Complaint.  As a
     result of the November 19, 2004 settlement,  Franklin Resources, Inc. filed
     a new Form 8-K. The terms of the Massachusetts Consent Order did not change
     and there was no monetary fine associated with this second settlement.

     On November 17, 2004, Franklin Resources,  Inc. announced that FTDI reached
     an agreement with the CAGO,  resolving the issues resulting from the CAGO's
     investigation  concerning sales and marketing support  payments.  Under the
     terms of the settlement,  FTDI neither  admitted nor denied the allegations
     in the  CAGO's  complaint  and  agreed  to pay $2  million  to the State of
     California as a civil penalty, $14 million to the Funds, to be allocated by
     an  independent  distribution  consultant  to be paid for by  FTDI,  and $2
     million to the CAGO for its investigative  costs. The Company's results for
     the quarter and fiscal year ended  September  30, 2004 included a charge to
     income  of  $18.5  million  ($12.2  million,  net of tax)  related  to this
     settlement.

     On  December  13,  2004,  Franklin  Resources,   Inc.  announced  that  its
     subsidiaries  FTDI and Franklin Advisers reached an agreement with the SEC,
     resolving  the issues  resulting  from the SEC's  investigation  concerning
     marketing  support payments to securities  dealers who sell Fund shares. In
     connection  with that  agreement,  the SEC  issued  an  "Order  Instituting
     Administrative  and  Cease-and-Desist  Proceedings,  Making  Findings,  and
     Imposing Remedial  Sanctions  Pursuant to Sections 203(e) and 203(k) of the
     Investment  Advisers Act of 1940,  Sections 9(b) and 9(f) of the Investment
     Company Act of 1940,  and Section 15(b) of the  Securities  Exchange Act of
     1934" (the "Second Order").

     Under the terms of the Second  Order,  in which FTDI and Franklin  Advisers
     neither admitted nor denied the findings contained therein,  they agreed to
     pay the Funds a penalty of $20 million and disgorgement of $1 (one dollar).
     FTDI and Franklin  Advisers also agreed to implement  certain  measures and
     undertakings  relating to marketing support payments to broker-dealers  for
     the  promotion  or  sale  of  Fund  shares,   including  making  additional
     disclosures  in  the  Funds'  Prospectuses  and  Statements  of  Additional
     Information.  The Second  Order  further  requires  the  appointment  of an
     independent  distribution  consultant,  at the Company's expense, who shall
     develop a plan for the  distribution of the penalty and disgorgement to

                                       17
- --------------------------------------------------------------------------------


     the Funds.  The Company  recorded a charge of $21.5 million ($17.3 million,
     net of taxes) in its fiscal  quarter  ended June 30,  2004  related to this
     matter.

     INTERNAL   INQUIRIES.   The  Company  also   conducted   its  own  internal
     fact-finding  inquiry with the  assistance of outside  counsel to determine
     whether any Fund shareholders,  including Company employees, were permitted
     to engage in late trading or in market timing transactions  contrary to the
     policies of the  affected  Fund and, if so, the  circumstances  and persons
     involved.  The Company's  internal inquiry regarding market timing and late
     trading is complete. We did not find any late trading, though we identified
     various  instances  of frequent  trading.  One officer of a  subsidiary  of
     Franklin   Resources,   Inc.  was  placed  on   administrative   leave  and
     subsequently resigned from his position with the Company in December 2003.

     The Company found no instances of inappropriate  mutual fund trading by any
     portfolio  manager,  investment  analyst or officer of Franklin  Resources,
     Inc. As previously  disclosed,  the Company  identified  some  instances of
     frequent  trading  in shares of  certain  Funds by a few  current or former
     employees  in  their  personal  401(k)  plan  accounts.  These  individuals
     included  one trader and one  officer of the  Funds.  Pending  our  further
     inquiry,  these two individuals were placed on administrative leave and the
     officer  resigned  from his  positions  with  the  Funds.  The  independent
     directors of the Funds and the Company also  retained  independent  outside
     counsel  to  review  these  matters  and  to  report  their   findings  and
     recommendations.    Based   on   independent    counsel's    findings   and
     recommendations, the Company reinstated the trader. The independent counsel
     concluded that some instances of the former Fund officer's trading violated
     Company  policy,  and the Company was  prepared  to  institute  appropriate
     disciplinary  action.  Subsequently,  the former Fund officer resigned from
     his  employment  with the Company.  The Company does not believe there were
     any losses to the Funds as a result of this trading.

     OTHER LEGAL PROCEEDINGS

     In addition,  the Company and certain Funds,  current and former  officers,
     employees,  and directors have been named in multiple lawsuits in different
     federal  courts in Nevada,  California,  Illinois,  New York,  and Florida,
     alleging  violations of various federal securities laws and seeking,  among
     other relief,  monetary  damages,  restitution,  removal of Fund  trustees,
     directors,  advisers,  administrators,  and  distributors,   rescission  of
     management  contracts and 12b-1 Plans,  and/or  attorneys'  fees and costs.
     Specifically,  the  lawsuits  claim  breach of duty with respect to alleged
     arrangements  to permit  market  timing  and/or late trading  activity,  or
     breach of duty with respect to the valuation of the portfolio securities of
     certain Templeton Funds managed by Franklin Resources,  Inc.  subsidiaries,
     resulting in alleged market timing activity. The majority of these lawsuits
     duplicate, in whole or in part, the allegations asserted in the February 4,
     2004 Massachusetts  administrative  complaint and the findings in the SEC's
     August 2, 2004 Order, as described  above. The lawsuits are styled as class
     actions,  or  derivative  actions  on behalf of either  the named  Funds or
     Franklin Resources, Inc.

     To date,  more than 240  similar  lawsuits  against  at least 19  different
     mutual fund companies have been filed in federal district courts throughout
     the country.  Because these cases  involve  common  questions of fact,  the
     Judicial Panel on Multidistrict  Litigation (the "Judicial  Panel") ordered
     the creation of a  multidistrict  litigation in the United States  District
     Court for the District of Maryland, entitled "In re Mutual Funds Investment
     Litigation" (the "MDL"). The Judicial Panel then transferred  similar cases
     from  different  districts  to the  MDL  for  coordinated  or  consolidated
     pretrial proceedings.

     As of February 8, 2005, the following  federal lawsuits are pending against
     the Company (and in some  instances,  against certain  officers,  directors
     and/or Funds) and have been transferred to the MDL:

     Kenerley v.  Templeton  Funds,  Inc., et al., Case No. 03-770 GPM, filed on
     November  19, 2003 in the United  States  District  Court for the  Southern
     District of Illinois;  Cullen v. Templeton  Growth Fund, Inc., et al., Case
     No. 03-859 MJR,  filed on December 16, 2003 in the United  States  District
     Court for the Southern  District of Illinois and  transferred to the United
     States  District  Court for the  Southern  District of Florida on March 29,
     2004;   Jaffe  v.   Franklin  AGE  High  Income  Fund,  et  al.,  Case  No.
     CV-S-04-0146-PMP-RJJ,  filed  on  February  6,  2004 in the  United  States
     District Court for the District of Nevada; Lum v. Franklin Resources, Inc.,
     et al.,  Case No. C 04 0583 JSW,  filed on February  11, 2004 in the United
     States District Court for the Northern District of California; Fischbein v.
     Franklin AGE High Income  Fund,  et al.,  Case No. C 04 0584 JSW,  filed on
     February  11, 2004 in the United  States  District  Court for the  Northern
     District of California; Beer v. Franklin AGE High Income Fund, et al., Case
     No.  8:04-CV-249-T-26  MAP, filed on February 11, 2004 in the United States
     District  Court for the Middle  District  of Florida;  Bennett v.  Franklin

                                       18
- --------------------------------------------------------------------------------


     Resources, Inc., et al., Case No.  CV-S-04-0154-HDM-RJJ,  filed on February
     12, 2004 in the United  States  District  Court for the District of Nevada;
     Dukes v.  Franklin  AGE High Income Fund,  et al.,  Case No. C 04 0598 MJJ,
     filed on February 12, 2004,  in the United  States  District  Court for the
     Northern District of California;  McAlvey v. Franklin  Resources,  Inc., et
     al.,  Case No. C 04 0628 PJH,  filed on  February  13,  2004 in the  United
     States District Court for the Northern District of California; Alexander v.
     Franklin  AGE High Income  Fund,  et al.,  Case No. C 04 0639 SC,  filed on
     February  17, 2004 in the United  States  District  Court for the  Northern
     District of California; Hugh Sharkey IRA/RO v. Franklin Resources, Inc., et
     al.,  Case No. 04 CV 1330,  filed on February 18, 2004 in the United States
     District  Court  for the  Southern  District  of New  York;  D'Alliessi  v.
     Franklin  AGE High Income  Fund,  et al.,  Case No. C 04 0865 SC,  filed on
     March 3, 2004 in the United States District Court for the Northern District
     of California;  Marcus v. Franklin  Resources,  Inc., et al., Case No. C 04
     0901 JL, filed on March 5, 2004 in the United States District Court for the
     Northern  District of California;  Banner v. Franklin  Resources,  Inc., et
     al.,  Case No. C 04 0902 JL,  filed on March 5, 2004 in the  United  States
     District  Court for the  Northern  District  of  California;  Denenberg  v.
     Franklin  Resources,  Inc., et al., Case No. C 04 0984 EMC,  filed on March
     10, 2004 in the United States  District Court for the Northern  District of
     California;  Hertz v. Burns,  et al., Case No. 04 CV 02489,  filed on March
     30, 2004 in the United States  District Court for the Southern  District of
     New York.

     Plaintiffs in the MDL filed  consolidated  amended  complaints on September
     29, 2004. It is anticipated that defendants will file motions to dismiss in
     the coming months, with a hearing scheduled for June 2005.

     As previously reported,  various subsidiaries of Franklin Resources,  Inc.,
     as well as  certain  Templeton  Fund  registrants,  have also been named in
     multiple class action lawsuits filed in state courts in Illinois,  alleging
     breach of duty with respect to the valuation of the portfolio securities of
     certain Templeton Funds managed by such  subsidiaries,  and seeking,  among
     other relief, monetary damages and attorneys' fees and costs, as follows:

     Bradfisch v. Templeton Funds,  Inc., et al., Case No. 2003 L 001361,  filed
     on  October 3, 2003 in the  Circuit  Court of the Third  Judicial  Circuit,
     Madison County,  Illinois;  Woodbury v. Templeton Global Smaller  Companies
     Fund, Inc., et al., Case No. 2003 L 001362, filed on October 3, 2003 in the
     Circuit Court of the Third  Judicial  Circuit,  Madison  County,  Illinois;
     Kwiatkowski  v.  Templeton  Growth Fund,  Inc.,  et al., Case No. 03 L 785,
     filed on December 17, 2003 in the Circuit Court of the  Twentieth  Judicial
     Circuit,  St. Clair County,  Illinois;  Parise v. Templeton Funds, Inc., et
     al.,  Case No.  2003 L 002049,  filed on  December  22, 2003 in the Circuit
     Court of the Third Judicial Circuit, Madison County, Illinois.

     These lawsuits are state court actions and are not subject to the MDL.

     In addition, FTIC has been named in two class action market timing lawsuits
     in Canada,  seeking, among other relief, monetary damages, an order barring
     any  increase  in  management  fees for a  period  of two  years  following
     judgment,  and/or  attorneys' fees and costs,  as follows:  Huneault v. AGF
     Funds, Inc., et al., Case No. 500-06-000256-046,  filed on October 25, 2004
     in the Superior Court for the Province of Quebec, District of Montreal, and
     Heinrichs,  et al. v. CI Mutual Funds, Inc., et al., Case No.  04-CV-29700,
     filed on December 17, 2004 in the Ontario Superior Court of Justice.

     As previously reported,  the Company, as well as certain current and former
     officers,  employees,  and directors,  have been named in multiple lawsuits
     alleging violations of various securities laws and pendent state law claims
     relating to the disclosure of directed brokerage payments and/or payment of
     allegedly  excessive  advisory,  commission,  and  distribution  fees,  and
     seeking, among other relief, monetary damages,  restitution,  rescission of
     advisory  contracts,  including recovery of all fees paid pursuant to those
     contracts,  an  accounting  of  all  monies  paid  to the  named  advisers,
     declaratory  relief,  injunctive relief,  and/or attorneys' fees and costs.
     These lawsuits are styled as class actions or derivative actions brought on
     behalf of certain Funds, and are as follows:

     Stephen Alexander IRA v. Franklin Resources,  Inc., et al., Case No. 04-982
     JLL,  filed on March 2, 2004 in the United  States  District  Court for the
     District of New Jersey;  Strigliabotti v. Franklin Resources, Inc., et al.,
     Case No. C 04 0883 SI, filed on March 4, 2004 in the United States District
     Court for the  Northern  District  of  California;  Tricarico  v.  Franklin
     Resources, Inc., et al., Case No. CV-04-1052 JAP, filed on March 4, 2004 in
     the United States District Court for the District of New Jersey;  Miller v.
     Franklin Mutual Advisors,  LLC, et al., Case No. 04-261 DRH, filed on April
     16, 2004 in the United States  District Court for the Southern  District of
     Illinois  and  transferred  to the  United  States  District  Court for the
     District of New Jersey on August 5, 2004 (plaintiffs  voluntarily dismissed
     this action,  without prejudice,  on October 22,


                                       19
- --------------------------------------------------------------------------------


     2004);  Wilcox v. Franklin  Resources,  Inc., et al., Case No. 04-2258 WHW,
     filed on May 12, 2004 in the United States  District Court for the District
     of   New   Jersey;   Bahe,   Custodian   CGM   Roth   Conversion   IRA   v.
     Franklin/Templeton Distributors, Inc., et al., Case No. 04-11195 PBS, filed
     on June 3, 2004 in the United  States  District  Court for the  District of
     Massachusetts.

     The  United  States   District   Court  for  the  District  of  New  Jersey
     consolidated  for pretrial  purposes three of the above  lawsuits  (Stephen
     Alexander IRA, Tricarico, and Wilcox) into a single action, entitled "In re
     Franklin Mutual Funds Fee  Litigation."  Plaintiffs in those three lawsuits
     filed a  consolidated  amended  complaint (the  "Complaint")  on October 4,
     2004.  Defendants  filed a motion to dismiss the  Complaint on November 19,
     2004. It is anticipated that the matter will be heard in the coming months.

     Management  strongly  believes that the claims made in each of the lawsuits
     identified above are without merit and intends to vigorously defend against
     them.  The Company  cannot predict with  certainty,  however,  the eventual
     outcome of the remaining  governmental  investigations or private lawsuits,
     nor  whether  they will have a  material  negative  impact on the  Company.
     Public trust and confidence are critical to the Company's  business and any
     material  loss of  investor  and/or  client  confidence  could  result in a
     significant decline in assets under management by the Company,  which would
     have an adverse effect on future  financial  results.  If the Company finds
     that it bears responsibility for any unlawful or inappropriate conduct that
     caused  losses to our Funds,  it is  committed to making the Funds or their
     shareholders whole, as appropriate.  The Company is committed to taking all
     appropriate actions to protect the interests of its Funds' shareholders.

     In  addition,  pending  regulatory  and  legislative  actions  and  reforms
     affecting the mutual fund industry may significantly increase the Company's
     costs of doing business and/or  negatively  impact its revenues,  either of
     which  could have a material  negative  impact on the  Company's  financial
     results.

     OTHER COMMITMENTS AND CONTINGENCIES

     Under FIN  46-R,  we have  determined  that we are a  significant  variable
     interest holder in a number of sponsored  investment products as well as in
     LFL, a company established in Ireland to provide deferred commission assets
     financing.  As of December 31, 2004,  total assets of sponsored  investment
     products  in  which  we  held a  significant  interest  were  approximately
     $2,100.2  million and our  exposure to loss as a result of our  interest in
     these products was $277.6 million.  LFL had approximately $541.0 million in
     total  assets at December  31,  2004.  Our  exposure to loss related to our
     investment  in LFL was limited to the carrying  value of our  investment in
     and loans to LFL,  and interest and fees  receivable  from LFL  aggregating
     approximately $55.7 million. This amount represents our maximum exposure to
     loss and does not  reflect  our  estimate  of the actual  losses that could
     result from adverse changes.

     In July 2003, we renegotiated  an agreement to outsource  management of our
     data  center  and  distributed  server  operations,  originally  signed  in
     February  2001. We may terminate the amended  agreement any time after July
     1, 2006 by incurring a termination  charge. The maximum  termination charge
     payable will depend on the termination date of the amended  agreement,  the
     service levels before our  termination of the agreement,  costs incurred by
     our service  provider to wind-down the services and costs  associated  with
     assuming  equipment  leases.  As of December 31, 2004, we estimate that the
     termination fee payable in July 2006, not including  costs  associated with
     assuming  equipment  leases,  would  approximate  $14.1  million  and would
     decrease  each month for the  subsequent  two years,  reaching a payment of
     approximately $2.2 million in July 2008.

     At December 31, 2004, our banking/finance operating segment had commitments
     to extend credit  aggregating  $241.2 million,  primarily under credit card
     lines.

     We lease office space and equipment under long-term operating leases. As of
     December 31, 2004, there were no material  changes in leasing  arrangements
     that would  have a  significant  effect on future  minimum  lease  payments
     reported in our Annual Report on Form 10-K for the year ended September 30,
     2004.

14.  COMMON STOCK REPURCHASES
     ------------------------

     During the three months ended  December 31, 2004,  we purchased and retired
     1.8  million  shares at a cost of $117.7  million.  At December  31,  2004,
     approximately  11.5 million shares remained  available for


                                       20
- --------------------------------------------------------------------------------




     repurchase  under  board  authorizations.  During  the three  months  ended
     December 31, 2003, we purchased and retired 0.3 million shares at a cost of
     $12.5 million.

15.  SEGMENT INFORMATION
     -------------------

     We have two operating segments:  investment management and banking/finance.
     We based our  operating  segment  selection  process  primarily on services
     offered.  The investment  management segment derives  substantially all its
     revenues and net income from providing investment advisory, administration,
     distribution  and  related  services  to the  Franklin,  Templeton,  Mutual
     Series,  Bissett,  Fiduciary Trust and Darby Overseas sponsored  investment
     products.  The  banking/finance   segment  offers  selected  retail-banking
     services to high net-worth individuals,  foundations and institutions,  and
     consumer  lending  services.   Our  consumer  lending   activities  include
     automotive 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.

     Financial  information  for our two operating  segments is presented in the
     table below. Operating revenues of the banking/finance segment are reported
     net of interest expense and the provision for probable loan losses.


                                                                                THREE MONTHS ENDED
                                                                                   DECEMBER 31,
    (in thousands)                                                               2004        2003
    ------------------------------------------------------------------------------------------------

                                                                                   
    OPERATING REVENUES
    Investment management                                                    $973,609    $794,748
    Banking/finance                                                            12,413      14,918
    ------------------------------------------------------------------------------------------------
    TOTAL                                                                    $986,022    $809,666
    ------------------------------------------------------------------------------------------------

    INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
    Investment management                                                    $329,777    $228,061
    Banking/finance                                                             5,872       7,879
    ------------------------------------------------------------------------------------------------
    TOTAL                                                                    $335,649    $235,940
    ------------------------------------------------------------------------------------------------



     Operating segment assets were as follows:

                                                                    DECEMBER 31,    SEPTEMBER 30,
     (in thousands)                                                         2004             2004
     ------------------------------------------------------------------------------------------------

                                                                                  
     Investment management                                             $7,623,261       $7,402,291
     Banking/finance                                                      827,987          825,844
     ------------------------------------------------------------------------------------------------
     TOTAL                                                             $8,451,248       $8,228,135
     ------------------------------------------------------------------------------------------------



                                       21
- --------------------------------------------------------------------------------



     Operating  revenues of the  banking/finance  segment included above were as
     follows:


                                                                               THREE MONTHS ENDED
                                                                                   DECEMBER 31,
     (in thousands)                                                            2004           2003
     ------------------------------------------------------------------------------------------------

                                                                                     
     Interest on loans                                                       $6,242         $7,270
     Interest and dividends on investment securities                          2,130          2,964
     ------------------------------------------------------------------------------------------------
     Total interest income                                                    8,372         10,234
     Interest on deposits                                                    (1,439)        (1,193)
     Interest on short-term debt                                                (21)           (61)
     Interest expense - inter-segment                                          (380)          (489)
     ------------------------------------------------------------------------------------------------
     Total interest expense                                                  (1,840)        (1,743)
     Net interest income                                                      6,532          8,491
     Other income                                                             6,150         10,469
     Provision for probable loan losses                                        (269)        (4,042)
     ------------------------------------------------------------------------------------------------
     TOTAL OPERATING REVENUES                                               $12,413        $14,918
     ------------------------------------------------------------------------------------------------


     Inter-segment  interest  payments from the  banking/finance  segment to the
     investment  management  segment are based on market rates prevailing at the
     inception of each loan.  Inter-segment  interest income and expense are not
     eliminated in our Consolidated Statements of Income.

16.  BANKING REGULATORY RATIOS
     -------------------------

     Following  the  acquisition  of Fiduciary  Trust in April 2001, we became a
     bank holding  company and a financial  holding  company  subject to various
     regulatory  capital  requirements   administered  by  the  federal  banking
     agencies.  Failure  to meet  minimum  capital  requirements  can  result in
     certain  mandatory,  and  possibly  additional,  discretionary  actions  by
     regulators that, if undertaken, could have a direct material adverse effect
     on our  financial  statements.  We  must  meet  specific  capital  adequacy
     guidelines that involve quantitative  measures of our assets,  liabilities,
     and  certain   off-balance  sheet  items  as  calculated  under  regulatory
     accounting  practices.  Our  capital  amounts and  classification  are also
     subject to qualitative  judgments by the regulators about components,  risk
     weightings and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
     require us to maintain a minimum  Tier 1 capital and Tier 1 leverage  ratio
     (as  defined  in the  regulations),  as well as  minimum  Tier 1 and  Total
     risk-based  capital  ratios (as defined in the  regulations).  Based on our
     calculations,  at December  31,  2004,  and 2003,  we exceeded  the capital
     adequacy requirements applicable to us as listed below.


                                                DECEMBER 31,     SEPTEMBER 30,          OUR CAPITAL
     (in thousands)                                     2004              2004     ADEQUACY MINIMUM
     ---------------------------------------- ---------------- ----------------- --------------------

                                                                                       
     Tier 1 capital                              $3,358,587         $3,144,919                  N/A
     Total risk-based capital                     3,361,538          3,148,617                  N/A
     Tier 1 leverage ratio                              51%                50%                   4%
     Tier 1 risk-based capital ratio                    82%                76%                   4%
     Total risk-based capital ratio                     82%                76%                   8%
     ---------------------------------------- ---------------- ----------------- --------------------



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

In this  section  we  discuss  our  results  of  operations  and  our  financial
condition.  In  addition  to  historical  information,  we also make  statements
relating   to   the   future,   called   "forward-looking"   statements.   These
forward-looking  statements  involve a number of 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


                                       22
- --------------------------------------------------------------------------------


such  forward-looking  statements.   Forward-looking  statements  are  our  best
prediction at the time they are made,  and for this reason,  you should not rely
too heavily on them and should review the "Risk Factors" section set forth below
and in our recent filings with the U.S.  Securities and Exchange Commission (the
"SEC"),  which describes these risks,  uncertainties and other important factors
in more detail.

OVERVIEW

The past year was challenging for the mutual fund industry as various regulatory
bodies continued their investigations of certain industry practices. While these
investigations  continue  during  the  first  quarter  of fiscal  2005,  current
regulatory and legislative  developments  could adversely impact the mutual fund
industry, our assets under management and profitability.

Despite these uncertainties,  many of our key performance measures including net
income,  earnings per share and operating margin continued to improve during the
first quarter of fiscal 2005. In part, we can attribute  these  improvements  to
our continued focus to broaden our client base  geographically.  This expansion,
along with the  overall  increases  in the global  equity  markets,  has lead to
increases in our assets under  management  driven from both market  appreciation
and positive cash flows into our sponsored investment products.

GENERAL

We derive the majority of our  operating  revenues,  operating  expenses and net
income from providing  investment advisory and related services to retail mutual
funds,  institutional  accounts,  high net-worth  clients,  private accounts and
other investment  products.  This is our primary business activity and operating
segment. The mutual funds and other products that we advise, collectively called
our sponsored investment products,  are distributed to the public globally under
six distinct names:

*  Franklin
*  Templeton
*  Mutual Series
*  Bissett
*  Fiduciary Trust
*  Darby Overseas

Our sponsored investment products include a broad range of  global/international
equity,  Domestic (U.S.) equity,  hybrid,  fixed-income  and money market mutual
funds,  and other  investment  products  that meet a wide  variety  of  specific
investment needs of individuals and institutions.

The level of our  revenues  depends  largely  on the level and  relative  mix of
assets under  management.  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  and  operating   segment  is   banking/finance.   Our
banking/finance group offers selected  retail-banking services to high net-worth
individuals,  foundations and institutions,  and consumer lending services.  Our
consumer lending  activities include automotive 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.



RESULTS OF OPERATIONS

                                                                  THREE MONTHS ENDED
                                                                     DECEMBER 31,         PERCENT
(in millions except per share data)                              2004            2003      CHANGE
- ----------------------------------------------------------------------------------------------------

                                                                                     
NET INCOME                                                     $240.0          $172.3         39%
EARNINGS PER SHARE
   Basic                                                        $0.96           $0.70         37%
   Diluted                                                       0.92            0.67         37%
OPERATING MARGIN                                                  30%             28%          --
- ----------------------------------------------------------------------------------------------------



                                       23
- --------------------------------------------------------------------------------


Net income  increased  39% in the three  months  ended  December  31,  2004,  as
compared  to the same  period  last year,  due  primarily  to higher  investment
management and underwriting  and distribution  fees reflecting a 20% increase in
simple monthly average assets under management and a 19% increase in gross sales
over the same  period  last  year.  The  increase  was  partly  offset by higher
operating expenses including  underwriting and distribution and compensation and
benefits expenses.



ASSETS UNDER MANAGEMENT

(in billions)                                             DECEMBER 31, 2004     DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------------------

                                                                                     
EQUITY
  Global/international                                               $155.7                $118.5
  Domestic (U.S.)                                                      73.3                  63.6
- ----------------------------------------------------------------------------------------------------
    Total equity                                                      229.0                 182.1
- ----------------------------------------------------------------------------------------------------

HYBRID                                                                 66.4                  51.1
FIXED-INCOME
  Tax-free                                                             51.8                  52.4
  Taxable
    Domestic (U.S.)                                                    32.5                  32.2
    Global/international                                               16.3                  13.1
- ----------------------------------------------------------------------------------------------------
       Total fixed-income                                             100.6                  97.7
- ----------------------------------------------------------------------------------------------------

MONEY MARKET                                                            6.2                   5.8
- ----------------------------------------------------------------------------------------------------
TOTAL                                                                $402.2                $336.7
- ----------------------------------------------------------------------------------------------------
SIMPLE MONTHLY AVERAGE FOR THE THREE-MONTH PERIOD (1)                $381.0                $318.7
- ----------------------------------------------------------------------------------------------------

(1)  Investment  management  fees from  approximately  37% of our  assets  under
     management at December 31, 2004 were calculated using a daily average.


Our assets under management at December 31, 2004 were $402.2 billion, 19% higher
than they were a year ago,  primarily  due to excess sales over  redemptions  of
$23.9 billion and market  appreciation of $44.2 billion.  Simple monthly average
assets, which are generally more indicative of investment  management fee trends
than the year over year change in ending assets under management,  increased 20%
for the three months ended December 31, 2004 over the same period a year ago.

The simple monthly average mix of assets under management is shown below.


                                                                             THREE MONTHS ENDED
                                                                                 DECEMBER 31,
                                                                             2004            2003
- ----------------------------------------------------------------------------------------------------

                                                                                       
Equity                                                                        56%             53%
Fixed-income                                                                  26%             30%
Hybrid                                                                        16%             15%
Money market                                                                   2%              2%
- ----------------------------------------------------------------------------------------------------
TOTAL                                                                        100%            100%
- ----------------------------------------------------------------------------------------------------


For  the  three  months  ended  December  31,  2004,  our  effective  investment
management  fee rate  (investment  management  fees  divided  by simple  monthly
average  assets  under  management)  increased to 0.595% from 0.570% in the same
period last year.  The change in the mix of assets under  management,  resulting
from higher  relative excess sales over  redemptions,  appreciation of equity as
compared to fixed-income products, and an increase in performance fees led to an
increase in our effective investment management fee rate. Generally,  management
fees  earned on equity  products  are higher  than fees  earned on  fixed-income
products.

                                       24
- --------------------------------------------------------------------------------


Assets under management by sales office location were as follows:


                                                     DECEMBER 31,      % OF    SEPTEMBER 30,    % OF
(in billions)                                                2004     TOTAL             2004   TOTAL
- ---------------------------------------------- ------------------- --------- --------------- --------

                                                                                   
United States                                             $291.7       73%           $265.3     73%
Canada                                                      29.4        7%             25.8      7%
Europe                                                      36.2        9%             29.5      8%
Asia/Pacific and other /1                                   44.9       11%             41.3     12%
- ---------------------------------------------- ------------------- --------- --------------- --------
TOTAL                                                     $402.2      100%           $361.9    100%
- ---------------------------------------------- ------------------- --------- --------------- --------

/1   Includes multi-jurisdictional assets under management.


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


                                                                 THREE MONTHS ENDED
                                                                    DECEMBER 31,          PERCENT
(in billions)                                                    2004          2003        CHANGE
- ----------------------------------------------------------------------------------------------------

                                                                                     
Beginning assets under management                              $361.9        $301.9           20%
Sales                                                            28.4          23.8           19%
Reinvested distributions                                          4.3           1.9          126%
Redemptions                                                     (19.6)        (16.4)          20%
Distributions                                                    (5.4)         (2.7)         100%
Acquisitions                                                       --           0.9         (100%)
Appreciation                                                     32.6          27.3           19%
- ----------------------------------------------------------------------------------------------------
ENDING ASSETS UNDER MANAGEMENT                                 $402.2        $336.7           19%
- ----------------------------------------------------------------------------------------------------


For the three months ended December 31, 2004, excess sales over redemptions were
$8.8 billion,  as compared to $7.4 billion in the same period last year.  Market
appreciation  of $32.6  billion in the three  months  ended  December  31,  2004
related primarily to our equity and hybrid products.



OPERATING REVENUES

                                                                 THREE MONTHS ENDED
                                                                    DECEMBER 31,          PERCENT
(in millions)                                                    2004          2003        CHANGE
- ----------------------------------------------------------------------------------------------------

                                                                                    
Investment management fees                                     $566.5        $454.5           25%
Underwriting and distribution fees                              340.4         276.3           23%
Shareholder servicing fees                                       63.1          61.3            3%
Consolidated sponsored investment products income, net            0.6            --           N/A
Other, net                                                       15.4          17.6          (13%)
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES                                       $986.0        $809.7           22%
- ----------------------------------------------------------------------------------------------------


INVESTMENT MANAGEMENT FEES

Investment management fees, accounting for 57% of our operating revenues for the
three  months ended  December  31, 2004,  as compared to 56% for the same period
last year, include both investment advisory and administration  fees. These fees
are  generally  calculated  under  contractual  arrangements  with our sponsored
investment  products  as a  percentage  of the  market  value  of  assets  under
management.  Annual  rates vary by  investment  objective  and type of  services
provided.

Investment management fees increased 25% for the three months ended December 31,
2004, as compared to the same period last year,  consistent  with a 20% increase
in simple  monthly  average  assets  under  management  and


                                       25
- --------------------------------------------------------------------------------



an increase in our effective  investment  management  fee rate  resulting from a
shift in asset  mix  toward  equity  products,  which  generally  carry a higher
management fee than fixed-income products.

UNDERWRITING AND DISTRIBUTION FEES

We earn  underwriting  fees  from  the  sale of  certain  classes  of  sponsored
investment  products on which  investors  pay a sales  commission at the time of
purchase.  Sales commissions are reduced or eliminated on some share classes and
for sales to  shareholders  or  intermediaries  that  exceed  specified  minimum
amounts.  Therefore,  underwriting  fees will change with overall level of gross
sales,  the  size of  individual  transactions,  and the  relative  mix of sales
between different share classes.

Many of our sponsored  investment  products pay distribution  fees in return for
sales,   marketing  and  distribution  efforts  on  their  behalf.  While  other
contractual  arrangements  exist in international  jurisdictions,  in the United
States,  distribution  fees  include  "12b-1  fees".  These fees are  subject to
maximum payout levels based on a percentage of the assets in each fund and other
regulatory  limitations.  We  pay a  significant  portion  of  underwriting  and
distribution fees to the financial  advisers and other  intermediaries  who sell
our  sponsored  investment  products  to the  public  on  our  behalf.  See  the
description of underwriting and distribution expenses below.

Underwriting  and  distribution  fees  increased  23% for the three months ended
December  31, 2004  compared to the same period last year.  For the three months
ended December 31, 2004,  commission revenues increased 15% from the same period
last year consistent with a 19% increase in gross sales, partially offset by the
discontinuation  of front-end sales charges on Class C shares sold in the United
States effective January 1, 2004.  Distribution fees increased 32% for the three
months ended December 31, 2004 over the same period last year  consistent with a
20% increase in simple monthly  average  assets under  management and a shift in
the asset and share class mix.

SHAREHOLDER SERVICING FEES

Shareholder  servicing fees are generally fixed charges per shareholder  account
that vary with the particular  type of fund and the service being  rendered.  In
some instances,  sponsored  investment  products are charged these fees based on
the level of assets  under  management.  We  receive  fees as  compensation  for
providing transfer agency services,  including  providing  customer  statements,
transaction  processing,  customer  service  and tax  reporting.  In the  United
States,  transfer  agency service  agreements  provide that accounts closed in a
calendar  year  generally  remain  billable at a reduced rate through the second
quarter of the following calendar year. In Canada,  such agreements provide that
accounts  closed in the calendar year remain  billable for four months after the
end of the  calendar  year.  Accordingly,  the  level of fees will vary with the
growth in new accounts and the level of closed  accounts  that remain  billable.
Shareholder  servicing fees increased 3% for the three months ended December 31,
2004 from the same  period  last year  consistent  with an  increase in billable
shareholder accounts.

CONSOLIDATED SPONSORED INVESTMENT PRODUCTS INCOME, NET

Consolidated   sponsored  investment  products  income,  net  reflects  the  net
operating income of  majority-owned  sponsored  investment  products,  including
dividends  received.  The increase for the three months ended December 31, 2004,
as compared to the same period last year,  reflects an increase in the number of
products that have been consolidated in our results of operations.

OTHER, NET

Other,  net consists  primarily of revenues from the  banking/finance  operating
segment  as  well  as  income  from   custody   services.   Revenues   from  the
banking/finance  operating  segment include interest income on loans,  servicing
income, and investment income on banking/finance  investment securities, and are
reduced by interest expense and the provision for probable loan losses.

Other,  net decreased  13% in the three months ended  December 31, 2004 from the
same period last year due to lower realized gains on sales of automotive  loans,
lower  interest  income on loans  held for sale,  and lower  interest  income on
investments,  partially  offset by a decrease in  interest  on deposits  and the
decline  in  provision  for  probable  loan  losses  primarily  related  to  our
automotive portfolio.


                                       26
- --------------------------------------------------------------------------------





OPERATING EXPENSES

                                                                THREE MONTHS ENDED
                                                                   DECEMBER 31,           PERCENT
(in millions)                                                  2004             2003       CHANGE
- ----------------------------------------------------------------------------------------------------

                                                                                     
Underwriting and distribution                                $311.4           $248.7          25%
Compensation and benefits                                     211.5            189.2          12%
Information systems, technology and occupancy                  66.8             69.7          (4%)
Advertising and promotion                                      26.1             21.2          23%
Amortization of deferred sales commissions                     31.4             22.5          40%
Amortization of intangible assets                               4.4              4.4           --
Other                                                          34.3             31.1          10%
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES                                     $685.9           $586.8          17%
- ----------------------------------------------------------------------------------------------------


UNDERWRITING AND DISTRIBUTION

Underwriting  and  distribution  includes  amounts  payable to brokers and other
third  parties for  selling,  distributing  and  providing  ongoing  services to
investors in our sponsored  investment  products.  Underwriting and distribution
expense increased 25% for the three months ended December 31, 2004 over the same
period last year consistent with similar trends in underwriting and distribution
revenue.

COMPENSATION AND BENEFITS

Compensation  and  benefits  expense  increased  12% for the three  months ended
December 31, 2004 compared to the same period last year.  The increase  resulted
primarily  from an increase  in bonus  expense  under our  Amended and  Restated
Annual Incentive  Compensation  Plan, which awards cash and stock bonuses based,
in part, on our performance,  as well as under other performance-based plans. In
addition,  we experienced  increases related to annual merit salary  adjustments
effective  in  October  2004  and  to  other  employee  benefits.   We  employed
approximately  6,800  people at December  31, 2004 as compared to about 6,500 at
December 31, 2003.

INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY

Information  systems,  technology  and occupancy  costs  decreased 4% during the
three months ended  December 31, 2004.  This decrease was primarily due to lower
depreciation levels related to a decrease in purchases of information system and
technology  equipment as certain of our  technology  equipment  is  periodically
replaced  under  our  technology  outsourcing   agreement,   as  well  as  lower
expenditures on software due to the stabilization in the number and scope of new
technology  project   initiatives.   The  decline  in  information  systems  and
technology expense was partly offset by an increase in building costs related to
global expansion.

Details of capitalized information systems and technology costs were as follows:


                                                                            THREE MONTHS ENDED
                                                                                DECEMBER 31,
(in millions)                                                              2004              2003
- ----------------------------------------------------------------------------------------------------

                                                                                      
Net book value at beginning of period                                     $51.3             $79.2
Additions during period, net of disposals and other adjustments             2.9               7.3
Net assets added through acquisitions                                        --               0.3
Amortization during period                                                 (7.3)            (13.0)
- ----------------------------------------------------------------------------------------------------
NET CARRYING AMOUNT AT END OF  PERIOD                                     $46.9             $73.8
- ----------------------------------------------------------------------------------------------------



                                       27
- --------------------------------------------------------------------------------


ADVERTISING AND PROMOTION

Advertising  and  promotion  expense  increased  23% for the three  months ended
December 31, 2004 over the same period last year due to higher  expenditures  on
direct advertising campaigns and marketing materials. We are committed to invest
in advertising and promotion in response to changing business conditions,  which
means that the level of advertising and promotion expenditures may increase more
rapidly or decrease more slowly than our revenues.

AMORTIZATION OF DEFERRED SALES COMMISSIONS

Certain  fund share  classes,  including  Class B, are sold  without a front-end
sales charge to  shareholders,  although  our  distribution  subsidiaries  pay a
commission on the sale.  Furthermore,  in the United States,  Class A shares are
sold without a front-end  sales charge to shareholders  when minimum  investment
criteria are met,  and Class C shares are sold without a front-end  sales charge
since  January  1,  2004.  However,  our  U.S.  distribution  subsidiary  pays a
commission on these sales. We defer and amortize all up-front  commissions  paid
by our  distribution  subsidiaries  and amortize  them over 12 months to 8 years
depending on share class or financing arrangements.

Class B and certain of our Class C deferred  commission  assets ("DCA")  arising
from our U.S.,  Canadian and European  operations are financed through Lightning
Finance  Company  Limited  ("LFL"),  a company in which we have a 49%  ownership
interest.  LFL has entered into a financing agreement with our U.S. distribution
subsidiary and we maintain a continuing  interest in the DCA  transferred to LFL
until  resold  by LFL.  As a result,  we  retain  DCA sold to LFL under the U.S.
agreement in our financial  statements  and amortize them over an 8-year period,
or until sold by LFL to third parties. In contrast to the U.S. arrangement,  LFL
has entered into direct  agreements  with our  Canadian  and European  sponsored
investment  products,  and, as a result, we do not record DCA from these sources
in our  financial  statements.  The boards of the U.S.  funds that offer Class B
shares have  approved a proposal to cease the  offering of Class B shares to new
investors  and  existing  shareholders  desiring to make  additional  purchases.
Existing Class B shareholders  would continue to be permitted to exchange shares
into Class B shares of different funds. Existing Class B shareholders would also
be permitted to continue to reinvest dividends in additional Class B shares. The
cessation  of  purchases  of  Class  B  shares  by new  investors  and  existing
shareholders  will be  effective in the first  calendar  quarter of 2005 and may
have a negative effect on the overall sales of the funds' shares.

Amortization  of deferred sales  commissions  increased 40% for the three months
ended December 31, 2004 over the same period last year  principally due to a 19%
increase  in gross  product  sales and  because  LFL has not sold U.S.  DCA in a
securitization transaction since fiscal 2002.

OTHER INCOME (EXPENSES)

Other income  (expenses)  includes net realized and unrealized  investment gains
(losses) of consolidated  sponsored  investment  products,  investment and other
income, net and interest expense.  Investment and other income, net is comprised
primarily of income related to our investments,  including  dividends,  interest
income,  realized  gains and losses and income from  investments  accounted  for
using the equity method of accounting,  as well as minority interest expense and
foreign currency exchange gains and losses.

Other income  (expenses)  increased  172% during the three months ended December
31, 2004 from the same period last year  primarily  due to higher  realized  and
unrealized net gains from our consolidated sponsored investment products, net of
related minority interest expense, higher interest income from term deposits and
debt securities and higher equity method income from our investments.

TAXES ON INCOME

As a multi-national  corporation, we provide investment management services to a
wide range of international  sponsored investment  products,  often managed from
locations outside the United States.  Some of these jurisdictions have lower tax
rates than the United  States.  The mix of pre-tax  income  (primarily  from our
investment  management  business)  subject to these lower rates, when aggregated
with income originating in the United States, produces a lower overall effective
tax rate than existing U.S. Federal and state tax rates.

Our effective  income tax rate for the three months ended  December 31, 2004 was
28.5% and  remained  substantially  unchanged  from 29% for the same period last
year. The effective tax rate will continue to reflect


                                       28
- --------------------------------------------------------------------------------



the relative  contributions  of foreign earnings that are subject to reduced tax
rates and that are not currently  included in U.S.  taxable  income,  as well as
other factors.

LIQUIDITY AND CAPITAL RESOURCES

The  following  table  summarizes  certain key  financial  data  relating to our
liquidity, and sources and uses of capital:


                                                                  DECEMBER 31,      SEPTEMBER 30,
(in millions)                                                             2004               2004
- ----------------------------------------------------------------------------------------------------

                                                                                   
BALANCE SHEET DATA
Assets
  Liquid assets                                                       $4,528.9           $4,279.3
  Cash and cash equivalents                                            3,105.2            2,917.2

Liabilities
  Federal funds purchased and Federal Home Loan Bank Advances             $0.2               $6.0
  Commercial paper                                                       170.0              170.0
  Convertible Notes                                                      532.6              530.1
  Medium Term Notes                                                      420.0              420.0
  Other long-term debt                                                   263.2              246.3
- ----------------------------------------------------------------------------------------------------
    Total debt                                                        $1,386.0           $1,372.4
- ----------------------------------------------------------------------------------------------------



                                                                            THREE MONTHS ENDED
                                                                               DECEMBER 31,
                                                                          2004              2003
- ----------------------------------------------------------------------------------------------------
                                                                                      

CASH FLOW DATA
Operating cash flows                                                    $239.9              $94.7
Investing cash flows                                                     (53.1)             133.4
Financing cash flows                                                       1.2               70.9
- ----------------------------------------------------------------------------------------------------


Liquid assets, which consist of cash and cash equivalents,  investments (trading
and  available-for-sale)  and current receivables,  increased from September 30,
2004,  primarily  due to cash  provided by operating  activities.  Cash and cash
equivalents  include cash, debt  instruments  with maturities of three months or
less at the purchase date and other highly liquid  investments  that are readily
convertible into cash,  including money market funds.  Cash and cash equivalents
increased  from  September 30, 2004 as we invested  operating cash flows in debt
instruments,  including term deposits,  U.S. T-bills and other  interest-bearing
deposits, with maturities of three months or less from the purchase date.

The increase in total debt outstanding from September 30, 2004 relates primarily
to an increase in long-term financing  liability  recognized in relation to U.S.
DCA financed by LFL.

We experienced  higher  operating cash flows for the three months ended December
31,  2004 as  compared to the same period last year due to higher net income and
net  proceeds  from the  securitization  of loans held for sale.  The decline in
investing cash flows for the three months ended December 31, 2004 as compared to
the same period last year related  primarily to excess  purchases of investments
over liquidations.  Financing  activities in the three months ended December 31,
2004  included the purchase and  retirement  of 1.8 million  shares at a cost of
$117.7 million. At December 31, 2004, approximately 11.5 million shares remained
available for repurchase  under board  authorizations.  We purchased and retired
0.3 million  shares at a cost of $12.5  million  during the three  months  ended
December 31, 2003.


                                       29
- --------------------------------------------------------------------------------


CAPITAL RESOURCES

We believe  that we can meet our present and  reasonably  foreseeable  operating
cash needs and future  commitments  through  existing liquid assets,  continuing
cash flows from operations,  borrowing capacity under current credit facilities,
the ability to issue debt or equity securities, and mutual fund sales commission
financing arrangements. In particular, we expect to finance future investment in
our  banking/finance  activities through operating cash flows,  debt,  increased
deposit base,  and through the  securitization  of a portion of the  receivables
from consumer lending activities.

As of December 31,  2004,  we had $300.0  million of debt and equity  securities
available to be issued under shelf  registration  statements  filed with the SEC
and $330.0 million of additional  commercial  paper available for issuance.  Our
committed  revolving  credit  facilities  at December  31, 2004  totaled  $420.0
million,  of which, $210.0 million was under a 364-day facility expiring in June
2005. The remaining $210.0 million  facility is under a five-year  facility that
will expire in June 2007. In addition, at December 31, 2004, our banking/finance
operating  segment had $511.5 million in available  uncommitted  short-term bank
lines under the Federal Reserve Funds system,  the Federal Reserve Bank discount
window, and Federal Home Loan Bank short-term borrowing capacity. Our ability to
access the  capital  markets in a timely  manner  depends on a number of factors
including our credit  rating,  the condition of the global  economy,  investors'
willingness to purchase our securities,  interest rates,  credit spreads and the
valuation levels of equity markets.  In extreme  circumstances,  we might not be
able to access this liquidity readily.

Our  investment  management  segment  finances  Class B and certain  Class C DCA
arising from our U.S.,  Canadian and European  operations through LFL, a company
in which we have a 49% ownership interest.  Class B and C sales commissions that
we have financed globally through LFL during the three months ended December 31,
2004,  were  approximately  $42.7 million  compared to $43.3 million  during the
three months ended December 31, 2003. LFL's ability to access credit  facilities
and the  securitization  market  will  directly  affect our  existing  financing
arrangements.

Our banking/finance operating segment finances its automotive lending activities
through  operational  cash  flows,  inter-segment  loans and by selling its auto
loans in  securitization  transactions  with qualified special purpose entities,
which then issue  asset-backed  securities  to private  investors.  Beginning in
calendar  year 2005,  automotive  lending  activities  may also be  financed  by
issuing auto loan backed variable funding notes to institutional  investors, and
as a result,  we expect that  inter-segment  lending  activities  will decrease.
Gross sale  proceeds  from auto loan  securitization  transactions  were  $178.8
million for the three months ended  December 31, 2004 and $185.1  million in the
three months ended December 31, 2003.  Our ability to access the  securitization
market will directly  affect our plans to finance the auto loan portfolio in the
future.

USES OF CAPITAL

We expect that the main uses of cash will be to expand our core  business,  make
strategic  acquisitions,  acquire shares of our common stock,  fund property and
equipment purchases, pay operating expenses of the business,  enhance technology
infrastructure and business processes,  pay shareholder  dividends and repay and
service debt.

In May 2001, we received  approximately  $490.0 million in net proceeds from the
sale of $877.0 million  principal amount at maturity of zero-coupon  convertible
senior notes due 2031 (the "Convertible  Notes").  The Convertible  Notes, which
were offered to qualified  institutional  buyers only, carry an interest rate of
1.875% per annum, with an initial  conversion premium of 43%. Each of the $1,000
(principal  amount at maturity)  Convertible  Notes is  convertible  into 9.3604
shares  of our  common  stock,  when the  price  of our  stock  reaches  certain
thresholds.  To date, we have repurchased Convertible Notes with a face value of
$5.9 million  principal  amount at maturity,  for their  accreted  value of $3.5
million,  in cash. We may redeem the remaining  Convertible Notes for cash on or
after May 11, 2006 or, at the option of the holders,  we may be required to make
additional  repurchases on May 11 of 2006,  2011,  2016,  2021 and 2026. In this
event, we may choose to pay the accreted value of the Convertible  Notes in cash
or shares of our common  stock.  The amount  that the  holders may redeem in the
future will depend on, among other factors, the performance of our common stock.


                                       30
- --------------------------------------------------------------------------------


CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Our contractual obligations are summarized in our Annual Report on Form 10-K for
the year ended  September 30, 2004.  As of December 31, 2004,  there had been no
material changes in our contractual obligations from September 30, 2004.

In relation to the auto loan  securitization  transactions  that we have entered
into with a number of qualified  special purpose  entities,  we are obligated to
cover shortfalls in amounts due to the holders of the notes up to certain levels
as specified under the related agreements.  As of December 31, 2004, the maximum
potential  amount of future  payments  related  to these  obligations  was $29.5
million.  In  addition,  our  Consolidated  Balance  Sheet at December  31, 2004
included  a $0.5  million  liability  to  reflect  the  fair  value  of  certain
additional obligations arising from auto securitization transactions.

At December 31, 2004, the  banking/finance  operating segment had commitments to
extend credit aggregating $241.2 million, primarily under its credit card lines,
and had issued  financial  standby  letters of credit  totaling  $2.6 million on
which  beneficiaries  would be able to draw upon in the event of non-performance
by our customers,  primarily in relation to lease and lien  obligations of these
banking customers.  These standby letters of credit,  issued prior to January 1,
2003, were secured by marketable securities with a fair value of $2.2 million as
of December 31, 2004 and commercial real estate.

OFF-BALANCE SHEET ARRANGEMENTS

As discussed  above, we obtain  financing for sales  commissions  that we pay to
broker/dealers on Class B and certain Class C shares of our sponsored investment
products through LFL, a company established in Ireland to provide DCA financing.
We hold a 49%  ownership  interest  in LFL and we  account  for  this  ownership
interest using the equity method of accounting.  Our exposure to loss related to
our  investment in LFL is limited to the carrying  value of our  investment  and
loans,  and interest and fees receivable  from LFL. At December 31, 2004,  those
amounts  approximated $55.7 million.  During the three months ended December 31,
2004, we recognized  pre-tax income of approximately  $2.5 million for our share
of its net income over this period.

As discussed above, our  banking/finance  operating segment  periodically enters
into  auto loan  securitization  transactions  with  qualified  special  purpose
entities,  which then issue asset-backed  securities to private  investors.  Our
main objective in entering in securitization transactions is to obtain financing
for auto loan activities.  Securitized loans held by the  securitization  trusts
totaled  $844.8 million at December 31, 2004 and $768.9 million at September 30,
2004.

CRITICAL ACCOUNTING POLICIES

Our financial  statements and accompanying notes are prepared in accordance with
generally accepted  accounting  principles in the United States. The preparation
of these financial statements requires us to make estimates and assumptions that
impact our financial  position and results of  operations.  These  estimates and
assumptions  are affected by our  application of accounting  policies.  Below we
describe certain critical  accounting  policies that we believe are important to
understanding our results of operations and financial  position.  For additional
information  about  our  accounting  policies,  please  refer  to  Note 1 to the
financial  statements contained in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2004.

GOODWILL AND OTHER INTANGIBLE ASSETS

We make  significant  estimates and assumptions  when valuing goodwill and other
intangibles  in  connection  with the initial  purchase  price  allocation of an
acquired  entity,  as well as when  evaluating  impairment of  intangibles on an
ongoing basis.

Under Statement of Financial  Accounting  Standards No. 142, "Goodwill and Other
Intangible  Assets",  we are  required  to test the fair value of  goodwill  and
indefinite-lived  intangibles  when there is an indication of impairment,  or at
least once a year.  Goodwill impairment is indicated when the carrying amount of
a reporting unit exceeds its implied fair value, calculated based on anticipated
discounted  cash flows.  In estimating the fair value of the reporting  unit, we
use  valuation  techniques  based on  discounted  cash  flows  similar to models
employed in analyzing the purchase price of an acquisition target.

Intangible  assets  subject to  amortization  are reviewed for impairment on the
basis of the expected future undiscounted operating cash flows, without interest
charges,  to be derived from these assets. We review


                                       31
- --------------------------------------------------------------------------------



definite-lived  intangible  assets for impairment when there is an indication of
impairment, or at least once a year.

We completed our latest annual impairment test of goodwill and  indefinite-lived
and definite-lived intangible assets during the quarter ended March 31, 2004 and
we  determined  that there was no  impairment  to these  assets as of October 1,
2003.

In performing our analysis,  we used certain assumptions and estimates including
those related to discount rates and the expected  future period of cash flows to
be derived from the assets, based on, among other factors, historical trends and
the  characteristics  of the  assets.  While we  believe  that our  testing  was
appropriate,  if these estimates and assumptions change in the future, we may be
required  to  record  impairment  charges  or  otherwise  increase  amortization
expense.

INCOME TAXES

As a  multinational  corporation,  we operate in various  locations  outside the
United  States.  As of December 31, 2004,  and based on tax laws in effect as of
this  date,  it is our  intention  to  continue  to  indefinitely  reinvest  the
undistributed earnings of foreign subsidiaries.  As a result, we have not made a
provision for U.S.  taxes and have not recorded a deferred tax liability on $2.6
billion of cumulative undistributed earnings recorded by foreign subsidiaries as
of December 31, 2004. Changes to our policy of reinvesting  foreign earnings may
have a significant effect on our financial condition and results of operation.

In December  2004,  the FASB issued Staff  Position No. 109-2,  "Accounting  and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American  Jobs  Creation  Act of 2004"  ("FSP FAS  109-2").  The  American  Jobs
Creation Act of 2004 (the "Act") was signed into law on October 22, 2004.  Under
a  provision  of the Act,  we may elect to  repatriate  certain  earnings of our
foreign-based subsidiaries at a reduced federal tax rate in either of our fiscal
years ending  September 30, 2005 or September 30, 2006.  FSP FAS 109-2  provides
guidance on when an enterprise should recognize in its financial  statements the
effects of the one-time tax benefit of  repatriation  of foreign  earnings under
the  Act,  and  specifies  interim  disclosure  requirements.  We are  currently
evaluating the effect of this repatriation provision;  however, we do not expect
to complete this evaluation until after the U.S. Congress or the U.S. Department
of the Treasury issue additional guidance regarding this provision. The range of
possible  amounts we are considering  for  repatriation is between zero and $1.9
billion,  and the potential  range of income tax associated with amounts subject
to the reduced rate is between zero and $117.0 million.

VALUATION OF INVESTMENTS

We record  substantially  all  investments  in our financial  statements at fair
value or amounts that  approximate fair value.  Where  available,  we use prices
from independent  sources such as listed market prices or broker or dealer price
quotations.  For  investments in illiquid and privately held  securities that do
not  have  readily  determinable  fair  values,  we  estimate  the  value of the
securities based upon available information.  However, even where the value of a
security is derived from an independent  market price or broker or dealer quote,
some  assumptions may be required to determine the fair value.  For example,  we
generally assume that the size of positions in securities that we hold would not
be large enough to affect the quoted price of the securities when sold, and that
any such sale would happen in an orderly manner.  However, these assumptions may
be incorrect and the actual value realized on sale could differ from the current
carrying value.

We  evaluate  our  investments  for  other-than-temporary  decline in value on a
periodic basis. This may exist when the fair value of an investment security has
been below the  current  value for an  extended  period of time.  As most of our
investments  are carried at fair value,  if an  other-than-temporary  decline in
value is determined to exist, the unrealized investment loss recorded net of tax
in accumulated other comprehensive income is realized as a charge to net income,
in the period in which the other-than-temporary  decline in value is determined.
We classify  securities as trading when it is management's intent at the time of
purchase to sell the  security  within a short period of time.  Accordingly,  we
record  unrealized  gains and  losses on these  securities  in our  consolidated
income.

While  we   believe   that  we  have   accurately   estimated   the   amount  of
other-than-temporary  decline in value in our portfolio,  different  assumptions
could result in changes to the recorded amounts in our financial statements.


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LOSS CONTINGENCIES

We are involved in various lawsuits and claims  encountered in the normal course
of business. When such a matter arises and periodically  thereafter,  we consult
with our legal  counsel and  evaluate the merits of the claim based on the facts
available at that time. In management's  opinion,  an adequate  accrual has been
made as of December 31, 2004 to provide for any  probable  losses that may arise
from these matters. See also "Legal Proceedings " included in Part II, Item 1 of
this report.

VARIABLE INTEREST ENTITIES

Under FIN 46-R,  a variable  interest  entity  ("VIE") is an entity in which the
equity investment holders have not contributed sufficient capital to finance its
activities  or the  equity  investment  holders do not have  defined  rights and
obligations  normally  associated with an equity  investment.  FIN 46-R requires
consolidation  of a VIE by the enterprise that has the majority of the risks and
rewards of ownership, referred to as the primary beneficiary.

Evaluating  whether  related  entities are VIEs and determining if we qualify as
the primary beneficiary of these VIEs, is highly complex and involves the use of
estimates and  assumptions.  To determine our interest in the expected losses or
residual  returns of each VIE, we performed an expected cash flow analysis using
certain discount rate and volatility  assumptions based on available  historical
information  and  management's  estimates.  Based  on our  analysis,  we did not
consolidate any VIEs in our financial  statements as of December 31, 2004. While
we believe that our testing and approach  were  appropriate,  future  changes in
estimates and assumptions may affect our decision and lead to the  consolidation
of one or more VIEs in our financial statements.

IMPACT OF INFLATION

Our  Consolidated  Financial  Statements  and  related  Notes are  presented  in
historical  dollars  without  considering  the  effect  of  inflation.  Since  a
significant  portion of our assets are liquid in nature, the potential effect of
inflation is  mitigated.  In addition,  the majority of our revenues and related
expenses  are  denominated  in U.S.  dollars,  a  currency  that  has  not  been
significantly  affected by the impact of changes in prices in recent  years.  To
the extent that a potential  rise in inflation may affect the securities and the
consumer  lending markets,  it may adversely  affect our financial  position and
results of operation in the future.

RISK FACTORS

WE FACE STRONG  COMPETITION  FROM NUMEROUS AND SOMETIMES  LARGER  COMPANIES WITH
COMPETING OFFERINGS AND PRODUCTS. We compete with numerous investment management
companies,  mutual fund, stock brokerage and investment banking firms, insurance
companies,   banks,   savings  and  loan   associations   and  other   financial
institutions.  Continuing  consolidation in the financial  services industry has
created  stronger  competitors  with  greater  financial  resources  and broader
distribution   channels  than  our  own.   Additionally,   competing  securities
broker/dealers  whom we rely upon to distribute our mutual funds also sell their
own  proprietary   funds  and  investment   products,   which  could  limit  the
distribution  of  our  investment  products.  To the  extent  that  existing  or
potential customers, including securities broker/dealers, decide to invest in or
distribute the products of our competitors, the sales of our products as well as
our market share,  revenues and net income could decline. Our ability to attract
and  retain  assets  under our  management  is also  dependent  on the  relative
investment  performance of our funds and other managed investment portfolios and
our ability to maintain our  investment  management and  administrative  fees at
competitive levels.

CHANGES  IN THE  DISTRIBUTION  CHANNELS  ON WHICH WE  DEPEND  COULD  REDUCE  OUR
REVENUES AND HINDER OUR GROWTH.  We derive  nearly all of our fund sales through
broker/dealers and other similar investment advisers. Increasing competition for
these distribution channels and recent regulatory  initiatives,  have caused our
distribution  costs to rise and could  cause  further  increases  in the future.
Higher distribution costs lower our net revenues and earnings.  Additionally, if
one of the major  financial  advisers who distributes our products were to cease
its operations,  it could have a significant  adverse impact on our revenues and
earnings.  Moreover,  our failure to maintain strong business relationships with
these  advisers  would impair our ability to  distribute  and sell our products,
which  would have a  negative  effect on our level of assets  under  management,
related revenues and overall business and financial condition.

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WE HAVE  BECOME  SUBJECT TO AN  INCREASED  RISK OF  VOLATILITY  OF THE ASSETS WE
MANAGE  CAUSED BY CHANGES IN THE FINANCIAL  AND EQUITY  MARKETS.  We have become
subject to an increased  risk of asset  volatility  from changes in the domestic
and  global  financial  and  equity  markets  due to the  continuing  threat  of
terrorism. Declines in these markets have caused in the past, and would cause in
the future, a decline in our revenue and income.

THE LEVELS OF OUR ASSETS UNDER MANAGEMENT, WHICH IMPACT REVENUES, ARE SUBJECT TO
SIGNIFICANT  FLUCTUATIONS.  Global  economic  conditions,  changes in the equity
market place,  currency  exchange rates,  interest rates,  inflation  rates, the
yield curve and other  factors  that are  difficult  to predict  affect the mix,
market  values  and  levels of our  assets  under  management.  Changing  market
conditions may cause a shift in our asset mix towards fixed-income  products and
a related  decline in our revenue and income,  since we generally  derive higher
fee revenues and income from equity  assets than from  fixed-income  products we
manage.  Similarly,  our securitized consumer receivables business is subject to
marketplace fluctuation, including economic and credit market downturns.

OUR FUTURE  RESULTS ARE  DEPENDENT  UPON  MAINTAINING  AN  APPROPRIATE  LEVEL OF
EXPENSES,  WHICH ARE  SUBJECT  TO  FLUCTUATION.  The level of our  expenses  are
subject to fluctuation  and may increase for the following or other reasons:  an
increase  in  insurance  expenses  including  through the  assumption  of higher
deductibles and/or co-insurance liability; changes in the level and scope of our
advertising  expenses in response to market conditions;  variations in the level
of total compensation  expense due to, among other things,  bonuses,  changes in
our employee count and mix, and competitive factors; expenses and capital costs,
including  costs  incurred  to  maintain  and  enhance  our  administrative  and
operating services infrastructure.

WE  FACE  RISKS  ASSOCIATED  WITH  CONDUCTING  OPERATIONS  IN  NUMEROUS  FOREIGN
COUNTRIES.  We sell  mutual  funds and offer  investment  advisory  and  related
services in many different regulatory jurisdictions around the world, and intend
to continue to expand our operations internationally which may involve increased
expense and capital costs.  Regulators in these  jurisdictions could also change
their policies or laws in a manner that might  restrict or otherwise  impede our
ability to  distribute  or  register  investment  products  in their  respective
markets.

OUR  ABILITY TO  SUCCESSFULLY  INTEGRATE  WIDELY  VARIED  BUSINESS  LINES CAN BE
IMPEDED BY SYSTEMS AND OTHER TECHNOLOGICAL LIMITATIONS. Our continued success in
effectively  managing and growing our  business  both  domestically  and abroad,
depends  on  our  ability  to  integrate  the  varied   accounting,   financial,
information and operational systems of our various businesses on a global basis.

OUR ABILITY TO MEET CASH NEEDS DEPENDS UPON CERTAIN FACTORS, INCLUDING OUR ASSET
VALUE,  CREDIT WORTHINESS AND THE MARKET VALUE OF OUR STOCK. Our ability to meet
anticipated  cash needs  depends upon  factors  including  our asset value,  our
creditworthiness  as  perceived  by lenders  and the market  value of our stock.
Similarly, our ability to securitize and hedge future loan portfolios and credit
card receivables,  and to obtain continued financing for certain Class C shares,
is also  subject to the  market's  perception  of those  assets,  finance  rates
offered by  competitors,  and the  general  market for private  debt.  If we are
unable  to  obtain  these  funds  and  financing,  we may  be  forced  to  incur
unanticipated costs or revise our business plans.

CERTAIN OF THE PORTFOLIOS WE MANAGE,  INCLUDING OUR EMERGING MARKET  PORTFOLIOS,
AND RELATED REVENUES,  ARE VULNERABLE TO  MARKET-SPECIFIC  POLITICAL OR ECONOMIC
RISKS.  Our emerging market  portfolios and revenues derived from managing these
portfolios  are  subject  to  significant  risks  of  loss  from  political  and
diplomatic developments,  currency fluctuations,  social instability, changes in
governmental  polices,  expropriation,  nationalization,  asset confiscation and
changes in legislation  related to foreign  ownership.  Foreign trading markets,
particularly in some emerging market countries,  are often smaller, less liquid,
less  regulated  and  significantly  more  volatile  than  the  U.S.  and  other
established markets.

OUR  REVENUES  COULD  BE  ADVERSELY  AFFECTED  IF THE  TERMS  OF OUR  INVESTMENT
MANAGEMENT   AGREEMENTS  ARE  SIGNIFICANTLY  ALTERED  OR  THESE  AGREEMENTS  ARE
TERMINATED  BY THE FUNDS WE ADVISE.  Our revenues  are  dependent on fees earned
under investment  management or related  administrative  agreements that we have
with the funds we advise.  These  revenues  could be  adversely  affected if the
terms of these  agreements  are  significantly  altered or these  agreements are
terminated.

DIVERSE AND STRONG  COMPETITION  LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON
CONSUMER LOANS.  We compete with many types of institutions  for consumer loans,
which  can  provide  loans  at  significantly  below-market  interest  rates  in
connection  with  automobile  sales or in some cases zero  interest  rates.  Our
inability  to compete  effectively  against  these  companies or to maintain our
relationships with the various automobile dealers through whom we offer consumer
loans could limit the growth of our consumer loan business.  Economic and credit

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market downturns could reduce the ability of our customers to repay loans, which
could cause our consumer loan portfolio losses to increase.

WE ARE SUBJECT TO EXTENSIVE  REGULATION  DOMESTICALLY AND ABROAD. Our investment
management business and other businesses are subject to extensive  regulation in
the United  States and abroad,  including,  among others,  securities,  banking,
accounting and tax laws and  regulations.  We are subject to Federal  securities
laws, state laws regarding securities fraud, other Federal and State regulations
promulgated by the Securities and Exchange Commission,  the National Association
of  Securities  Dealers  and the New  York  Stock  Exchange,  and to the  extent
operations  take place outside the United  States,  by foreign  regulations  and
regulators.  During the past five years,  the Federal  securities laws have been
augmented substantially by, among other measures, the Sarbanes-Oxley Act of 2002
and the USA Patriot Act. Upon  completion of our  acquisition of Fiduciary Trust
in April 2001, we became a bank holding company and a financial  holding company
subject to the  supervision  and  regulation  of the Federal  Reserve Board (the
"FRB"). We are subject to the restrictions,  limitations, or prohibitions of the
Bank  Holding  Company Act of 1956 and the  Gramm-Leach-Bliley  Act. The FRB may
impose  additional  limitations or restrictions on our activities,  including if
the FRB believes that we do not have the  appropriate  financial and  managerial
resources to commence or conduct an activity or make an acquisition.

REGULATORY OR LEGISLATIVE  ACTIONS AND REFORMS,  PARTICULARLY THOSE SPECIFICALLY
FOCUSED ON THE MUTUAL FUND  INDUSTRY,  COULD  ADVERSELY  IMPACT OUR ASSETS UNDER
MANAGEMENT,  INCREASE COSTS AND NEGATIVELY  IMPACT OUR  PROFITABILITY AND FUTURE
FINANCIAL RESULTS.  Current and pending  regulatory and legislative  actions and
reforms affecting the mutual fund industry,  including  compliance  initiatives,
may negatively  impact revenues,  either of which could have a material negative
impact on our financial results.

TECHNOLOGY AND OPERATING RISK AND LIMITATIONS COULD CONSTRAIN OUR OPERATIONS. We
are highly dependent on the integrity of our technology,  operating  systems and
premises.  Although we have in place certain  disaster  recovery  plans,  we may
experience  system delays and  interruptions  as a result of natural  disasters,
power failures,  acts of war, and third party failures,  which could  negatively
impact our operations.

GOVERNMENTAL  INVESTIGATIONS,  SETTLEMENTS OF SUCH  INVESTIGATIONS,  ONGOING AND
PROPOSED   GOVERNMENTAL   ACTIONS,  AND  REGULATORY   EXAMINATIONS  OF  FRANKLIN
RESOURCES, INC. AND CERTAIN OF ITS SUBSIDIARIES (THE "COMPANY") AND ITS BUSINESS
ACTIVITIES AS WELL AS CIVIL LITIGATION ARISING OUT OF OR RELATED TO SUCH MATTERS
COULD  ADVERSELY  IMPACT  OUR  ASSETS  UNDER  MANAGEMENT,   INCREASE  COSTS  AND
NEGATIVELY IMPACT THE PROFITABILITY OF THE COMPANY AND FUTURE FINANCIAL RESULTS.

INVESTIGATIONS.  As part of various investigations by a number of federal, state
and  foreign  regulators,  including  the  Securities  and  Exchange  Commission
("SEC"),  the California  Attorney  General's Office ("CAGO"),  and the National
Association of Securities Dealers, Inc. ("NASD"),  relating to certain practices
in the mutual fund industry, including late trading, market timing and marketing
support  payments to securities  dealers who sell fund shares,  the Company,  as
well as certain  current or former  executives  and  employees  of the  Company,
received subpoenas and/or requests for documents,  information and/or testimony.
The Company and its current  employees  provided  documents and  information  in
response to those requests and subpoenas.

Franklin  Templeton  Investments Corp.  ("FTIC"),  a Company  subsidiary and the
investment  manager of Franklin  Templeton's  Canadian  mutual  funds,  has been
cooperating  with and  responding to requests for  information  from the Ontario
Securities  Commission  (the  "OSC")  relating  to the OSC's  review of frequent
trading  practices  within the Canadian  mutual fund  industry.  On December 10,
2004,  FTIC  received  a  letter  indicating  that  the  staff  of  the  OSC  is
contemplating  enforcement  proceedings  against  FTIC  before  the OSC.  In its
letter,  the OSC staff expressed the view that, over the period of February 1999
to February 2003, there were certain accounts that engaged in a frequent trading
market timing  strategy in certain funds being managed by FTIC.  The letter also
gave FTIC the  opportunity  to respond to the issues raised in the letter and to
provide the OSC staff with additional information relevant to those matters. The
Company has entered into  discussions with the OSC staff in an effort to resolve
the issues raised in the OSC's review. The Company cannot predict the likelihood
of whether those  discussions will result in a settlement or the terms or amount
of any such  settlement.  Should a  settlement  be reached,  the amount could be
material to the Company's financial results.

On December 9, 2004, the enforcement staff of the NASD informed the Company that
it had made a preliminary  determination to recommend a disciplinary  proceeding
against  Franklin/Templeton  Distributors,  Inc.  ("FTDI"),  alleging  that FTDI
violated certain NASD rules by the use of directed brokerage  commissions to pay
for sales and marketing  support.  The  enforcement  staff has since advised the
Company  that it has  determined  not to  recommend  a  disciplinary  proceeding
against FTDI and has concluded  its  investigation  of

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this  matter.  Separately,  FTDI has also  received a letter from the NASD staff
advising of its preliminary determination to recommend a disciplinary proceeding
against FTDI  alleging  violation  of certain NASD rules  relating to FTDI's Top
Producers  program.  The Company  believes that any such charges are unwarranted
and has responded with a submission as to why such action is not  warranted.  As
of the date of this filing, the NASD staff has not taken any further action.

SETTLEMENTS. Beginning in August 2004, the Company entered into settlements with
certain regulators investigating the mutual fund industry practices noted above.
The Company  believes that  settlement of each of the matters  described in this
section is in the best interest of the Company and  shareholders of the Franklin
Templeton mutual funds (the "Funds").

On August 2, 2004,  Franklin  Resources,  Inc.  announced  that its  subsidiary,
Franklin Advisers,  Inc. ("Franklin Advisers") reached an agreement with the SEC
that  resolved  the  issues   resulting  from  the   previously   disclosed  SEC
investigation  into market timing  activity.  In connection with that agreement,
the  SEC  issued  an  "Order  Instituting  Administrative  and  Cease-and-Desist
Proceedings  Pursuant to Sections  203(e) and 203(k) of the Investment  Advisers
Act of 1940 and Sections  9(b) and 9(f) of the  Investment  Company Act of 1940,
Making Findings and Imposing Remedial  Sanctions and a  Cease-and-Desist  Order"
(the "Order").  The SEC's Order  concerned the activities of a limited number of
third  parties  that ended in 2000 and those that were the  subject of the first
Massachusetts administrative complaint described below.

Under the terms of the SEC's Order,  pursuant to which Franklin Advisers neither
admitted nor denied any of the findings  contained  therein,  Franklin  Advisers
agreed to pay $50 million to be  distributed to  shareholders  of certain of the
Funds,  of which $20 million was a civil  penalty.  The  settlement  and related
legal and distribution  costs of $60 million ($45.6 million,  net of taxes) were
recorded as a charge to income in the fiscal quarter ended March 31, 2004.

The Order required Franklin Advisers to, among other things:

*    Enhance and periodically  review  compliance  policies and procedures,  and
     establish a corporate ombudsman;
*    Establish a new internal  position  whose  responsibilities  shall  include
     compliance matters related to conflicts of interests; and
*    Retain  an  Independent  Distribution  Consultant  to  develop  a  plan  to
     distribute the $50 million settlement to Fund shareholders.

The Order  further  provided  that in any  related  investor  actions,  Franklin
Advisers would not benefit from any offset or reduction of any investor's  claim
by the amount of any distribution from the  above-described  $50 million to such
investor  that is  proportionately  attributable  to the civil  penalty  paid by
Franklin Advisers.

On September  20,  2004,  Franklin  Resources,  Inc.  announced  that two of its
subsidiaries,  Franklin Advisers and Franklin Templeton Alternative  Strategies,
Inc. ("FTAS"),  reached an agreement with the Securities  Division of the Office
of  the  Secretary  of  the  Commonwealth  of   Massachusetts   (the  "State  of
Massachusetts")  related to its  administrative  complaint  filed on February 4,
2004,  concerning  one instance of market  timing that was also a subject of the
August 2, 2004  settlement  that  Franklin  Advisers  reached  with the SEC,  as
described above.  Under the terms of the settlement  consent order issued by the
State of  Massachusetts,  Franklin Advisers and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Company recorded
this expense in the quarter ended September 30, 2004. The Massachusetts  Consent
Order included two different  sections:  "Statements of Fact" and "Violations of
Massachusetts Securities Laws." Franklin Advisers and FTAS admitted the facts in
the Statements of Fact.

On October 25, 2004, the State of  Massachusetts  filed a second  administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described  the  Massachusetts  Consent  Order and stated that  "Franklin did not
admit  or deny  engaging  in any  wrongdoing")  failed  to state  that  Franklin
Advisers and FTAS admitted the  Statements of Fact portion of the  Massachusetts
Consent  Order (the "Second  Complaint").  Franklin  Resources,  Inc.  reached a
second agreement with the State of Massachusetts on November 19, 2004, resolving
the Second Complaint. As a result of the November 19, 2004 settlement,  Franklin
Resources,  Inc.  filed a new Form 8-K. The terms of the  Massachusetts  Consent
Order did not change and there was no monetary fine  associated with this second
settlement.

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On November 17, 2004,  Franklin  Resources,  Inc. announced that FTDI reached an
agreement  with the  CAGO,  resolving  the  issues  resulting  from  the  CAGO's
investigation  concerning sales and marketing support payments.  Under the terms
of the  settlement,  FTDI  neither  admitted nor denied the  allegations  in the
CAGO's  complaint  and agreed to pay $2 million to the State of  California as a
civil  penalty,  $14 million to the Funds,  to be  allocated  by an  independent
distribution  consultant to be paid for by FTDI,  and $2 million to the CAGO for
its  investigative  costs. The Company's results for the quarter and fiscal year
ended  September 30, 2004  included a charge to income of $18.5  million  ($12.2
million, net of tax) related to this settlement.

On December 13, 2004, Franklin  Resources,  Inc. announced that its subsidiaries
FTDI and Franklin  Advisers  reached an agreement  with the SEC,  resolving  the
issues  resulting  from the SEC's  investigation  concerning  marketing  support
payments to securities  dealers who sell Fund shares.  In  connection  with that
agreement,   the  SEC   issued  an   "Order   Instituting   Administrative   and
Cease-and-Desist  Proceedings,  Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections  203(e) and 203(k) of the Investment  Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment  Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").

Under the terms of the Second Order, in which FTDI and Franklin Advisers neither
admitted nor denied the findings contained therein, they agreed to pay the Funds
a penalty of $20 million and disgorgement of $1 (one dollar).  FTDI and Franklin
Advisers also agreed to implement certain measures and undertakings  relating to
marketing support payments to  broker-dealers  for the promotion or sale of Fund
shares,  including making additional  disclosures in the Funds' Prospectuses and
Statements of  Additional  Information.  The Second Order  further  requires the
appointment of an independent distribution consultant, at the Company's expense,
who shall develop a plan for the distribution of the penalty and disgorgement to
the Funds. The Company recorded a charge of $21.5 million ($17.3 million, net of
taxes) in its fiscal quarter ended June 30, 2004 related to this matter.

INTERNAL  INQUIRIES.  The Company also  conducted its own internal  fact-finding
inquiry with the  assistance  of outside  counsel to determine  whether any Fund
shareholders,  including  Company  employees,  were  permitted to engage in late
trading  or in  market  timing  transactions  contrary  to the  policies  of the
affected Fund and, if so, the circumstances and persons involved.  The Company's
internal inquiry  regarding  market timing and late trading is complete.  We did
not find any late trading,  though we identified  various  instances of frequent
trading.  One officer of a subsidiary of Franklin Resources,  Inc. was placed on
administrative  leave  and  subsequently  resigned  from his  position  with the
Company in December 2003.

The Company  found no  instances  of  inappropriate  mutual fund  trading by any
portfolio manager,  investment analyst or officer of Franklin Resources, Inc. As
previously disclosed,  the Company identified some instances of frequent trading
in  shares of  certain  Funds by a few  current  or  former  employees  in their
personal  401(k) plan accounts.  These  individuals  included one trader and one
officer of the Funds.  Pending our further  inquiry,  these two individuals were
placed on administrative  leave and the officer resigned from his positions with
the Funds. The independent  directors of the Funds and the Company also retained
independent outside counsel to review these matters and to report their findings
and   recommendations.    Based   on   independent    counsel's   findings   and
recommendations,  the Company  reinstated the trader.  The  independent  counsel
concluded  that some  instances of the former Fund  officer's  trading  violated
Company  policy,   and  the  Company  was  prepared  to  institute   appropriate
disciplinary  action.  Subsequently,  the former Fund officer  resigned from his
employment with the Company.  The Company does not believe there were any losses
to the Funds as a result of this trading.

CLASS ACTION AND OTHER LAWSUITS. The Company has been named in shareholder class
action and other lawsuits  related to some of the matters  described  above. See
"Legal  Proceedings"  included  in Part II,  Item 1 of this  report.  Management
believes  that the claims made in the lawsuits are without  merit and intends to
vigorously  defend against them. It is possible that the Company may be named in
additional similar civil actions.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the normal course of business,  our  financial  position is subject to market
risk: the potential  loss due to changes in the value of  investments  including
those resulting from adverse changes in interest rates,  foreign exchange and/or
equity prices.  Management is responsible for managing this risk. Our Enterprise
Risk  Management  Committee is  responsible  for providing a framework to assist
management to identify, assess and manage market and other risks.

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Our  banking/finance  operating segment is exposed to interest rate fluctuations
on its loans receivable,  debt securities held, and deposit liabilities.  In our
banking/finance  operating segment,  we monitor the net interest rate margin and
the average maturity of interest earning assets, as well as funding sources.  In
addition,  as of December 31, 2004, we have  considered the potential  impact of
the effect on the banking/finance  operating segment balances,  individually and
collectively, of a 100 basis point (1%) movement in market interest rates. Based
on our analysis,  we do not expect that this change would have a material impact
on our operating revenues or results of operations in either scenario.

Our investment  management  operating  segment is exposed to changes in interest
rates through its  investment in debt  securities and its  outstanding  debt. We
minimize the impact of interest rate fluctuations  related to our investments in
debt  securities  by managing the  maturities of these  securities,  and through
diversification.  Our  exposure to  interest  rate  changes  related to our debt
issuances is not material since a significant percentage of our outstanding debt
is at fixed interest rates.

We are subject to foreign  exchange  risk  through our  foreign  operations.  We
operate  primarily  in the United  States,  but also  provide  services and earn
revenues  in Canada,  the  Bahamas,  Europe,  Asia,  South  America,  Africa and
Australia.   Our  exposure  to  foreign  exchange  risk  is  minimized  since  a
significant portion of these revenues and associated expenses are denominated in
U.S. dollars.  This situation may change in the future as our business continues
to grow outside the United States.

We are exposed to equity price fluctuations  through securities we hold that are
carried at fair value and through  investments held by majority-owned  sponsored
investment  products that we  consolidate.  To mitigate this risk, we maintain a
diversified  investment portfolio.  Our exposure to equity price fluctuations is
also  minimized  as we sponsor a broad range of  investment  products in various
global jurisdictions.

ITEM 4.  CONTROLS AND PROCEDURES.

The Company's  management  evaluated,  with the  participation  of the Company's
principal executive and principal  financial officers,  the effectiveness of the
Company's  disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e)  under the Securities  Exchange Act of 1934, as amended (the "Exchange
Act"))  as of  December  31,  2004.  Based on their  evaluation,  the  Company's
principal   executive  and  principal  financial  officers  concluded  that  the
Company's  disclosure  controls and procedures were effective as of December 31,
2004.

There  has been no change  in the  Company's  internal  control  over  financial
reporting (as defined in Rules  13a-15(f) and 15d-15(f)  under the Exchange Act)
that occurred during the Company's  fiscal quarter ended December 31, 2004, that
has  materially  affected,  or is reasonably  likely to materially  affect,  the
Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

As  previously  reported,  on  September  20,  2004,  Franklin  Resources,  Inc.
announced that two of its subsidiaries, Franklin Advisers and Franklin Templeton
Alternative Strategies,  Inc. ("FTAS"), reached an agreement with the Securities
Division of the Office of the  Secretary of the  Commonwealth  of  Massachusetts
(the "State of Massachusetts") related to its administrative  complaint filed on
February  4, 2004,  concerning  one  instance  of market  timing that was also a
subject of the August 2, 2004 settlement that Franklin Advisers reached with the
SEC, as described in Note 13,  "Commitments  and  Contingencies  -  Governmental
Investigations,  Proceedings and Actions",  of Notes to  Consolidated  Financial
Statements  included in Part I, Item 1 of this  report  ("Note  13").  Under the
terms of the  settlement  consent  order  issued by the State of  Massachusetts,
Franklin  Advisers  and FTAS  consented to the entry of a cease and desist order
and agreed to pay a $5 million administrative fine to the State of Massachusetts
(the "Massachusetts Consent Order"). Franklin Resources, Inc. and certain of its
subsidiaries (as used in this section,  together,  the "Company")  recorded this
expense in the quarter ended September 30, 2004. The Massachusetts Consent Order
included  two  different  sections:  "Statements  of Fact"  and  "Violations  of
Massachusetts Securities Laws." Franklin Advisers and FTAS admitted the facts in
the Statements of Fact.

                                       38
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On October 25, 2004, the State of  Massachusetts  filed a second  administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described  the  Massachusetts  Consent  Order and stated that  "Franklin did not
admit  or deny  engaging  in any  wrongdoing")  failed  to state  that  Franklin
Advisers and FTAS admitted the  Statements of Fact portion of the  Massachusetts
Consent  Order (the "Second  Complaint").  Franklin  Resources,  Inc.  reached a
second agreement with the State of Massachusetts on November 19, 2004, resolving
the Second Complaint. As a result of the November 19, 2004 settlement,  Franklin
Resources,  Inc. filed a new Form 8-K. The terms of the original  settlement did
not  change  and  there  was  no  monetary  fine  associated  with  this  second
settlement.

In  addition,  the  Company  and certain  Funds,  current  and former  officers,
employees,  and  directors  have been named in multiple  lawsuits  in  different
federal courts in Nevada, California,  Illinois, New York, and Florida, alleging
violations of various federal  securities laws and seeking,  among other relief,
monetary damages, restitution,  removal of Fund trustees,  directors,  advisers,
administrators,  and distributors,  rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading  activity,  or breach  of duty  with  respect  to the  valuation  of the
portfolio  securities of certain Templeton Funds managed by Franklin  Resources,
Inc. subsidiaries,  resulting in alleged market timing activity. The majority of
these lawsuits duplicate,  in whole or in part, the allegations  asserted in the
February 4, 2004 Massachusetts  administrative complaint and the findings in the
SEC's August 2, 2004 Order,  as described in Note 13. The lawsuits are styled as
class  actions,  or  derivative  actions on behalf of either the named  Funds or
Franklin Resources, Inc.

To date,  more than 240 similar  lawsuits  against at least 19 different  mutual
fund  companies  have been  filed in  federal  district  courts  throughout  the
country.  Because these cases  involve  common  questions of fact,  the Judicial
Panel on Multidistrict Litigation (the "Judicial Panel") ordered the creation of
a multidistrict  litigation in the United States District Court for the District
of Maryland,  entitled "In re Mutual Funds  Investment  Litigation" (the "MDL").
The Judicial Panel then  transferred  similar cases from different  districts to
the MDL for coordinated or consolidated pretrial proceedings.

As of February 8, 2005, the following  federal  lawsuits are pending against the
Company (and in some  instances,  against  certain  officers,  directors  and/or
Funds) and have been transferred to the MDL:

Kenerley v.  Templeton  Funds,  Inc.,  et al.,  Case No.  03-770  GPM,  filed on
November 19, 2003 in the United States District Court for the Southern  District
of Illinois; Cullen v. Templeton Growth Fund, Inc., et al., Case No. 03-859 MJR,
filed on December 16, 2003 in the United States  District Court for the Southern
District of Illinois and transferred to the United States District Court for the
Southern  District  of Florida on March 29,  2004;  Jaffe v.  Franklin  AGE High
Income Fund, et al., Case No. CV-S-04-0146-PMP-RJJ, filed on February 6, 2004 in
the United  States  District  Court for the District of Nevada;  Lum v. Franklin
Resources,  Inc., et al., Case No. C 04 0583 JSW,  filed on February 11, 2004 in
the United  States  District  Court for the  Northern  District  of  California;
Fischbein  v.  Franklin AGE High Income  Fund,  et al.,  Case No. C 04 0584 JSW,
filed on February 11, 2004 in the United States  District Court for the Northern
District of California;  Beer v. Franklin AGE High Income Fund, et al., Case No.
8:04-CV-249-T-26  MAP, filed on February 11, 2004 in the United States  District
Court for the Middle District of Florida;  Bennett v. Franklin Resources,  Inc.,
et al., Case No. CV-S-04-0154-HDM-RJJ,  filed on February 12, 2004 in the United
States  District  Court for the District of Nevada;  Dukes v.  Franklin AGE High
Income Fund, et al., Case No. C 04 0598 MJJ,  filed on February 12, 2004, in the
United States District Court for the Northern District of California; McAlvey v.
Franklin Resources,  Inc., et al., Case No. C 04 0628 PJH, filed on February 13,
2004  in  the  United  States  District  Court  for  the  Northern  District  of
California;  Alexander v.  Franklin AGE High Income Fund,  et al., Case No. C 04
0639 SC, filed on February 17, 2004 in the United States  District Court for the
Northern  District of  California;  Hugh Sharkey  IRA/RO v. Franklin  Resources,
Inc.,  et al.,  Case No. 04 CV 1330,  filed on  February  18, 2004 in the United
States  District  Court for the  Southern  District of New York;  D'Alliessi  v.
Franklin AGE High Income Fund,  et al., Case No. C 04 0865 SC, filed on March 3,
2004  in  the  United  States  District  Court  for  the  Northern  District  of
California;  Marcus v. Franklin Resources,  Inc., et al., Case No. C 04 0901 JL,
filed on March 5, 2004 in the  United  States  District  Court for the  Northern
District of California;  Banner v. Franklin Resources,  Inc., et al., Case No. C
04 0902 JL, filed on March 5, 2004 in the United States  District  Court for the
Northern District of California;  Denenberg v. Franklin Resources, Inc., et al.,
Case No. C 04 0984 EMC,  filed on March 10, 2004 in the United  States  District
Court for the Northern District of California;  Hertz v. Burns, et al., Case No.
04 CV 02489, filed on March 30, 2004 in the United States District Court for the
Southern District of New York.

                                       39
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Plaintiffs  in the MDL filed  consolidated  amended  complaints on September 29,
2004.  It is  anticipated  that  defendants  will file motions to dismiss in the
coming months, with a hearing scheduled for June 2005.

As previously  reported,  various  subsidiaries of Franklin Resources,  Inc., as
well as certain  Templeton  Fund  registrants,  have also been named in multiple
class action lawsuits filed in state courts in Illinois, alleging breach of duty
with respect to the valuation of the portfolio  securities of certain  Templeton
Funds managed by such subsidiaries,  and seeking,  among other relief,  monetary
damages and attorneys' fees and costs, as follows:

Bradfisch v.  Templeton  Funds,  Inc., et al., Case No. 2003 L 001361,  filed on
October 3, 2003 in the  Circuit  Court of the Third  Judicial  Circuit,  Madison
County, Illinois;  Woodbury v. Templeton Global Smaller Companies Fund, Inc., et
al.,  Case No. 2003 L 001362,  filed on October 3, 2003 in the Circuit  Court of
the Third Judicial Circuit, Madison County,  Illinois;  Kwiatkowski v. Templeton
Growth Fund,  Inc., et al., Case No. 03 L 785, filed on December 17, 2003 in the
Circuit Court of the Twentieth  Judicial  Circuit,  St. Clair County,  Illinois;
Parise v.  Templeton  Funds,  Inc.,  et al.,  Case No.  2003 L 002049,  filed on
December 22, 2003 in the Circuit Court of the Third  Judicial  Circuit,  Madison
County, Illinois.

These lawsuits are state court actions and are not subject to the MDL.

In addition,  FTIC has been named in two class action market timing  lawsuits in
Canada,  seeking,  among other relief,  monetary  damages,  an order barring any
increase in management fees for a period of two years following judgment, and/or
attorneys' fees and costs, as follows: Huneault v. AGF Funds, Inc., et al., Case
No.  500-06-000256-046,  filed on October 25, 2004 in the Superior Court for the
Province of Quebec,  District of Montreal,  and  Heinrichs,  et al. v. CI Mutual
Funds,  Inc.,  et al., Case No.  04-CV-29700,  filed on December 17, 2004 in the
Ontario Superior Court of Justice.

As  previously  reported,  the  Company,  as well as certain  current and former
officers,  employees,  and  directors,  have  been  named in  multiple  lawsuits
alleging  violations  of various  securities  laws and pendent  state law claims
relating to the  disclosure of directed  brokerage  payments  and/or  payment of
allegedly  excessive advisory,  commission,  and distribution fees, and seeking,
among  other  relief,  monetary  damages,  restitution,  rescission  of advisory
contracts,  including recovery of all fees paid pursuant to those contracts,  an
accounting  of all  monies  paid  to the  named  advisers,  declaratory  relief,
injunctive  relief,  and/or attorneys' fees and costs. These lawsuits are styled
as class actions or derivative  actions brought on behalf of certain Funds,  and
are as follows:

Stephen Alexander IRA v. Franklin Resources,  Inc., et al., Case No. 04-982 JLL,
filed on March 2, 2004 in the United States  District  Court for the District of
New Jersey;  Strigliabotti  v. Franklin  Resources,  Inc., et al., Case No. C 04
0883 SI,  filed on March 4, 2004 in the  United  States  District  Court for the
Northern District of California;  Tricarico v. Franklin Resources, Inc., et al.,
Case No.  CV-04-1052  JAP, filed on March 4, 2004 in the United States  District
Court for the District of New Jersey;  Miller v. Franklin Mutual Advisors,  LLC,
et al.,  Case No.  04-261  DRH,  filed on April 16,  2004 in the  United  States
District  Court for the  Southern  District of Illinois and  transferred  to the
United  States  District  Court for the District of New Jersey on August 5, 2004
(plaintiffs voluntarily dismissed this action, without prejudice, on October 22,
2004); Wilcox v. Franklin  Resources,  Inc., et al., Case No. 04-2258 WHW, filed
on May 12,  2004 in the United  States  District  Court for the  District of New
Jersey;   Bahe,   Custodian  CGM  Roth  Conversion  IRA  v.   Franklin/Templeton
Distributors,  Inc., et al., Case No. 04-11195 PBS, filed on June 3, 2004 in the
United States District Court for the District of Massachusetts.

The United States District Court for the District of New Jersey consolidated for
pretrial purposes three of the above lawsuits (Stephen Alexander IRA, Tricarico,
and Wilcox)  into a single  action,  entitled  "In re Franklin  Mutual Funds Fee
Litigation."  Plaintiffs in those three lawsuits  filed a  consolidated  amended
complaint (the  "Complaint")  on October 4, 2004.  Defendants  filed a motion to
dismiss the  Complaint on November 19, 2004. It is  anticipated  that the matter
will be heard in the coming months.

Management  strongly  believes  that  the  claims  made in each of the  lawsuits
identified  above are without  merit and intends to  vigorously  defend  against
them. The Company cannot predict with certainty,  however,  the eventual outcome
of the remaining  governmental  investigations or private lawsuits,  nor whether
they will have a  material  negative  impact on the  Company.  Public  trust and
confidence  are critical to the  Company's  business  and any  material  loss of
investor  and/or  client  confidence  could result in a  significant  decline in
assets under  management by the Company,  which would have an adverse  effect on
future financial results. If the Company finds that it bears  responsibility for
any unlawful or  inappropriate  conduct that caused  losses to our Funds,  it is

                                       40
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committed to making the Funds or their shareholders  whole, as appropriate.  The
Company is committed to taking all appropriate  actions to protect the interests
of its Funds' shareholders.

In addition,  pending  regulatory and legislative  actions and reforms affecting
the mutual fund industry may significantly increase the Company's costs of doing
business  and/or  negatively  impact its revenues,  either of which could have a
material negative impact on the Company's financial results.

Please  also  see  the  discussion  of  certain  governmental   proceedings  and
investigations  in  Note  13,  "Commitments  and  Contingencies  -  Governmental
Investigations,  Proceedings and Actions",  of Notes to  Consolidated  Financial
Statements included in Part I, Item 1 of this report.

Except for the matters described above, there have been no material developments
in the litigation  previously reported in our annual report on Form 10-K for the
period ended  September 30, 2004, as filed with the SEC on December 14, 2004. We
are involved from time to time in litigation  relating to claims  arising in the
normal  course of  business.  Management  is of the  opinion  that the  ultimate
resolution of such claims will not  materially  affect our business or financial
position.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following  table provides  information  with respect to the shares of common
stock we repurchased during the three months ended December 31, 2004:



                                                                           (c) TOTAL NUMBER OF     (d) MAXIMUM NUMBER
                                                                           SHARES PURCHASED AS     OF SHARES THAT MAY
                                  (a) TOTAL NUMBER                            PART OF PUBLICLY       YET BE PURCHASED
                                         OF SHARES    (b) AVERAGE PRICE     ANNOUNCED PLANS OR     UNDER THE PLANS OR
PERIOD                                   PURCHASED       PAID PER SHARE               PROGRAMS               PROGRAMS
- ------------------------------- ------------------- -------------------- ---------------------- ----------------------
                                                                                               
October 1, 2004 through                    217,567               $55.55                217,567             13,013,516
  October 31, 2004
November 1, 2004 through
  November 30, 2004                             --                   --                     --             13,013,516
December 1, 2004 through
  December 31, 2004                      1,551,956               $68.07              1,551,956             11,461,560
                                      ------------                                ------------
TOTAL                                    1,769,523                                   1,769,523


Under a stock  repurchase  program  authorized  by our  Board  of  Directors  in
September  of 1985,  we can  repurchase  shares of our common  stock on the open
market and in private  transactions  in accordance  with  applicable  securities
laws. In August 2002, May 2003,  and August 2003, we announced  increases in the
number of shares  available for repurchase  under our stock  repurchase  program
totaling 30.0 million shares, of which, 11.5 million shares remain available for
repurchase as of December 31, 2004. Our stock repurchase  program is not subject
to an expiration date.

ITEM 6. EXHIBITS.

      EXHIBIT NO.
      -----------

      Exhibit 3(i)(a)   Registrant's  Certificate of Incorporation, as filed
                        November  28,  1969,  incorporated  by  reference to
                        Exhibit  (3)(i) to the  Company's  Annual  Report on
                        Form 10-K for the fiscal  year ended  September  30,
                        1994 (the "1994 Annual Report").

      Exhibit 3(i)(b)   Registrant's Certificate of Amendment of Certificate
                        of  Incorporation,   as  filed  on  March  1,  1985,
                        incorporated  by reference to Exhibit (3)(ii) to the
                        1994 Annual Report.

      Exhibit 3(i)(c)   Registrant's Certificate of Amendment of Certificate
                        of  Incorporation,   as  filed  on  April  1,  1987,
                        incorporated by reference to Exhibit (3)(iii) to the
                        1994 Annual Report.

                                       41
- --------------------------------------------------------------------------------



      Exhibit 3(i)(d)   Registrant's Certificate of Amendment of Certificate
                        of  Incorporation,  as filed on  February  2,  1994,
                        incorporated  by reference to Exhibit (3)(iv) to the
                        1994 Annual Report.

      Exhibit 3(i)(e)   Registrant's Certificate of Amendment of Certificate
                        of Incorporation, as filed on February 4, 2005.

      Exhibit 3(ii)     Registrant's    Amended   and   Restated   By-Laws
                        incorporated  by reference  to Exhibit  3(ii) to the
                        Company's  Annual Report on Form 10-K for the fiscal
                        year ended September 30, 2002.

      Exhibit 4.1       Form of Indenture between Franklin Resources, Inc.
                        and The Chase Manhattan Bank (formerly Chemical Bank),
                        as trustee,  dated as of May 19, 1994,  incorporated
                        by  reference  to  Exhibit  4  to  the  Registrant's
                        Registration  Statement on Form S-3,  filed with the
                        SEC on April 14, 1994.

      Exhibit 4.2       Indenture between Franklin Resources, Inc. and The
                        Bank of New York dated May 11, 2001 incorporated by
                        reference   to  Exhibit  4.2  to  the   Registrant's
                        Registration  Statement on Form S-3,  filed with the
                        SEC on August 6, 2001.

      Exhibit 4.3       Form of Liquid Yield Option Note due 2031 (Zero
                        Coupon-Senior) incorporated by reference to Exhibit
                        4.2 to the Registrant's  Registration  Statement on
                        Form S-3, filed with the SEC on August 6, 2001.

      Exhibit 4.4       Registration   Rights   Agreement   between  Franklin
                        Resources,  Inc. and Merrill Lynch, Pierce, Fenner &
                        Smith Incorporated dated May 11, 2001,  incorporated
                        by  reference  to  Exhibit  4.4 to the  Registrant's
                        Registration  Statement on Form S-3,  filed with the
                        SEC on August 6, 2001.

      Exhibit 4.5       Form of 3.7%  Senior  Notes due 2008,  incorporated  by
                        reference to Exhibit 4.5 to the Company's  Quarterly
                        Report on Form 10-Q for the period  ended  March 31,
                        2003.

      Exhibit 10.78     Form of Restricted  Stock Award  Agreement and Notice
                        of Restricted  Stock Award under the Company's  2002
                        Universal  Stock  Incentive  Plan,  incorporated  by
                        reference to the Company's  Report on Form 8-K filed
                        with the SEC on November 12, 2004.*

      Exhibit 10.79     Form of Stock  Option  Agreement  and Notice of Stock
                        Option  Grant  under the  Company's  2002  Universal
                        Stock Incentive  Plan,  incorporated by reference to
                        the Company's  Report on Form 8-K filed with the SEC
                        on November 12, 2004.*

      Exhibit 10.80     Form of Restricted  Stock Award  Agreement and Notice
                        of Restricted  Stock Award under the Company's  2002
                        Universal  Stock  Incentive  Plan,  incorporated  by
                        reference to the Company's  Report on Form 8-K filed
                        with the SEC on November 19, 2004.*

      Exhibit 10.81     Form of Restricted  Stock Award  Agreement and Notice
                        of  Restricted  Stock Unit Award under the Company's
                        2002 Universal Stock  Incentive Plan,  referenced in
                        the Company's  Report on Form 8-K filed with the SEC
                        on November 19, 2004.*

      Exhibit 10.82     Form of Restricted  Stock Award  Agreement and Notice
                        of Restricted  Stock Award under the Company's  2002
                        Universal  Stock  Incentive  Plan,  incorporated  by
                        reference to Exhibit 10.1 to the Company's  Form 8-K
                        filed with the SEC on December 21, 2004.*

      Exhibit 10.83     Franklin  Resources,   Inc.  Deferred   Compensation
                        Arrangement for Director's  Fees, date as of January
                        21, 2005, by and between Franklin Resources, Inc. and


                                       42
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                        Samuel H. Armacost  incorporated by reference to
                        Exhibit  10.1 to the  Company's  Form 8-K filed with
                        the SEC on January 27, 2005.*

      Exhibit 10.84     Franklin   Resources,   Inc.  2002  Universal  Stock
                        Incentive Plan (as amended and restated December 16,
                        2004)  incorporated  by reference to Exhibit 10.2 to
                        the Company's Form 8-K filed with the SEC on January
                        27, 2005.*

      Exhibit 10.85     Franklin Resources,  Inc. Amended and Restated Annual
                        Incentive Compensation Plan (as amended and restated
                        December 16, 2004).*

      Exhibit 10.86     Description of Non-Management Director's Compensation.*

      Exhibit 10.87     Description of  Performance  Goals for the Company's
                        Co-Chief Executive Officers for the 2005 Fiscal Year
                        under the 2004 Key Executive Compensation Plan.*

      Exhibit 12        Computations of ratios of earnings to fixed charges.

      Exhibit 31.1      Certification of Co-Chief  Executive Officer pursuant
                        to  Section  302 of the  Sarbanes-Oxley  Act of 2002
                        (filed herewith).

      Exhibit 31.2      Certification of Co-Chief  Executive Officer pursuant
                        to  Section  302 of the  Sarbanes-Oxley  Act of 2002
                        (filed herewith).

      Exhibit 31.3      Certification of Chief Financial  Officer pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 2002 (filed
                        herewith).

      Exhibit 32.1      Certification of Co-Chief  Executive Officer Pursuant
                        to 18 U.S.C.  Section 1350,  as Adopted  Pursuant to
                        Section  906  of  the  Sarbanes-Oxley  Act  of  2002
                        (furnished herewith).

      Exhibit 32.2      Certification of Co-Chief  Executive Officer Pursuant
                        to 18 U.S.C.  Section 1350,  as Adopted  Pursuant to
                        Section  906  of  the  Sarbanes-Oxley  Act  of  2002
                        (furnished herewith).

      Exhibit 32.3      Certification of Chief Financial  Officer Pursuant to
                        18 U.S.C.  Section  1350,  as  Adopted  Pursuant  to
                        Section  906  of  the  Sarbanes-Oxley  Act  of  2002
                        (furnished herewith).

                        *  Management/Employment  Contract  or  Compensatory
                           Plan or Arrangement.


                                       43
- --------------------------------------------------------------------------------


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                    FRANKLIN RESOURCES, INC.
                                    (Registrant)


Date:  February 8, 2005                  By:  /S/ JAMES R. BAIO
                                         -------------------------------
                                         James R. Baio
                                         Senior Vice President and
                                         Chief Financial Officer


                                       44
- --------------------------------------------------------------------------------


                                  EXHIBIT INDEX

EXHIBIT NO.
- -----------

Exhibit 3(i)(a)     Registrant's  Certificate  of  Incorporation,  as  filed
                    November  28,  1969,  incorporated  by  reference to Exhibit
                    (3)(i) to the  Company's  Annual Report on Form 10-K for the
                    fiscal  year ended  September  30,  1994 (the  "1994  Annual
                    Report").

Exhibit 3(i)(b)     Registrant's  Certificate of Amendment of Certificate
                    of Incorporation, as filed on March 1, 1985, incorporated by
                    reference to Exhibit (3)(ii) to the 1994 Annual Report.

Exhibit 3(i)(c)     Registrant's Certificate of Amendment of Certificate of
                    Incorporation,  as filed on April 1, 1987,  incorporated  by
                    reference to Exhibit (3)(iii) to the 1994 Annual Report.

Exhibit 3(i)(d)     Registrant's Certificate of  Amendment of Certificate of
                    Incorporation, as filed on February 2, 1994, incorporated by
                    reference to Exhibit (3)(iv) to the 1994 Annual Report.

Exhibit 3(i)(e)     Registrant's Certificate of Amendment of Certificate of
                    Incorporation, as filed on February 4, 2005.

Exhibit 3(ii)       Registrant's Amended and Restated By-Laws incorporated by
                    reference to Exhibit 3(ii) to the Company's Annual Report on
                    Form 10-K for the fiscal year ended September 30, 2002.

Exhibit 4.1         Form of  Indenture  between  Franklin  Resources,  Inc.  and
                    The  Chase  Manhattan  Bank  (formerly  Chemical  Bank),  as
                    trustee, dated as of May 19, 1994, incorporated by reference
                    to Exhibit 4 to the Registrant's  Registration  Statement on
                    Form S-3, filed with the SEC on April 14, 1994.

Exhibit 4.2         Indenture  between Franklin  Resources, Inc. and The Bank of
                    New York dated May 11, 2001  incorporated  by  reference  to
                    Exhibit 4.2 to the  Registrant's  Registration  Statement on
                    Form S-3, filed with the SEC on August 6, 2001.

Exhibit 4.3         Form  of  Liquid  Yield  Option  Note  due  2031  (Zero
                    Coupon-Senior)  incorporated  by reference to Exhibit 4.2 to
                    the Registrant's  Registration  Statement on Form S-3, filed
                    with the SEC on August 6, 2001.

Exhibit 4.4         Registration Rights Agreement between Franklin Resources,
                    Inc. and Merrill Lynch, Pierce,  Fenner & Smith Incorporated
                    dated May 11, 2001, incorporated by reference to Exhibit 4.4
                    to the  Registrant's  Registration  Statement  on Form  S-3,
                    filed with the SEC on August 6, 2001.

Exhibit 4.5         Form of 3.7%  Senior  Notes due 2008,  incorporated  by
                    reference to Exhibit 4.5 to the Company's  Quarterly  Report
                    on Form 10-Q for the period ended March 31, 2003.

Exhibit 10.78       Form of Restricted  Stock Award Agreement and Notice of
                    Restricted  Stock Award under the Company's  2002  Universal
                    Stock  Incentive  Plan,  incorporated  by  reference  to the
                    Company's  Report on Form 8-K filed with the SEC on November
                    12, 2004.*

Exhibit 10.79       Form of Stock Option  Agreement  and Notice of Stock  Option
                    Grant under the Company's  2002  Universal  Stock  Incentive
                    Plan,  incorporated by reference to the Company's  Report on
                    Form 8-K filed with the SEC on November 12, 2004.*

Exhibit 10.80       Form of Restricted  Stock Award Agreement and Notice of
                    Restricted  Stock Award under the Company's  2002  Universal
                    Stock  Incentive  Plan,  incorporated  by  reference  to the
                    Company's  Report on Form 8-K filed with the SEC on November
                    19, 2004.*

Exhibit 10.81       Form of Restricted  Stock Award Agreement and Notice of
                    Restricted   Stock  Unit  Award  under  the  Company's  2002
                    Universal Stock Incentive Plan,  referenced in the Company's
                    Report on Form 8-K filed with the SEC on November 19, 2004.*

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Exhibit 10.82       Form of Restricted  Stock Award Agreement and Notice of
                    Restricted  Stock Award under the Company's  2002  Universal
                    Stock Incentive  Plan,  incorporated by reference to Exhibit
                    10.1  to the  Company's  Form  8-K  filed  with  the  SEC on
                    December 21, 2004.*

Exhibit 10.83       Franklin Resources, Inc. Deferred Compensation Arrangement
                    for  Director's  Fees,  date as of January 21, 2005,  by and
                    between  Franklin  Resources,  Inc.  and Samuel H.  Armacost
                    incorporated  by reference to Exhibit 10.1 to the  Company's
                    Form 8-K filed with the SEC on January 27, 2005.*

Exhibit 10.84       Franklin Resources, Inc. 2002 Universal Stock Incentive Plan
                    (as amended and restated December 16, 2004)  incorporated by
                    reference  to Exhibit 10.2 to the  Company's  Form 8-K filed
                    with the SEC on January 27, 2005.*

Exhibit 10.85       Franklin Resources, Inc. Amended and Restated Annual
                    Incentive   Compensation   Plan  (as  amended  and  restated
                    December 16, 2004).*

Exhibit 10.86       Description of Non-Management Director's Compensation.*

Exhibit 10.87       Description of Performance  Goals for the Company's Co-Chief
                    Executive  Officers  for the 2005 Fiscal Year under the 2004
                    Key Executive Compensation Plan.*

Exhibit 12          Computations of ratios of earnings to fixed charges.

Exhibit 31.1        Certification of Co-Chief Executive Officer pursuant to
                    Section  302  of  the  Sarbanes-Oxley  Act  of  2002  (filed
                    herewith).

Exhibit 31.2        Certification of Co-Chief Executive Officer pursuant to
                    Section  302  of  the  Sarbanes-Oxley  Act  of  2002  (filed
                    herewith).

Exhibit 31.3        Certification of Chief Financial Officer pursuant to Section
                    302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

Exhibit 32.1        Certification of Co-Chief Executive Officer Pursuant to 18
                    U.S.C.  Section 1350, as Adopted  Pursuant to Section 906 of
                    the Sarbanes-Oxley Act of 2002 (furnished herewith).

Exhibit 32.2        Certification of Co-Chief Executive Officer Pursuant to 18
                    U.S.C.  Section 1350, as Adopted  Pursuant to Section 906 of
                    the Sarbanes-Oxley Act of 2002 (furnished herewith).

Exhibit 32.3        Certification of Chief Financial Officer Pursuant to 18
                    U.S.C.  Section 1350, as Adopted  Pursuant to Section 906 of
                    the Sarbanes-Oxley Act of 2002 (furnished herewith).

                    *  Management/Employment  Contract or  Compensatory  Plan or
                       Arrangement.


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