ThZeal - The Zeal

PRE 14A 1 tfiproxy03.txt TEMPLETON FUNDS, INC. PROXY MTG 12/15/03 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 TEMPLETON FUNDS, INC. ------------------------------------------------ (Name of Registrant as Specified in its Charter) -------------------------------------------------------------------- Name of Person(s) Filing Proxy Statement, other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11(s)(2). (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: [LOGO] TEMPLETON FUNDS, INC. TEMPLETON WORLD FUND TEMPLETON FOREIGN FUND IMPORTANT SHAREHOLDER INFORMATION These materials are for a Special Meeting of Shareholders scheduled for December [ ], 2003 at 10:00 a.m. Eastern time. The enclosed materials discuss four proposals (the "Proposals" or, each, a "Proposal") to be voted on at the meeting, and contain the Notice of Meeting, proxy statement and proxy card. A proxy card is, in essence, a ballot. When you vote your proxy by signing and returning your proxy card, it tells us how you wish to vote on important issues relating to Templeton World Fund and Templeton Foreign Fund (each, a "Fund," and together, the "Funds"), each a series of Templeton Funds, Inc. (the "Company"). If you specify a vote for all Proposals, your proxy will be voted as you indicate. If you specify a vote for one or more Proposals, but not all, your proxy will be voted as specified on such Proposals and, on the Proposal(s) for which no vote is specified, your proxy will be voted FOR such Proposal(s). If you simply sign and date the proxy card, but do not specify a vote for any Proposal, your proxy will be voted FOR all Proposals. WE URGE YOU TO SPEND A FEW MINUTES REVIEWING THE PROPOSALS IN THE PROXY STATEMENT. THEN, PLEASE FILL OUT AND SIGN THE PROXY CARD AND RETURN IT TO US SO THAT WE KNOW HOW YOU WOULD LIKE TO VOTE. WHEN SHAREHOLDERS RETURN THEIR PROXIES PROMPTLY, THE COMPANY MAY BE ABLE TO SAVE MONEY BY NOT HAVING TO CONDUCT ADDITIONAL MAILINGS. WE WELCOME YOUR COMMENTS. IF YOU HAVE ANY QUESTIONS, CALL FUND INFORMATION AT 1-800/DIAL BEN(R) (1-800-342-5236). ------------------------------------------------------------------------------- TELEPHONE AND INTERNET VOTING FOR YOUR CONVENIENCE, YOU MAY BE ABLE TO VOTE BY TELEPHONE OR THROUGH THE INTERNET, 24 HOURS A DAY. IF YOUR ACCOUNT IS ELIGIBLE, A CONTROL NUMBER AND SEPARATE INSTRUCTIONS ARE ENCLOSED. ------------------------------------------------------------------------------- [LOGO] TEMPLETON FUNDS, INC. TEMPLETON WORLD FUND TEMPLETON FOREIGN FUND NOTICE OF SPECIAL MEETING OF SHAREHOLDERS A Special Meeting of Shareholders (the "Meeting") of Templeton Funds, Inc. (the "Company"), will be held at the Company's offices, 500 East Broward Boulevard, 12th Floor, Fort Lauderdale, Florida 33394-3091 on December [], 2003 at 10:00 a.m. Eastern time. During the Meeting, shareholders of Templeton World Fund and Templeton Foreign Fund (each, a "Fund," and together, the "Funds"), each a series of the Company, will vote on the following Proposals and Sub-Proposals: 1. To elect a Board of Directors of the Company. 2. To approve an Agreement and Plan of Reorganization that provides for the reorganization of the Company from a Maryland corporation to a Delaware statutory trust. 3. To approve amendments to certain of each Fund's fundamental investment restrictions (includes eight (8) Sub-Proposals): (a) To amend each Fund's fundamental investment restriction regarding diversification of investments. (b) To amend each Fund's fundamental investment restriction regarding investments in real estate. (c) To amend each Fund's fundamental investment restriction regarding investments in commodities. (d) To amend each Fund's fundamental investment restriction regarding underwriting. (e) To amend each Fund's fundamental investment restriction regarding issuing senior securities. (f) To amend each Fund's fundamental investment restriction regarding lending. (g) To amend each Fund's fundamental investment restriction regarding borrowing. (h) To amend each Fund's fundamental investment restriction regarding industry concentration. 4. To approve the elimination of certain of each Fund's fundamental investment policies and restrictions. By Order of the Board of Directors, Barbara J. Green SECRETARY October [], 2003 PROXY STATEMENT TABLE OF CONTENTS PAGE Information About Voting Proposal 1: To Elect a Board of Directors of the Company Proposal 2: To Approve an Agreement and Plan of Reorganization that provides for the Reorganization of the Company from a Maryland Corporation to a Delaware Statutory Trust Introduction to Proposals 3 and 4 Proposal 3: To Approve Amendments to Certain of each Fund's Fundamental Investment Restrictions (this Proposal involves separate votes on Sub-Proposals 3a-3h) Sub-Proposal 3a: To amend each Fund's fundamental investment restriction regarding diversification of investments Sub-Proposal 3b: To amend each Fund's fundamental investment restriction regarding investments in real estate Sub-Proposal 3c: To amend each Fund's fundamental investment restriction regarding investments in commodities Sub-Proposal 3d: To amend each Fund's fundamental investment restriction regarding underwriting Sub-Proposal 3e: To amend each Fund's fundamental investment restriction regarding issuing senior securities Sub-Proposal 3f: To amend each Fund's fundamental investment restriction regarding lending Sub-Proposal 3g: To amend each Fund's fundamental investment restriction regarding borrowing Sub-Proposal 3h: To amend each Fund's fundamental investment restriction regarding industry concentration Proposal 4: To Approve the Elimination of Certain of each Fund's Fundamental Investment Policies and Restrictions Information About the Funds Audit Committee Further Information About Voting and the Meeting EXHIBITS Exhibit A - Agreement and Plan of Reorganization between Templeton A-1 Funds, Inc. (a Maryland corporation) and Templeton Funds Trust (a Delaware statutory trust) Exhibit B - A Comparison of Governing Documents and State Law B-1 Exhibit C - Fundamental Investment Policies and Restrictions Proposed to be Amended or Eliminated C-1 TEMPLETON FUNDS, INC. TEMPLETON WORLD FUND TEMPLETON FOREIGN FUND PROXY STATEMENT ? INFORMATION ABOUT VOTING WHO IS ASKING FOR MY VOTE? The Directors of Templeton Funds, Inc. (the "Company"), on behalf of its two series, Templeton World Fund and Templeton Foreign Fund (each, a "Fund" and together, the "Funds"), in connection with the Special Meeting of Shareholders of the Company to be held on December [], 2003 (the "Meeting"), have requested your vote on several matters. WHO IS ELIGIBLE TO VOTE? Shareholders of record at the close of business on September 17, 2003 are entitled to be present and to vote at the Meeting or any adjourned Meeting. Each share of record of each Fund is entitled to one vote (and a proportionate fractional vote for each fractional share) on each matter presented at the Meeting with respect to that Fund. The Notice of Meeting, the proxy card, and proxy statement were first mailed to shareholders of record on or about October [] , 2003. ON WHAT ISSUES AM I BEING ASKED TO VOTE? You are being asked to vote on four Proposals: 1. To elect a Board of Directors of the Company; 2. To approve an Agreement and Plan of Reorganization that provides for the reorganization of the Company from a Maryland corporation to a Delaware statutory trust; 3. To approve amendments to certain of each Fund's fundamental investment restrictions (includes eight (8) Sub-Proposals); and 4. To approve the elimination of certain of each Fund's fundamental investment policies and restrictions. HOW DO THE DIRECTORS RECOMMEND THAT I VOTE? The Directors unanimously recommend that you vote: 1. FOR the election of all nominees as Directors of the Company; 2. FOR the approval of an Agreement and Plan of Reorganization that provides for the reorganization of the Company from a Maryland corporation to a Delaware statutory trust; 3. FOR the approval of each of the proposed amendments to certain of each Fund's fundamental investment restrictions; and 4. FOR the approval of the elimination of certain of each Fund's fundamental investment policies and restrictions. HOW DO I ENSURE THAT MY VOTE IS ACCURATELY RECORDED? You may attend the Meeting and vote in person or you may complete and return the enclosed proxy card. If you are eligible to vote by telephone or through the Internet, a control number and separate instructions are enclosed. Proxy cards that are properly signed, dated and received at or prior to the Meeting will be voted as specified. If you specify a vote for or against any of the Proposals 1 through 4, your proxy will be voted as you indicate, and any Proposal for which no vote is specified will be voted FOR that Proposal. If you simply sign, date and return the proxy card, but do not specify a vote for any of the Proposals 1 through 4, your shares will be voted FOR the election of all nominees as Directors of the Company (Proposal 1); FOR the approval of an Agreement and Plan of Reorganization that provides for the reorganization of the Company from a Maryland corporation to a Delaware statutory trust (Proposal 2); FOR the approval of each of the proposed amendments to certain of each Fund's fundamental investment restrictions (Sub-Proposals 3a-3h); and FOR the approval of the elimination of certain of each Fund's fundamental investment policies and restrictions (Proposal 4). MAY I REVOKE MY PROXY? You may revoke your proxy at any time before it is voted by forwarding a written revocation or a later-dated proxy to the Company that is received by the Company at or prior to the Meeting, or by attending the Meeting and voting in person. WHAT IF MY SHARES ARE HELD IN A BROKERAGE ACCOUNT? If your shares are held by your broker, then in order to vote in person at the Meeting, you will have to obtain a "Legal Proxy" from your broker and present it to the Inspector of Election at the Meeting. ? THE PROPOSALS PROPOSAL 1: TO ELECT A BOARD OF DIRECTORS OF THE COMPANY HOW ARE NOMINEES SELECTED? The Board of Directors of the Company (the "Board" or the "Directors") has a Nominating and Compensation Committee (the "Committee") consisting of Andrew H. Hines, Jr. (Chairman) and Gordon S. Macklin, neither of whom is an "interested person" of the Company as defined by the Investment Company Act of 1940, as amended, (the "1940 Act"). Directors who are not interested persons of the Company are referred to as the "Independent Directors." The Committee is responsible for the selection and nomination of candidates to serve as Directors of the Company. The Committee will review shareholders' nominations to fill vacancies on the Board if these nominations are submitted in writing and addressed to the Committee at the Company's offices. However, the Committee expects to be able to identify from its own resources an ample number of qualified candidates. WHO ARE THE NOMINEES? All of the nominees, except Frank J. Crothers, Edith E. Holiday, Frank A. Olson and Constantine D. Tseretopoulos, are currently members of the Board. The term of each nominee is for one year and until his or her successor shall be elected and shall qualify or until his or her earlier death, resignation or removal. In addition, all of the current nominees are also directors or trustees of other Franklin(R)funds and/or Templeton(R)funds (collectively, the "funds in Franklin Templeton Investments"). Among these nominees, Nicholas F. Brady, Charles B. Johnson and Rupert H. Johnson, Jr. are deemed to be "interested persons" for purposes of the 1940 Act. Directors who are "interested persons" are referred to as the "Interested Directors." Certain Directors of the Company hold director and/or officer positions with Franklin Resources, Inc. ("Resources") and its affiliates. Resources is a publicly owned holding company, the principal shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately [ ]% and [ ]%, respectively, of its outstanding shares as of August 31, 2003. Resources, a global investment organization operating as Franklin Templeton Investments, is primarily engaged, through various subsidiaries, in providing investment management, share distribution, transfer agent and administrative services to a family of investment companies. Resources is a New York Stock Exchange, Inc. ("NYSE") listed holding company (NYSE: BEN). Charles B. Johnson, Chairman of the Board, Director and Vice President of the Company, and Rupert H. Johnson, Jr., Director and Vice President of the Company, are brothers. There are no other family relationships among any of the nominees for Director. Each nominee currently is available and has consented to serve if elected. If any of the nominees should become unavailable, the designated proxy holders will vote in their discretion for another person or persons who may be nominated as Directors. Listed below, for each nominee, are their name, age and address, as well as their position and length of service with the Company, principal occupation during the past five years, the number of portfolios in the Franklin Templeton Investments fund complex that they oversee, and any other directorships held by the nominee. NOMINEES FOR INDEPENDENT DIRECTOR:

Nominees for Interested Director:

* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex that a nominee for election as director would oversee if elected. These portfolios have a common investment adviser or affiliated investment advisers, and may also share a common underwriter. ** Nicholas F. Brady, Charles B. Johnson and Rupert H. Johnson, Jr. are "interested persons" of the Company as defined by the 1940 Act. The 1940 Act limits the percentage of interested persons that can comprise a fund's board of directors. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are considered interested persons of the Company due to their position as officers and directors and major shareholders of Resources, which is the parent company of the Funds' investment manager, and their positions with the Company. Mr. Brady's status as an interested person results from his business affiliations with Resources and Templeton Global Advisors Limited. On October 1, 2003, Resources acquired all of the shares of Darby Overseas Investments, Ltd. ("Darby Investments") and the remaining portion of the limited partner interests not currently owned by Reources of Darby Overseas Partners, L.P. ("Darby Partners"). Mr. Brady, formerly a shareholder of Darby Investments and a partner of Daryby Partners, will continue as Chairman of Darby Investments, which is the corporate general partner of Darby Partners. In addition, Darby Partners and Templeton Global Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P. ("DEMF"). Mr. Brady will also continue to serve as Chairman of the corporate general partner of DEMF, and Darby Partners and Darby Investments own 100% of the stock of the general partner of DEMF. Resources also is an investor in Darby Technology Ventures Group, LLC ("DTV") in which Darby Partners is a significant investor and for which Darby Partners has the right to appoint a majority of the directors. Templeton Global Advisors Limited also is a limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. ("DBVA"), a private equity fund in which Darby Partners is a significant investor, and the general partner of which Darby Partners controls jointly with an unaffiliated third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd. ("TCAL"), which serves as investment manager to certain unregistered funds. TCAL and Templeton Global Advisors Limited are both indirect subsidiaries of Resources. The remaining nominees are Independent Directors. The following tables provide the dollar range of the equity securities of the Funds and of all funds overseen by the Directors in the Franklin Templeton Investments fund complex beneficially owned by the Company's Directors as of June 30, 2003. INDEPENDENT NOMINEES:

HOW OFTEN DO THE DIRECTORS MEET AND WHAT ARE THEY PAID? The role of the Directors is to provide general oversight of the Company's business and to ensure that the Funds are operated for the benefit of all shareholders. The Directors anticipate meeting at least five times during the current fiscal year to review the operations of the Funds and the Funds' investment performance. The Directors also oversee the services furnished to each Fund by Templeton Global Advisors Limited, each Fund's investment manager ("TGAL" or the "Investment Manager"), and various other service providers. The Company currently pays the Independent Directors and Mr. Brady an annual retainer of $24,000 and a fee of $1,800 per Board meeting attended. Directors serving on the Audit Committee of the Company and other funds in Franklin Templeton Investments receive a flat fee of $2,000 per Audit Committee meeting attended, a portion of which is allocated to the Company. Members of a committee are not compensated for any committee meeting held on the day of a Board meeting. During the fiscal year ended August 31, 2003, there were five meetings of the Board, three meetings of the Audit Committee, and five meetings of the Nominating and Compensation Committee. Each Director then in office attended at least [75%] of the aggregate of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which the Director served. Certain Directors and officers of the Company are shareholders of Resources and may receive indirect remuneration due to their participation in management fees and other fees received by the Investment Manager and its affiliates from the funds in Franklin Templeton Investments. The Investment Manager or its affiliates pay the salaries and expenses of the officers. No pension or retirement benefits are accrued as part of Company expenses. The table below indicates the total fees paid to Directors by the Company individually and by all of the funds in Franklin Templeton Investments. These Directors also serve as directors or trustees of other funds in Franklin Templeton Investments, many of which hold meetings at different dates and times. The Directors and the Company's management believe that having the same individuals serving on the boards of many of the funds in Franklin Templeton Investments enhances the ability of each fund to obtain, at a relatively modest cost to each separate fund, the services of high caliber, experienced and knowledgeable Independent Directors who can more effectively oversee the management of the funds.

* Compensation received for the fiscal year ended August 31, 2003. ** Compensation received for the calendar year ended December 31, 2002. *** We base the number of boards on the number of U.S. registered investment companies in the Franklin Templeton Investments fund complex. This number does not include the total number of series or funds within each investment company for which the Board members are responsible. Franklin Templeton Investments currently includes 51 registered investment companies, with approximately 149 U.S. based funds or series. Board members historically have followed a policy of having substantial investments in one or more of the funds in Franklin Templeton Investments, as is consistent with their individual financial goals. In February 1998, this policy was formalized through adoption of a requirement that each board member invest one-third of the fees received for serving as a director or trustee of a Templeton fund in shares of one or more Templeton funds and one-third of the fees received for serving as a director or trustee of a Franklin fund in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual fees paid to such board member. Investments in the name of family members or entities controlled by a board member constitute fund holdings of such board member for purposes of this policy, and a three-year phase-in period applies to such investment requirements for newly elected board members. In implementing this policy, a board member's fund holdings existing on February 27, 1998, were valued as of such date with subsequent investments valued at cost. WHO ARE THE EXECUTIVE OFFICERS OF THE COMPANY? Officers of the Company are appointed by the Directors and serve at the pleasure of the Board. Listed below, for each Executive Officer, are their name, age and address, as well as their position and length of service with the Company, and principal occupation during the past five years.

PROPOSAL 2: TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION THAT PROVIDES FOR THE REORGANIZATION OF THE COMPANY FROM A MARYLAND CORPORATION TO A DELAWARE STATUTORY TRUST The Directors unanimously recommend that you approve an Agreement and Plan of Reorganization (the "Plan"), substantially in the form attached to this proxy statement as EXHIBIT A, that would change the state of organization of the Company. This proposed change calls for the reorganization of the Company from a Maryland corporation into a newly formed Delaware statutory trust. This proposed reorganization will be referred to throughout this proxy statement as the "Reorganization." To implement the Reorganization, the Directors have approved the Plan, which contemplates the continuation of the current business of the Company in the form of a new Delaware statutory trust, named "Templeton Funds Trust" (the "DE Trust"). As of the effective date of the Reorganization, the DE Trust will have two series that correspond to the Funds, also named "Templeton World Fund" (referred to throughout this proxy statement as "DE World Fund") and "Templeton Foreign Fund" (referred to throughout this proxy statement as "DE Foreign Fund" and, with DE World Fund, each referred to throughout this proxy statement as a "DE Fund" and together, the "DE Funds"). WHAT WILL THE REORGANIZATION MEAN FOR THE FUNDS AND THEIR SHAREHOLDERS? If the Plan is approved by shareholders and the Reorganization is implemented, the DE Funds would have the same investment goal, policies and restrictions as the corresponding Funds (including, if approved by shareholders at the Meeting, the same fundamental investment restrictions amended or eliminated by Proposals 3 and 4 in this proxy statement). The Board, including any persons elected under Proposal 1, and officers of the DE Trust would be the same as those of the Company, and would operate the DE Funds in essentially the same manner as it previously operated the Funds. Thus, on the effective date of the Reorganization, you would hold an interest in the applicable DE Fund that is equivalent to your then interest in the corresponding Fund. For all practical purposes, a shareholder's investment in a Fund would not change. WHY ARE THE DIRECTORS RECOMMENDING APPROVAL OF THE PLAN AND THE REORGANIZATION? The Directors have determined that investment companies formed as Delaware statutory trusts have certain advantages over investment companies organized as Maryland corporations. Under Delaware law, investment companies are able to simplify their operations by reducing administrative burdens. For example, Delaware law allows greater flexibility in drafting and amending an investment company's governing documents, which can result in greater efficiencies of operation and savings for an investment company and its shareholders. Delaware law also provides favorable state tax treatment. Most significantly, an investment company formed as a Delaware statutory trust, unlike one formed as a Maryland corporation, need not pay an organization and capitalization tax on the aggregate par value of shares it issues to shareholders. Furthermore, as described below, in Delaware there is a well-established body of legal precedent in the area of corporate law that may be relevant in deciding issues pertaining to the DE Trust. This could benefit the DE Trust and its shareholders by, for example, making litigation involving the interpretation of provisions in the DE Trust's governing documents less likely or, if litigation should be initiated, less burdensome or expensive. Accordingly, the Directors believe that it is in the best interests of the shareholders to approve the Plan. HOW DOES THE MARYLAND CORPORATION LAW AND THE COMPANY'S GOVERNING DOCUMENTS COMPARE TO THE DELAWARE STATUTORY TRUST LAW AND THE DE TRUST'S GOVERNING DOCUMENTS? The following summary compares certain rights and characteristics of the shares of the Company to shares of the DE Trust. The summary is qualified in its entirety by the more complete comparisons of Maryland corporation law and Delaware statutory trust law, and a comparison of the relevant provisions of the governing documents of the Company and the DE Trust, attached as EXHIBIT B to this proxy statement, which is entitled "A COMPARISON OF GOVERNING DOCUMENTS AND STATE LAW." Reorganizing the Company from a Maryland corporation to a Delaware statutory trust is expected to provide many benefits to the Company and its shareholders. Funds formed as Delaware statutory trusts under the Delaware Statutory Trust Act (the "Delaware Act") are granted a significant amount of operational flexibility, resulting in efficiencies of operation that translate into savings for a fund, such as the DE Trust, and its shareholders. For example, the Delaware Act authorizes management to take various actions without requiring shareholder approval if permitted by the governing instrument. Additionally, unlike the Maryland corporation law, the Delaware Act permits any amendment to the statutory trust's governing instrument without the need for a state filing, which can reduce administrative burdens and costs. The operations of a Delaware statutory trust formed under the Delaware Act are governed by a declaration of trust and by-laws. The DE Trust's Agreement and Declaration of Trust ("Declaration of Trust") and By-Laws streamline many of the provisions in the Company's Charter and By-Laws, and should thus lead to enhanced flexibility in management and administration as compared to its current operation as a Maryland corporation. As a Delaware statutory trust, the DE Trust should also be able to adapt more quickly and cost effectively to new developments in the mutual fund industry and the financial markets. Moreover, to the extent provisions in the DE Trust's Declaration of Trust and By-Laws are addressed by rules and principles established under Delaware corporation law and the laws governing other Delaware business entities (such as limited partnerships and limited liability companies), the Delaware courts may look to such other laws to help interpret provisions of the DE Trust's Declaration of Trust and By-Laws. Applying this body of law to the operation of the DE Trust should prove beneficial because these laws are extensively developed and business-oriented. In addition, Delaware's Chancery Court is dedicated to business law matters, which means that the judges tend to be more specialized and better versed in the nuances of the law that will be applied to the DE Trust. These legal advantages tend to make more certain the resolution of legal controversies and help to reduce legal costs resulting from uncertainty in the law. Shares of the DE Trust and the Company each have one vote per full share and a proportionate fractional vote for each fractional share. Both the DE Trust and Company provide for noncumulative voting in the election of their Trustees/Directors. The DE Trust is not required by its governing instrument to hold annual shareholder meetings. Shareholder meetings may be called at any time by the DE Trust Board, by the chairperson of the DE Trust Board or by the president of the DE Trust for the purpose of taking action upon any matter deemed by the DE Trust Board to be necessary or desirable. To the extent permitted by the 1940 Act, a meeting of the shareholders [for the purpose of electing trustees] may also be called by the chairperson of the DE Trust Board, or shall be called by the president or any vice-president of the DE Trust at the request of shareholders holding not less than 10% of the DE Trust's shares, provided that the shareholders requesting such meeting shall have paid the DE Trust the reasonably estimated cost of preparing and mailing the notice of the meeting. With respect to shareholder inspection rights of a fund's books and records, the Company and the DE Trust each provide certain inspection rights to its shareholders at least to the extent required by applicable law. While shareholders of the DE Trust will have similar distribution and voting rights as they currently have as shareholders of the Company, there are certain differences. The organizational structures differ in record date parameters for determining shareholders entitled to notice, to vote and to a distribution, and differ in the proportion of shares required to vote on certain matters. Under the Maryland corporation law, the shareholders of the Company are not subject to any personal liability for any claims against, or liabilities of, the Company solely by reason of being or having been a shareholder of the Company. Under the Delaware Act, shareholders of the DE Trust will be entitled to the same limitation of personal liability as is extended to shareholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware. WHAT ARE THE PROCEDURES AND CONSEQUENCES OF THE REORGANIZATION? Upon completion of the Reorganization, the DE Trust will continue the business of the Company and each DE Fund will have the same investment goal and policies as those of the corresponding Fund existing on the date of the Reorganization, and will hold the same portfolio of securities previously held by its corresponding Fund. Each DE Fund will be operated under substantially identical overall management, investment management, distribution and administrative arrangements as those of its corresponding Fund. As the successor to the Company's operations, the DE Trust will adopt the Company's registration statement under the federal securities laws with amendments to show the new Delaware statutory trust structure. The DE Trust was created solely for the purpose of becoming the successor organization to, and carrying on the business of, the Company. To accomplish the Reorganization, the Plan provides that the Company, on behalf of each Fund, will transfer all of its portfolio securities and any other assets, subject to its related liabilities, to the DE Trust, on behalf of each corresponding DE Fund. In exchange for these assets and liabilities, the DE Trust will issue shares of each DE Fund to the Company, which will then distribute those shares pro rata to shareholders of the corresponding Fund. Through this procedure, you will receive exactly the same number and dollar amount of shares of each DE Fund as you held in the corresponding Fund immediately prior to the Reorganization. You will retain the right to any declared but undistributed dividends or other distributions payable on the shares of a Fund that you may have had as of the effective date of the Reorganization. As soon as practicable after the date of the Reorganization, the Company will be dissolved and will cease its existence. The Directors may terminate the Plan and abandon the Reorganization at any time prior to the effective date of the Reorganization if they determine that proceeding with the Reorganization is inadvisable. If the Reorganization is not approved by shareholders of each Fund, or if the Directors abandon the Reorganization, the Company will continue to operate as a Maryland corporation. If the Reorganization is approved by shareholders, it is expected to be completed [early in 2004]. WHAT EFFECT WILL THE REORGANIZATION HAVE ON THE CURRENT INVESTMENT MANAGEMENT AGREEMENT? As a result of the Reorganization, each DE Fund will be subject to a new investment management agreement between the DE Trust, on behalf of each DE Fund, and the Investment Manager. The new management agreement will be substantially identical to the current management agreement between the Investment Manager and the Company on behalf of each Fund. WHAT EFFECT WILL THE REORGANIZATION HAVE ON THE SHAREHOLDER SERVICING AGREEMENTS AND DISTRIBUTION PLANS? The DE Trust, on behalf of the DE Funds, will enter into an agreement with Franklin Templeton Investor Services, LLC for transfer agency, dividend disbursing and shareholder services that is substantially identical to the agreement currently in place for the Company on behalf of the Funds. Franklin Templeton Distributors, Inc. will serve as the distributor for the shares of the DE Funds under a separate distribution agreement that is substantially identical to the distribution agreement currently in effect for the Funds. As of the effective date of the Reorganization, each DE Fund will have distribution plans under Rule 12b-1 of the 1940 Act relating to the distribution of the classes of shares that are substantially identical to the distribution plans currently in place for the corresponding classes of shares of each corresponding Fund. It is anticipated that there will be no material change to the distribution plans as a result of the Reorganization. WHAT IS THE EFFECT OF SHAREHOLDER APPROVAL OF THE PLAN? Under the 1940 Act, the shareholders of a mutual fund must elect directors and approve the initial investment management agreement for the fund. Theoretically, if the Plan is approved and the Company is reorganized to a Delaware statutory trust, the shareholders would need to vote on these two items for the DE Trust. In fact, the DE Trust must obtain shareholder approval of these items or it will not comply with the 1940 Act. However, the Directors have determined that it is in the best interests of the shareholders to avoid the considerable expense of another shareholder meeting to obtain these approvals after the Reorganization. Therefore, the Directors have determined that approval of the Plan also will constitute, for purposes of the 1940 Act, shareholder approval of (1) the election of the Directors of the Company who are in office at the time of the Reorganization as trustees of the DE Trust (note that "directors" of a Delaware statutory trust are referred to as "trustees"); and (2) a new investment management agreement between the DE Trust, on behalf of each DE Fund, and the Investment Manager, which is substantially identical to the investment management agreement currently in place for the Company, on behalf of each Fund. Prior to the Reorganization, if the Plan is approved by shareholders, the officers will cause the Company on behalf of each Fund, as the sole shareholder of the DE Trust and each DE Fund, to vote its shares FOR the matters specified above. This action will enable the DE Trust to satisfy the requirements of the 1940 Act without involving the time and expense of another shareholder meeting. WHAT IS THE CAPITALIZATION AND STRUCTURE OF THE DE TRUST? The DE Trust was formed as a Delaware statutory trust on [__________ ____], 2003 pursuant to the Delaware Act. As of the effective date of the Reorganization, the DE Trust will have two series, DE World Fund and DE Foreign Fund, each with an unlimited number of shares of beneficial interest without par value. The shares of DE World Fund will be allocated into three classes to correspond to the current three classes of shares of Templeton World Fund, and the shares of DE Foreign Fund will be allocated into five classes to correspond to the current five classes of shares of Templeton Foreign Fund. As of the effective date of the Reorganization, outstanding shares of the DE Trust will be fully paid, nonassessable, freely transferable, and have no preemptive or subscription rights. The DE Trust will also have the same fiscal year as the Company. WHO WILL BEAR THE EXPENSES OF THE REORGANIZATION? Since the Reorganization will benefit the Funds and their shareholders, the Board has authorized that the expenses incurred in the Reorganization, exclusive of the costs associated with soliciting proxies, shall be paid by the Company, whether or not the Reorganization is approved by shareholders. The costs of soliciting proxies will be shared [one-quarter by the Investment Manager and three-quarters] by the Company. ARE THERE ANY TAX CONSEQUENCES FOR SHAREHOLDERS? The Reorganization is designed to be tax-free for federal income tax purposes so that you will not experience a taxable gain or loss when the Reorganization is completed. Generally, the basis and holding period of your shares in a DE Fund will be the same as the basis and holding period of your shares in the corresponding Fund. Consummation of the Reorganization is subject to receipt of a legal opinion from the law firm of Stradley Ronon Stevens & Young, LLP, counsel to the DE Trust and the Company, that, under the Internal Revenue Code of 1986, as amended, the Reorganization will not give rise to the recognition of income, gain or loss for federal income tax purposes to the Company, the DE Trust or their shareholders. As a result of the Reorganization, there may be adverse tax consequences in a foreign jurisdiction, including possible taxes on capital gains and forfeiture of capital loss carry forwards. If a foreign jurisdiction treats the Reorganization as a "sale" and "purchase" of portfolio securities that are registered in that jurisdiction, the Fund may be required to pay taxes on any capital gains arising from the "sale" of those portfolio securities. Similarly, such treatment by a foreign jurisdiction may prevent a Fund from retaining the capital losses it previously incurred on securities registered in that jurisdiction to offset future capital gains, if any, incurred on securities registered in that jurisdiction. However, neither Fund believes that it will experience a materially adverse impact as a result of a foreign jurisdiction's tax treatment of the Reorganization. WHAT IF I CHOOSE TO SELL MY SHARES AT ANY TIME? A request to sell shares of a Fund that is received and processed prior to the effective date of the Reorganization will be treated as a redemption of shares of that Fund. A request to sell shares that is received and processed after the effective date of the Reorganization will be treated as a request for the redemption of the same number of shares of the corresponding DE Fund. WHAT IS THE EFFECT OF MY VOTING "FOR" THE PLAN? By voting "FOR" the Plan, you will be agreeing to become a shareholder of a series of a mutual fund organized as a Delaware statutory trust, with Trustees, an investment management agreement, distribution plans and other service arrangements that are substantially identical to those in place for your corresponding Fund. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 2. INTRODUCTION TO PROPOSALS 3 AND 4 Each Fund is subject to a number of fundamental investment policies and restrictions that (1) are more restrictive than those required under present law; (2) are no longer required; or (3) were adopted in response to regulatory, business or industry conditions that no longer exist. Under the 1940 Act, "fundamental" investment policies and restrictions may be changed or eliminated only if shareholders approve such action. The Board is recommending that shareholders approve the amendment or elimination of certain of each Fund's fundamental investment policies and restrictions principally to (1) update those current investment policies and restrictions that are more restrictive than is required under the federal securities laws; and (2) conform each Fund's fundamental investment restrictions to those of the majority of the funds in Franklin Templeton Investments. In general, the proposed restrictions would (1) simplify, modernize and standardize the fundamental investment restrictions that are required to be stated by a fund under the 1940 Act; (2) eliminate those fundamental investment restrictions that are no longer required by the federal securities laws, interpretations of the U.S. Securities and Exchange Commission ("SEC") or state securities law, as preempted by the National Securities Markets Improvement Act of 1996 ("NSMIA"); and (3) eliminate those fundamental investment policies that are not required by the federal securities laws to be fundamental. After the Company was organized as a Maryland corporation in 1977, certain legal and regulatory requirements applicable to investment companies changed. For example, certain restrictions imposed by state securities laws and regulations were preempted by NSMIA and, therefore, are no longer applicable to investment companies. As a result, each Fund currently is subject to certain fundamental investment restrictions that are either more restrictive than is required under current law, or which are no longer required at all. In addition, each Fund has certain investment policies that have historically been treated as fundamental. These investment policies are not required by the 1940 Act to be fundamental. The elimination of these fundamental investment policies would provide each Fund with greater investment flexibility to meet its investment goals. The Board believes there are several distinct advantages to revising each Fund's fundamental investment policies and restrictions at this time. First, by reducing the total number of investment policies and restrictions that can be changed only by a shareholder vote, the Board and the Investment Manager believe that each Fund will be able to minimize the costs and delays associated with holding future shareholders' meetings to revise fundamental investment policies and restrictions that have become outdated or inappropriate. Second, the Board and the Investment Manager also believe that the Investment Manager's ability to manage each Fund's assets in a changing investment environment will be enhanced because each Fund will have greater investment management flexibility to respond to market, industry, regulatory or technical changes by seeking Board approval only when necessary to revise certain investment policies and restrictions. Finally, the standardized fundamental investment restrictions are expected to enable each Fund to more efficiently and more easily monitor portfolio compliance. The proposed standardized fundamental investment restrictions cover those areas for which the 1940 Act requires each Fund to have fundamental restrictions and are substantially similar to the fundamental investment restrictions of other funds in Franklin Templeton Investments that have recently amended their investment restrictions. The proposed standardized restrictions will not affect either Fund's investment goal or their current principal investment strategies. Although the proposed amendments will give each Fund greater flexibility to respond to possible future investment opportunities, the Board does not anticipate that the changes, individually or in the aggregate, will result in a material change in the current level of investment risk associated with an investment in a Fund, nor does the Board anticipate that the proposed changes in fundamental investment policies and restrictions will materially change the manner in which each Fund is currently managed and operated. However, the Board may change or modify the way a Fund is managed in the future, as contemplated by the proposed amendments to, or elimination of, the applicable investment policies and restrictions. Should the Board in the future modify materially the way a Fund is managed to take advantage of such increased flexibility, the Fund will make the necessary disclosures to shareholders, including amending its prospectus and statement of additional information ("SAI"), as appropriate. PROPOSAL 3: TO APPROVE AMENDMENTS TO CERTAIN OF EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS (THIS PROPOSAL INVOLVES SEPARATE VOTES ON SUB-PROPOSALS 3A - 3H) Each Fund's existing fundamental investment policies and restrictions, together with the recommended changes to the investment policies and restrictions, are detailed in EXHIBIT C, which is entitled "FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS PROPOSED TO BE AMENDED OR ELIMINATED." Shareholders of each Fund are requested to vote separately on each Sub-Proposal in Proposal 3. Any Sub-Proposal that is approved by shareholders of a Fund will be effective for that Fund on the later of January 1, 2004 or the date of shareholder approval. The Board of Directors recommends unanimously a vote "FOR" each Sub-Proposal. SUB-PROPOSAL 3A: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING DIVERSIFICATION OF INVESTMENTS. The 1940 Act prohibits "diversified" investment companies, like the Funds, from purchasing securities of any one issuer if, at the time of purchase, with respect to 75% of a fund's total assets, more than 5% of total assets would be invested in the securities of that issuer, or the fund would own or hold more than 10% of the outstanding voting securities of that issuer. Up to 25% of a fund's total assets may be invested without regard to these limitations. Under the 1940 Act, these limitations do not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, or to the securities of other investment companies. WHAT EFFECT WILL AMENDING THE CURRENT DIVERSIFICATION RESTRICTION HAVE ON THE FUNDS? Each Fund has a fundamental investment restriction prohibiting investments of more than 5% of a Fund's total assets in securities of any one company or government (other than U.S. government securities) (the "5% limitation"). In addition, each Fund has a fundamental investment restriction that prohibits a Fund from purchasing more than 10% of any class of securities of any one company, including more than 10% of that company's outstanding voting securities (the "10% limitation"). These restrictions, taken together, form each Fund's fundamental investment restriction regarding diversification of investments. Each Fund's current fundamental investment restriction regarding diversification of investments is more restrictive in several respects than the requirements of the 1940 Act. First, each Fund's current diversification restriction applies the 5% and 10% limitations to 100% of a Fund's total assets, rather than to 75% of total assets as permitted by the 1940 Act. Second, each Fund's current 5% limitation does not exclude securities of other investment companies, as permitted by the 1940 Act. Third, each Fund's current 10% limitation applies to "ANY class of securities of any one company, INCLUDING more than 10% of that company's outstanding voting securities," while the 1940 Act only requires that the 10% limitation apply to "outstanding voting securities." Fourth, each Fund's current fundamental investment restriction applies to securities issued by "any one company" or, in the 5% limitation, "any one . . . government." The 1940 Act, however, uses the more generic phrase "any one issuer." While the staff of the SEC (the "SEC Staff") continues informally to take the position that foreign governments are "issuers" for purposes of the diversification requirement, the Board proposes to remove this reference from the proposed fundamental investment restriction regarding diversification of investments in order to retain flexibility should the SEC Staff in the future modify its position. In addition, the proposed fundamental investment restriction would exclude from the 5% and 10% limitations securities issued by other investment companies (whether registered or unregistered under certain SEC rules or orders). Under the amended investment restriction, each Fund would be able to invest cash held at the end of the day in money market funds or other short-term investments (such as unregistered money market funds) without regard to the 5% and 10% investment limitations. The Funds, together with the other funds in Franklin Templeton Investments, obtained an exemptive order from the SEC (the "Cash Sweep Order") that permits the funds in Franklin Templeton Investments to invest their uninvested cash in one or more registered Franklin Templeton money market funds and in unregistered money market funds sponsored by Franklin Templeton Investments. Amending a Fund's current investment restriction regarding diversification would enable the Fund to take advantage of the investment opportunities presented by the Cash Sweep Order. The proposed fundamental investment restriction regarding diversification of investments is consistent with the definition of a diversified investment company under the 1940 Act and the Cash Sweep Order issued by the SEC. In addition, the proposed investment restriction would provide each Fund with greater investment flexibility consistent with the provisions of the 1940 Act and future rules or SEC interpretations. However, it is not currently anticipated that the adoption of the proposed restriction would materially change the way either Fund is managed. The 5% limitation in each Fund's current fundamental investment restriction regarding diversification of investments is combined with fundamental investment policies relating to (1) the kinds of instruments in which each Fund invests in seeking to achieve its investment goal; (2) each Fund's use of temporary defensive measures; and (3) investing more than 10% of each Fund's assets in securities with a limited trading market. In addition, Templeton World Fund's 5% limitation is combined with a fundamental investment policy that it will invest at least 65% of its total assets in issuers domiciled in at least three different nations, and Templeton Foreign Fund's 5% limitation is combined with a fundamental investment policy that it may purchase certain sponsored or unsponsored depositary receipts. Each Fund is proposing to eliminate these fundamental investment policies. (See Proposal 4 below.) Similarly, the 10% limitation in each Fund's current fundamental investment restriction regarding diversification of investments is combined with a fundamental investment restriction on investing for purposes of control. Each Fund is proposing to eliminate the restriction on investing for purposes of control. (See Proposal 4 below.) SUB-PROPOSAL 3B: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING INVESTMENTS IN REAL ESTATE. Under the 1940 Act, a fund's restriction regarding investment in real estate must be fundamental. The 1940 Act does not prohibit an investment company from investing in real estate, either directly or indirectly. Each Fund's current fundamental investment restriction relating to real estate prohibits the Fund from investing in real estate or mortgages on real estate, although each Fund may invest in marketable securities secured by real estate or interests therein or issued by companies or investment trusts which invest in real estate or interests therein. WHAT EFFECT WILL AMENDING THE CURRENT REAL ESTATE RESTRICTION HAVE ON THE FUNDS? The proposed restriction would permit each Fund to continue to invest in marketable securities secured by real estate or interests therein. In addition, under the proposed restriction a Fund would be permitted to invest in securities of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, including real estate limited partnership interests. The proposed restriction would also permit each Fund to hold and sell real estate acquired by the Fund as a result of owning a security or other instrument. Modifying each Fund's real estate restriction may increase each Fund's exposure to certain risks inherent to investments in real estate, such as relative illiquidity, difficulties in valuation, and greater price volatility. In addition, to the extent a Fund invests in developing or emerging market countries, these investments are subject to risk of forfeiture due to governmental action. Under the proposed real estate restriction, a Fund will not be limited to investments in "marketable" securities secured by real estate or interests therein, which would increase each Fund's ability to invest in illiquid securities. However, the Board has adopted a non-fundamental investment restriction, consistent with the SEC Staff's current position on illiquid securities, which prohibits each Fund from investing more than 15% of its net assets in illiquid securities (the "Illiquid Securities Restriction"). As a result, it is not currently intended that either Fund would materially change its investment strategies as they relate to real estate or interests therein. Thus, it is not currently anticipated that the proposed amendments to the investment restriction relating to real estate would involve additional material risk at this time. Each Fund's current fundamental investment restriction relating to real estate is combined with fundamental investment restrictions relating to investments in commodities, investments in other open-end investment companies, and investments in oil, gas, and other mineral development programs. The adoption of this Sub-Proposal would result in separating each Fund's restriction regarding investments in real estate from these other fundamental investment restrictions, including each Fund's fundamental investment restriction on investments in commodities. (See Sub-Proposal 3c below.) Each Fund is proposing to eliminate the restrictions on investing in other open-end investment companies and on investing in oil, gas, and mineral development programs. (See Proposal 4 below.) SUB-PROPOSAL 3C: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING INVESTMENTS IN COMMODITIES. Under the 1940 Act, a fund's investment policy relating to the purchase and sale of commodities must be fundamental. The most common types of commodities are physical commodities such as wheat, cotton, rice and corn. Under the federal securities and commodities laws, certain financial instruments such as futures contracts and options thereon, including currency futures, stock index futures or interest rate futures, may, under limited circumstances, also be considered to be commodities. Funds typically invest in futures contracts and related options on these and other types of commodity contracts for hedging purposes, to implement a tax or cash management strategy, or to enhance returns. WHAT EFFECT WILL AMENDING THE CURRENT COMMODITIES RESTRICTION HAVE ON THE FUNDS? The current fundamental investment restriction on commodities states that each Fund may not purchase or sell commodity contracts, except that Templeton World Fund may purchase or sell stock index futures contracts. The proposed investment restriction relating to commodities allows each Fund to engage in currency and futures contracts and related options and to invest in securities or other instruments that are secured by physical commodities. Notwithstanding the flexibility provided by the proposed fundamental investment restriction, each Fund is subject to guidelines established by the Board regarding the use of derivatives. Under these guidelines, currently no more than 5% of a Fund's assets may be invested in, or exposed to, options and swap agreements (as measured at the time of investment). The use of futures contracts can involve substantial risks and, therefore, each Fund would only invest in such futures contracts where the Investment Manager believes such investments are advisable and then only to the extent permitted by the guidelines established by the Board. It is not currently intended that either Fund would materially change these guidelines or its use of futures contracts, forward currency contracts and related options. Thus, it is not currently anticipated that the proposed amendments to the investment restriction relating to commodities would involve additional material risk at this time. Each Fund's current fundamental investment restriction relating to commodities is combined with fundamental investment restrictions relating to investments in real estate, investments in other open-end investment companies, and investments in oil, gas, and other mineral development programs. The adoption of this Sub-Proposal would result in separating each Fund's restriction regarding commodity contracts from these other fundamental investment restrictions, including each Fund's fundamental investment restriction relating to real estate. (See Sub-Proposal 3b above.) Each Fund is proposing to eliminate the restrictions on investing in other open-end investment companies and on investing in oil, gas, and mineral development programs. (See Proposal 4 below.) SUB-PROPOSAL 3D: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING UNDERWRITING. Under the 1940 Act, a Fund's policy concerning underwriting is required to be fundamental. Under the federal securities laws, a person or company generally is considered to be an underwriter if the person or company participates in the public distribution of securities of OTHER ISSUERS, which involves purchasing the securities from another issuer with the intention of re-selling the securities to the public. From time to time, a mutual fund may purchase securities in a private transaction for investment purposes and later sell or redistribute the securities to institutional investors. Under these or other circumstances, a Fund could possibly be considered to be within the technical definition of an underwriter under the federal securities laws. SEC Staff interpretations have clarified, however, that re-sales of privately placed securities by institutional investors, such as the Funds, do not make the institutional investor an underwriter in these circumstances. In addition, under certain circumstances, a Fund may be deemed to be an underwriter of its own securities. The proposed restriction incorporates these SEC interpretations and would make clear that a Fund has the ability to sell its own shares. WHAT EFFECT WILL AMENDING THE CURRENT UNDERWRITING RESTRICTION HAVE ON THE FUNDS? Each Fund's current fundamental investment restriction relating to underwriting prohibits the Fund from acting as an underwriter. The current investment restriction does not provide any clarification regarding whether a Fund may sell securities that the Fund owns or whether a Fund may sell its own shares in those limited circumstances where the Fund might be deemed to be an underwriter. The proposed restriction relating to underwriting is substantially similar to each Fund's current investment restriction by prohibiting a Fund from engaging in underwriting. The proposed investment restriction, however, clarifies that a Fund may re-sell securities that the Fund owns and that it may also sell its own shares. It is not anticipated that the adoption of the proposed restriction would involve additional material risk to either Fund or affect the way either Fund is currently managed or operated. Each Fund's current fundamental investment restriction relating to underwriting is combined with restrictions relating to issuing senior securities, purchasing securities on margin, short sales and writing, purchasing or selling options. The adoption of this Sub-Proposal would result in the separation of each Fund's underwriting restriction from these other fundamental investment restrictions, including each Fund's investment restriction relating to issuing senior securities. (See Sub-Proposal 3e below.) Each Fund is proposing to eliminate the restrictions on purchasing securities on margin, short sales and writing, purchasing or selling options. (See Proposal 4 below.) SUB-PROPOSAL 3E: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING ISSUING SENIOR SECURITIES. The 1940 Act requires each Fund to have an investment policy describing its ability to issue senior securities. A "senior security" is an obligation of a fund, with respect to its earnings or assets, that takes precedence over the claims of the fund's shareholders with respect to the same earnings or assets. The 1940 Act generally prohibits an open-end fund from issuing senior securities in order to limit the fund's ability to use leverage. In general, leverage occurs when a fund borrows money to enter into securities transactions or acquires an asset without being required to make payment until a later time. SEC Staff interpretations allow an open-end fund under certain conditions to engage in a number of types of transactions that might otherwise be considered to create "senior securities," for example, short sales, certain options and futures transactions, reverse repurchase agreements and securities transactions that obligate the fund to pay money at a future date (such as when-issued, forward commitment or delayed delivery transactions). According to SEC Staff interpretations, when engaging in these types of transactions, an open-end fund must mark on its books, or segregate with its custodian bank, cash or other liquid securities to cover its future obligations, in order to avoid the creation of a senior security. This procedure limits the amount of a fund's assets that may be invested in these types of transactions and the fund's exposure to the risks associated with senior securities. WHAT EFFECT WILL AMENDING THE CURRENT SENIOR SECURITIES RESTRICTION HAVE ON THE FUNDS? The current fundamental investment restriction relating to issuing senior securities prohibits each Fund from issuing senior securities. The proposed restriction would permit each Fund to issue senior securities as permitted under the 1940 Act or any relevant rule, exemption, or interpretation issued by the SEC. The proposed restriction also would clarify that a Fund may, provided that certain conditions are met, engage in those types of transactions that have been interpreted by the SEC Staff as not constituting senior securities, such as covered reverse repurchase transactions. Neither Fund has any present intention of changing its current investment strategies regarding transactions that may be interpreted as resulting in the issuance of senior securities. Therefore, the Board does not anticipate that amending the current restriction will result in additional material risk to either Fund. However, a Fund may initiate the use of these strategies in the future to the extent described in the proposed new restriction. To the extent a Fund does engage in such strategies in the future, it would be subject to the risks associated with leveraging, including reduced total returns and increased volatility. The additional risks to which a Fund may be exposed are limited, however, by the limitations on issuing senior securities imposed by the 1940 Act and any rule, exemption or interpretation thereof that may be applicable. Each Fund's current fundamental investment restriction relating to issuing senior securities is combined with restrictions relating to underwriting, purchasing securities on margin, short sales, and writing, purchasing and selling options. The adoption of this Sub-Proposal would result in the separation of each Fund's senior securities restriction from these other fundamental investment restrictions, including each Fund's investment restriction relating to underwriting. (See Sub-Proposal 3d above.) Each Fund is proposing to eliminate the restrictions on purchasing securities on margin, short sales, and writing, purchasing and selling options. (See Proposal 4 below.) SUB-PROPOSAL 3F: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING LENDING. Under the 1940 Act, a fund must describe, and designate as fundamental, its policy with respect to making loans. In addition to a loan of cash, the term "loans" may, under certain circumstances, be deemed to include certain transactions and investment-related practices. Among those transactions and practices are the lending of portfolio securities, entering into repurchase agreements and the purchase of certain debt instruments. If a fund adopts a fundamental policy that prohibits lending, the fund may still invest in debt securities, enter into securities lending transactions, and enter into repurchase agreements if it provides an exception from the general prohibition. Under SEC Staff interpretations, lending by an investment company, under certain circumstances, may also give rise to issues relating to the issuance of senior securities. To the extent that a Fund enters into lending transactions under these limited circumstances, the Fund will continue to be subject to the limitations imposed under the 1940 Act regarding the issuance of senior securities. (See Sub-Proposal 3e above.) WHAT EFFECT WILL AMENDING THE CURRENT LENDING RESTRICTION HAVE ON THE FUNDS? Each Fund's current investment restriction regarding lending prohibits the Fund from loaning money, except that the Fund may purchase a portion of an issue of publicly distributed bonds, debentures, notes and other evidences of indebtedness. In addition, a Fund may buy from a bank or broker-dealer U.S. government obligations with a simultaneous agreement by the seller to repurchase them within no more than seven days at the original purchase price plus accrued interest (such transactions are commonly known as "repurchase agreements"). Although each Fund's current investment restriction permits the purchase of certain debt securities, a Fund is only permitted to purchase publicly distributed debt securities and may not invest in certain types of private placement debt securities or engage in direct corporate loans, even if such investments would otherwise be consistent with that Fund's investment goal and policies. The proposed fundamental investment restriction provides that a Fund may not make loans to other persons except (1) through the lending of its portfolio securities; (2) through the purchase of debt securities, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies; and (3) to the extent the entry into a repurchase agreement is deemed to be a loan. The proposed investment restriction provides each Fund with greater lending flexibility by permitting a Fund to invest in non-publicly distributed debt securities, loan participations, and direct corporate loans. To the extent that these instruments are illiquid, they will be subject to the Illiquid Securities Restriction. The proposed investment restriction also provides each Fund with greater flexibility by permitting a Fund to enter into repurchase agreements with terms of more than seven days. To the extent that repurchase agreements with terms of more than seven days are illiquid, they will be subject to the Illiquid Securities Restriction. In addition, the proposed investment restriction will not limit a Fund to only collateralizing repurchase agreements with U.S. government obligations. To the extent a Fund uses other forms of collateral for its repurchase agreements, however, it will still generally be subject to regulations under the 1940 Act regarding eligible collateral. The proposed fundamental investment restriction also provides each Fund with additional flexibility to make loans to affiliated investment companies or other affiliated entities. In September 1999, the SEC granted an exemptive order to the Funds, together with other funds in Franklin Templeton Investments, permitting each Fund to loan money to other funds in Franklin Templeton Investments (the "Inter-Fund Lending and Borrowing Order"). These lending transactions may include terms that are more favorable than those which would otherwise be available from lending institutions. The proposed investment restriction would permit a Fund, under certain conditions, to lend cash to other funds in Franklin Templeton Investments at rates higher than those that the Fund would receive if the Fund loaned cash to banks through short-term lending transactions, such as repurchase agreements. Management anticipates that this additional flexibility to lend cash to affiliated investment companies would allow additional investment opportunities, and could enhance each Fund's ability to respond to changes in market, industry or regulatory conditions. Because the proposed lending restriction would provide each Fund with greater flexibility to invest in non-publicly distributed debt securities, loan participations, and other direct corporate loans, the Fund may be exposed to additional risks associated with such securities, including general illiquidity, greater price volatility and the possible lack of publicly available information about issuers of privately placed debt obligations and loan counterparties. However, these risks will be somewhat offset by each Fund's adoption of the non-fundamental Illiquid Securities Restriction. Thus, the Investment Manager believes that the risks posed by these investments should be relatively modest. SUB-PROPOSAL 3G: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING BORROWING. The 1940 Act requires investment companies to impose certain limitations on borrowing activities, and a fund's borrowing limitations must be fundamental. The 1940 Act limitations on borrowing are generally designed to protect shareholders and their investment by restricting a fund's ability to subject its assets to the claims of creditors who, under certain circumstances, might have a claim to the fund's assets that would take precedence over the claims of shareholders. Under the 1940 Act, an open-end fund may borrow up to 33 1/3% of its total assets (including the amount borrowed) from banks and may borrow up to 5% of its total assets for temporary purposes from any other person. Generally, a loan is considered temporary if it is repaid within sixty days. Funds typically borrow money to meet redemptions or for other short-term cash needs in order to avoid forced, unplanned sales of portfolio securities. This technique allows a fund greater flexibility by allowing its manager to buy and sell portfolio securities primarily for investment or tax considerations, rather than for cash flow considerations. WHAT EFFECT WILL AMENDING THE CURRENT BORROWING RESTRICTION HAVE ON THE FUNDS? Each Fund's current investment restriction relating to borrowing prohibits a Fund from borrowing money for any purpose other than redeeming its shares or purchasing its shares for cancellation, and then only as a temporary measure up to an amount not exceeding 5% of the value of its total assets. Each Fund's current fundamental investment restriction further prohibits a Fund from pledging, mortgaging or hypothecating its assets for any purpose other than to secure such borrowings, and only in amounts not exceeding 10% of the value of the Fund's total assets as the Board may approve. Included in this fundamental investment restriction is a statement that the Board has approved an "operating policy" that a Fund will not pledge, mortgage or hypothecate its assets if the percentage of pledged assets plus the sales commission will exceed 10% of the offering price of the shares of a Fund. For purposes of this restriction, collateral arrangements by Templeton World Fund with respect to margin for a stock index futures contract are not deemed to be a pledge of assets. The proposed investment restriction would prohibit borrowing money, except to the extent permitted by the 1940 Act or any rule, exemption or interpretation thereunder issued by the SEC. Unlike the current fundamental investment restriction on borrowing, the proposed restriction does not limit the purposes for which a Fund can borrow. In addition, each Fund's investment restriction on pledging, mortgaging or hypothecating its assets (including the "operating policy") would be eliminated because the 1940 Act does not require this type of fundamental investment restriction. By so amending the investment restriction, a Fund would not unnecessarily limit the Investment Manager if the Investment Manager determines that borrowing is in the best interests of that Fund and its shareholders. As a general matter, however, Section 18 of the 1940 Act limits a fund's borrowings to not more than 33 1/3% of the fund's total assets (including the amount borrowed), which is greater than each Fund's current investment restriction of up to 5% of the value of a Fund's total assets. The proposed restriction would also permit a Fund to borrow money from affiliated investment companies or other affiliated entities. In September 1999, the SEC granted the Inter-Fund Lending and Borrowing Order, permitting each Fund to borrow money from other funds in Franklin Templeton Investments. The proposed borrowing restriction would permit a Fund, under certain circumstances and in accordance with the Inter-Fund Lending and Borrowing Order, to borrow money from other funds in Franklin Templeton Investments at rates that are more favorable than the rates that the Fund would receive if it borrowed from banks or other lenders. The proposed borrowing restriction would also permit a Fund to borrow from other affiliated entities, such as the Investment Manager, under emergency market conditions should the SEC permit investment companies to engage in such borrowing in the future, such as it did in response to the emergency market conditions that existed immediately after the events of September 11, 2001. Because the proposed borrowing restriction would provide each Fund with additional borrowing flexibility, to the extent that a Fund uses such flexibility, the Fund may be subject to additional costs and risks inherent to borrowing, such as reduced total return and increased volatility. The additional costs and risks to which a Fund may be exposed are limited, however, by the borrowing limitations imposed by the 1940 Act and any rule, exemption or interpretation thereof that may be applicable. SUB-PROPOSAL 3H: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING INDUSTRY CONCENTRATION. Under the 1940 Act, a fund's policy regarding concentration of investments in the securities of companies in any particular industry must be fundamental. The SEC Staff takes the position that a fund "concentrates" its investments if it invests more than 25% of its "net" assets (exclusive of certain items such as cash, U.S. government securities, securities of other investment companies, and certain tax-exempt securities) in any particular industry or group of industries. An investment company is not permitted to concentrate its investments in any particular industry or group of industries unless it discloses its intention to do so. WHAT EFFECT WILL AMENDING THE CURRENT INDUSTRY CONCENTRATION RESTRICTION HAVE ON THE FUNDS? The proposed concentration policy is substantially the same as each Fund's current policy, except that (1) it modifies each Fund's asset measure (from "total assets" to "net assets") by which concentration is assessed; and (2) it expressly references, in a manner consistent with current SEC Staff policy, the categories of investments that are excepted from coverage of the restriction. The proposed restriction reflects a more modernized approach to industry concentration, and provides each Fund with investment flexibility that ultimately is expected to help each Fund respond to future legal, regulatory, market or technical changes. In addition, the Board may from time to time establish guidelines regarding industry classifications. The proposed restriction would expressly exempt from the 25% limitation those securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities, and the securities of other investment companies, consistent with SEC Staff policy. The proposed restriction thus clarifies the types of U.S. government securities in which a Fund may invest. In addition, if Proposal 4 is approved, then each Fund's current fundamental investment restriction against investments in other open-end investment companies will be eliminated. The proposed restriction on industry concentration will make explicit that such investments in other investment companies are exempt from each Fund's concentration policy. Even with this modified restriction, however, each Fund would continue to remain subject to the limitations on a fund's investments in other investment companies as set forth in the 1940 Act, its Prospectus and any exemptive orders issued by the SEC. In general, absent such rules or orders from the SEC, the 1940 Act would prohibit a Fund from investing more than 5% of its total assets in any one investment company and investing more than 10% of its total assets in other investment companies overall. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" SUB-PROPOSALS 3A-3H PROPOSAL 4: TO APPROVE THE ELIMINATION OF CERTAIN OF EACH FUND'S FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS. Each Fund's existing fundamental investment policies and restrictions, together with those recommended to be eliminated, are detailed in EXHIBIT C, which is entitled "FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS PROPOSED TO BE AMENDED OR ELIMINATED. " If a Fund's shareholders approve Proposal 4, the elimination of such investment policies and restrictions of that Fund will be effective on the later of January 1, 2004 or the date of shareholder approval. WHY IS THE BOARD RECOMMENDING THAT CERTAIN FUNDAMENTAL INVESTMENT POLICIES BE ELIMINATED, AND WHAT EFFECT WILL THEIR ELIMINATION HAVE ON THE FUNDS? Each Fund has certain investment policies that have historically been treated as fundamental. These include investment policies (1) about the kinds of instruments in which each Fund invests in seeking to achieve its investment goal, including equity and debt securities; (2) about each Fund's use of temporary defensive measures; and (3) prohibiting investments of more than 10% of each Fund's assets in securities with a limited trading market. In addition, Templeton World Fund has a fundamental investment policy that it will invest at least 65% of its total assets in issuers domiciled in at least three different nations (one of which may be the U.S.), and Templeton Foreign Fund has a fundamental investment policy that it may purchase sponsored or unsponsored American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"). These current fundamental investment policies are not required by the 1940 Act to be fundamental and are therefore proposed to be eliminated. If these fundamental investment policies are eliminated, each Fund will continue to be subject to (1) the current requirements of the 1940 Act and related regulations, including, for example, regulations pertaining to investing 80% of a fund's assets in investments that are suggested by the fund's name; and (2) the non-fundamental investment policies and strategies described in each Fund's prospectus and SAI, including non-fundamental policies and strategies relating to (a) investments in equity and debt securities and depositary receipts, and (b) the use of temporary defensive measures. In addition, in connection with the proposed elimination of each Fund's current fundamental investment policy limiting investments to not more than 10% of its assets in securities with a limited trading market (together with the elimination of a similar current fundamental investment restriction), the Board has adopted the non-fundamental Illiquid Securities Restriction, consistent with the SEC Staff's current position on illiquid securities, which prohibits each Fund from investing more than 15% of its net assets in illiquid securities. By reducing the total number of investment policies that can be changed only by a shareholder vote, the Board believes that each Fund will be able to reduce the costs and delays associated with holding future shareholder meetings for the purpose of revising fundamental policies that become outdated or inappropriate. The elimination of these current fundamental investment policies (1) will not affect a Fund's ability to use these policies and strategies as appropriate to achieve their respective investment goals; and (2) it will enhance the Investment Manager's ability to manage each Fund's assets in a changing investment environment without being constrained by additional and unnecessary limitations. Accordingly, the Investment Manager has recommended, and the Board has determined, that these remaining current fundamental investment policies be eliminated, and that their elimination is consistent with the federal securities laws. The elimination of these current fundamental investment policies is expected to have no impact on the manner in which each Fund is currently managed. Therefore, the Investment Manager does not anticipate that eliminating these remaining current fundamental investment policies will result in additional material risk to either Fund at this time. WHY IS THE BOARD RECOMMENDING THAT CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS BE ELIMINATED, AND WHAT EFFECT WILL THEIR ELIMINATION HAVE ON THE FUNDS? Certain of each Fund's fundamental investment restrictions are either restatements of restrictions that are already included within the 1940 Act or are more restrictive than current SEC Staff interpretations. These restrictions include those relating to (1) investments in other open-end investment companies; (2) purchasing securities on margin, short sales and purchasing and writing options; and (3) participation in joint trading accounts. Each Fund's fundamental investment restrictions relating to unlisted foreign securities, restricted securities and "letter" stocks do not represent current SEC Staff positions and are effectively limited by each Fund's non-fundamental Illiquid Securities Restriction. The other fundamental investment restrictions of each Fund were originally adopted to comply with state securities laws and regulations. Due to the passage of NSMIA, these fundamental restrictions are no longer required by law. As a result, a Fund is no longer legally required to adopt or maintain investment restrictions relating to (1) investments in oil and gas programs; (2) management ownership of portfolio securities; (3) investing for purposes of exercising control; (4) investments in companies with less than three years of continuous operation; and (5) warrants. Accordingly, the Investment Manager has recommended, and the Board has determined, that these ten restrictions (referred to in this Proposal 4 as the "Restrictions") be eliminated and that their elimination is consistent with the federal securities laws. By reducing the total number of investment restrictions that can be changed only by a shareholder vote, the Board believes that each Fund will be able to reduce the costs and delays associated with holding future shareholder meetings for the purpose of revising fundamental investment restrictions that become outdated or inappropriate. Elimination of the Restrictions would also enable each Fund to be managed in accordance with the current requirements of the 1940 Act, without being constrained by additional and unnecessary limitations. The Board believes that the elimination of the Restrictions is in the best interest of each Fund's shareholders as it will provide each Fund with increased flexibility to pursue its investment goal and will enhance the Investment Manager's ability to manage each Fund's assets in a changing investment environment. WHICH TEN (10) RESTRICTIONS IS THE BOARD RECOMMENDING THAT EACH FUND ELIMINATE? Each Fund currently is subject to ten Restrictions that are no longer required by law and were adopted primarily in response to regulatory, business or industry conditions that no longer exist. The exact language of the Restrictions has been included in EXHIBIT C, which is entitled "FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS PROPOSED TO BE AMENDED OR ELIMINATED. " INVESTMENT IN OTHER OPEN-END INVESTMENT COMPANIES Each Fund's current fundamental investment restriction prohibits a Fund from investing in other open-end investment companies. This fundamental investment restriction is more restrictive than the 1940 Act and current SEC Staff interpretations, which do not require a fund to adopt such a provision as a fundamental investment restriction. Upon elimination of this restriction, each Fund would remain subject to the restrictions under Section 12(d) of the 1940 Act relating to a Fund's ability to invest in other investment companies, including open-end investment companies, except where a Fund has received an exemption from such restrictions. The 1940 Act restrictions generally specify that a Fund may not purchase more than 3% of another fund's total outstanding voting stock, invest more than 5% of its total assets in another fund's securities, or have more than 10% of its total assets invested in securities of all other funds. In addition, eliminating each Fund's current restriction on investments in other open-end investment companies would enable each Fund to take advantage of the investment opportunities presented by the Cash Sweep Order (discussed in Sub-Proposal 3a above), since it contemplates relief from the 1940 Act restrictions relating to investments in other registered and unregistered investment companies in certain limited circumstances. Therefore, the Board is recommending that the restriction be eliminated. OIL AND GAS PROGRAMS Each Fund has a fundamental investment restriction that prohibits the Fund from investing in interests (other than debentures or equity stock interests) in oil, gas or other mineral exploration or development programs. Each Fund's fundamental investment restriction regarding oil and gas programs was based on state securities laws that had been adopted by a few jurisdictions, but have since been pre-empted by NSMIA. Accordingly, the Board proposes that the restriction be eliminated. MANAGEMENT OWNERSHIP OF SECURITIES Each Fund's current fundamental investment restriction prohibits a Fund from investing in companies in which certain affiliated persons of the Fund have an ownership interest. This restriction was based on state law provisions that have been pre-empted by NSMIA. In addition, the 1940 Act provisions addressing conflicts of interest would continue to apply to each Fund. Therefore, the Board is recommending that the restriction be eliminated. INVESTING FOR PURPOSES OF EXERCISING CONTROL The 1940 Act does not require, and applicable state law no longer requires, that a Fund adopt a fundamental investment restriction prohibiting it from investing in any company for the purpose of exercising control or management. Because each Fund, as a diversified investment company, is already subject to certain limitations with respect to how much of a single issuer's voting securities it may acquire (and, if approved by shareholders, would be subject to the amended fundamental investment restriction regarding diversification of investments described in Sub-Proposal 3a above), the Board is recommending that this restriction be eliminated. PURCHASING SECURITIES ON MARGIN, ENGAGING IN SHORT SALES AND WRITING, BUYING OR SELLING OPTIONS The 1940 Act does not require a Fund to adopt a fundamental investment restriction regarding purchasing on margin, engaging in short sales, or writing, buying or selling options, except to the extent that these transactions may result in the creation of senior securities (as described more fully in Sub-Proposal 3e above). Each Fund's current fundamental investment restrictions prohibits a Fund from (1) purchasing securities on margin; (2) engaging in short sales of securities; and (3) writing, buying or selling puts, calls, straddles or spreads (except Templeton World Fund may make margin payments in connection with, and purchase and sell, stock index futures contracts and options on securities indices). Current 1940 Act provisions on issuing senior securities, engaging in short sales and purchasing on margin, together with the proposed fundamental investment restriction on senior securities, will limit the ability of a Fund to purchase securities on margin, engage in short sales and write, buy or sell puts, calls, straddles or spreads. Therefore, the Investment Manager does not anticipate that deleting the current restrictions will result in additional material risk to either Fund at this time. THREE YEARS OF CONTINUOUS OPERATION Each Fund's current fundamental investment restriction relating to investments in newer companies limits a Fund's ability to invest more than 5% of the value of its total assets in securities of issuers which have been in continuous operation less than three years. This restriction was based upon state securities laws, which have been pre-empted by NSMIA. Therefore, the Board proposes that the restriction be eliminated. WARRANTS Each Fund's fundamental investment restriction relating to warrants limits a Fund's investments in warrants to 5% of its total assets whether or not the warrant is listed on the New York Stock Exchange or the American Stock Exchange, including no more than 2% of a Fund's total assets which may be invested in warrants that are not listed on those exchanges. A warrant entitles an investor to purchase a specified amount of stock at a specified price and is effective for a period of time normally ranging from a number of years to perpetuity. Each Fund's fundamental investment restriction on warrants was based on state securities laws that have since been pre-empted by NSMIA. Accordingly, the Board proposes that the restriction be eliminated. UNLISTED FOREIGN SECURITIES AND RESTRICTED SECURITIES The fundamental investment restriction on unlisted foreign securities and restricted securities limits each Fund from investing more than 15% of its total assets in securities of foreign issuers that are not listed on a recognized U.S. or foreign securities exchange. To the extent that unlisted foreign securities are not readily marketable at a price that is approximately equal to the value placed on such assets by a Fund, these types of securities may be considered illiquid. Each Fund remains subject to the limitations imposed by the SEC Staff on an open-end fund's ability to invest in illiquid securities, which is currently limited to 15% of its net assets. As a result of the proposed elimination of each Fund's current investment restrictions that relate to restricted and illiquid securities, the Board has adopted the non-fundamental Illiquid Securities Restriction. Thus, each Fund is already prohibited from investing more than 15% of its net assets in illiquid securities, including foreign securities that are not readily marketable. Each Fund's current fundamental investment restriction also limits a Fund's ability to invest in securities with a limited trading market to no more than 10% of the Fund's total assets. With some exceptions, such securities generally include securities that have not been registered under the Securities Act of 1933, as amended, and therefore may only be resold to certain institutional investors under certain circumstances, and securities that are subject to other contractual restrictions on resale (often referred to as "restricted securities"). To the extent that a restricted security is not readily marketable, such a security may also be considered illiquid. Each Fund's current fundamental investment restriction on investments in securities with a limited trading market was based upon state law restrictions on the purchase of unregistered securities, as well as an SEC Staff position relating to illiquid securities. The state law provision has been pre-empted by NSMIA and the SEC Staff, which does not require investment companies to adopt the position as a fundamental restriction, has subsequently amended its position to permit investment companies to invest up to 15% of their net assets in illiquid securities. As described above, the Board has adopted the Illiquid Securities Restriction in recognition of the SEC Staff position and, therefore, is recommending that the current fundamental investment restriction on unlisted foreign securities and restricted securities be eliminated. "LETTER" STOCKS Each Fund's fundamental investment restriction relating to "Letter" stocks prohibits a Fund from investing in "letter stocks" or securities on which there are any sales restrictions under a purchase agreement. As with unlisted foreign securities and restricted securities, discussed above, these types of securities may be illiquid to the extent that they are not readily marketable. This fundamental investment restriction is not required by the 1940 Act. Moreover, as described above, the Board has adopted the Illiquid Securities Restriction in recognition of the SEC Staff position on illiquid securities. Accordingly, the Board is recommending that the current fundamental investment restriction on "letter" stocks be eliminated. JOINT TRADING ACCOUNTS Each Fund's fundamental investment restriction relating to joint trading accounts prohibits a Fund's participation on a joint or a joint and several basis in such an account. Because Section 12(a)(2) of the 1940 Act prohibits a mutual fund from participating in a joint trading account unless allowed by rule or exemptive order, the current fundamental restriction is unnecessary. Therefore, the Board is recommending that the restriction be eliminated. WHAT ARE THE RISKS, IF ANY, IN ELIMINATING THE FUNDAMENTAL INVESTMENT POLICIES AND THE RESTRICTIONS? The Board does not anticipate that eliminating these fundamental investment policies and the Restrictions will result in any additional material risk to either Fund at this time. If this Proposal 4 is approved, each Fund will continue to be subject to the limitations of the 1940 Act, or any rule, SEC Staff interpretation, or exemptive orders granted under the 1940 Act. Moreover, neither Fund currently intends to change its present investment practices as a result of eliminating these fundamental investment policies and the Restrictions. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 4 INFORMATION ABOUT THE FUNDS THE INVESTMENT MANAGER. The Investment Manager of each Fund is Templeton Global Advisors Limited, Lyford Cay, Nassau, Bahamas. Pursuant to an investment management agreement, the Investment Manager manages the investment and reinvestment of the Funds' assets. The Investment Manager is an indirect, wholly owned subsidiary of Resources. THE ADMINISTRATOR. The administrator of the Funds is Franklin Templeton Services, LLC ("FT Services"), with offices at One Franklin Parkway, San Mateo, California 94403-1906. FT Services is an indirect, wholly owned subsidiary of Resources and an affiliate of the Fund's principal underwriter. Pursuant to an administration agreement, FT Services provides certain administrative functions for the Funds. THE UNDERWRITER. The underwriter for the Funds is Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906. THE TRANSFER AGENT. The transfer agent and dividend-paying agent for the Funds is Franklin Templeton Investor Services, LLC, 100 Fountain Parkway, St. Petersburg, Florida 33716-1205. THE CUSTODIAN. The custodian for the Funds is JPMorgan Chase Bank, MetroTech Center, Brooklyn, New York 11245. PENDING LITIGATION. A lawsuit, Bradfisch v. Templeton Funds, Inc. and Templeton Global Advisors Limited, Case No. 2003 L 001361, was filed on October 3, 2003 in the Circuit Court for the Third Judicial Circuit, Madison County, Illinois, alleging various breaches of fiduciary duty with respect to the valuation of Templeton World Fund's portfolio securities and market timing. Management strongly believes that the claims made in this action are without merit and intends vigorously to defend against this action. OTHER MATTERS. The Funds last audited financial statements and annual report, dated August 31, 2002, and their most recent semi-annual report, dated February 28, 2003, are available free of charge. It is anticipated that the Fund's audited financial statements and annual report dated August 31, 2003 will be available free of charge in late October 2003. To obtain a copy of any of these reports, please call 1-800/DIAL BEN(R) (1-800-342-5236) or forward a written request to Franklin Templeton Investor Services, LLC, P.O. Box 33030, St. Petersburg, Florida 33733-8030. SHAREHOLDERS SHARING THE SAME ADDRESS. If two or more shareholders share the same address, only one copy of this proxy statement is being delivered to that address, unless the Company has received contrary instructions from one or more of the shareholders at that shared address. Upon written or oral request, the Company will deliver promptly a separate copy of this proxy statement to a shareholder at a shared address. Please call [1-800/DIAL BEN(R) (1-800-342-5236)] or forward a written request to [Franklin Templeton Investor Services, LLC, P.O. Box 33030, St. Petersburg, Florida 33733-8030] if you would like to (1) receive a separate copy of this proxy statement; (2) receive your annual reports or proxy statements separately in the future; or (3) request delivery of a single copy of annual reports or proxy statements if you are currently receiving multiple copies at a shared address. PRINCIPAL SHAREHOLDERS. As of September 17, 2003, Templeton World Fund had total net assets of $[____________] and a total of [____________] shares of common stock, $1.00 par value ("shares") outstanding. Shares of Templeton World Fund are divided among three separate classes of shares as follows: [____________] Class A shares, [____________] Class B shares, and [____________] Class C shares. As of September 17, 2003, Templeton Foreign Fund had total net assets of $[____________] and a total of [____________] shares of common stock, $1.00 par value ("shares") outstanding. Shares of Templeton Foreign Fund are divided among five separate classes of shares as follows: [____________] Class A shares, [____________] Class B shares, [____________] Class C shares, [____________] Class R shares, and [____________] Advisor Class shares. From time to time, the number of shares held in "street name" accounts of various securities dealers for the benefit of their clients may exceed 5% of the total shares outstanding. To the knowledge of the Funds' management, as of September 17, 2003, the only other entities owning beneficially more than 5% of the outstanding shares of any class of the Funds were: TEMPLETON WORLD FUND PERCENTAGE OF AMOUNT AND NATURE OF OUTSTANDING SHARES NAME AND ADDRESS SHARE CLASS BENEFICIAL OWNERSHIP OF THE CLASS (%) ------------------------------------------------------------------------------- TEMPLETON FOREIGN FUND PERCENTAGE OF AMOUNT AND NATURE OF OUTSTANDING SHARES NAME AND ADDRESS SHARE CLASS BENEFICIAL OWNERSHIP OF THE CLASS (%) ------------------------------------------------------------------------------- [(1) Charles B. Johnson, who is Chairman of the Board, Director and an officer of the Company, Rupert H. Johnson, Jr., who is a Director and officer of the Company, and Harmon E. Burns and Martin L. Flanagan, who are officers of the Company, serve on the administrative committee of the Franklin Templeton Profit Sharing and 401(k) Plan, which owns shares of the Funds. In that capacity, they participate in the voting of such shares. Charles B. Johnson, Rupert H. Johnson, Jr., Harmon E. Burns and Martin L. Flanagan disclaim beneficial ownership of any shares of the Funds owned by the Franklin Templeton Profit Sharing and 401(k) Plan. Charles B. Johnson and Rupert H. Johnson, Jr. may be considered beneficial holders of the Funds' shares held by the Investment Manager. As principal shareholders of Resources, they may be able to control the voting of the Investment Manager's shares of the Funds.] In addition, to the knowledge of the Company's management, as of September 17, 2003, the Directors and officers of the Company, as a group, owned of record and beneficially [____]% of Templeton World Fund's Class shares, [____]% of Templeton Foreign Fund's [Advisor] Class shares and less than 1% of the outstanding shares of each Fund in the aggregate and of any other class of each Fund. AUDIT COMMITTEE AUDIT COMMITTEE AND INDEPENDENT AUDITORS. The Funds' Audit Committee is responsible for the selection of the Funds' independent auditors, including evaluating their independence and meeting with such auditors to consider and review matters relating to the Funds' financial reports and internal accounting. The Audit Committee also reviews the maintenance of the Funds' records and the safekeeping arrangements of the Funds' custodian. The Audit Committee consists of Andrew H. Hines, Jr. and Fred R. Millsaps (Chairman) who are Independent Directors. The Audit Committee and the Board selected the firm of PricewaterhouseCoopers LLP ("PwC") as independent auditors of the Funds for the current fiscal year. Representatives of PwC are not expected to be present at the Meeting, but will have the opportunity to make a statement if they wish, and will be available should any matter arise requiring their presence. AUDIT FEES. The aggregate fees paid to PwC for professional services rendered by PwC for the audit of the Funds' annual financial statements or for services that are normally provided by PwC in connection with statutory and regulatory filings or engagements were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002. AUDIT-RELATED FEES. The aggregate fees paid to PwC for assurance and related services by PwC that are reasonably related to the performance of the audit or review of the Funds' financial statements and are not reported under "Audit Fees" above were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002. The services for which these fees were paid included [the review of semi-annual reports to shareholders]. [In addition, the Audit Committee pre-approved PwC's engagements for audit-related services with the Investment Manager and certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds, which engagements related directly to the operations and financial reporting of the Funds. The fees for these services were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002.] [None of the above services were provided pursuant to the DE MINIMIS exception of the auditor independence standards.] TAX FEES. The aggregate fees paid to PwC for professional services rendered by PwC for tax compliance, tax advice and tax planning were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002. The services for which these fees were paid included [________________________________________________]. [In addition, the Audit Committee pre-approved PwC's engagements for tax services with the Investment Manager and certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds, which engagements related directly to the operations and financial reporting of the Funds. The fees for these services were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002.] [None of the above services were provided pursuant to the DE MINIMIS exception of the auditor independence standards.] ALL OTHER FEES. The aggregate fees billed for products and services provided by PwC, other than the services reported above, were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002. The services for which these fees were paid included [________________________________________________]. [In addition, the Audit Committee pre-approved PwC's engagements for other services with the Investment Manager and certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds, which engagements related directly to the operations and financial reporting of the Funds. The fees for these services were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002.] [None of the above services were provided pursuant to the DE MINIMIS exception of the auditor independence standards.] AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES. [As of the date of this proxy statement, the Audit Committee has not adopted pre-approval policies and procedures. As a result, all services provided by PwC must be directly pre-approved by the Audit Committee.] AGGREGATE NON-AUDIT FEES. The aggregate non-audit fees billed by PwC for services rendered to the Funds, to the Investment Manager and any entity controlling, controlled by, or under common control with the Investment Manager that provides ongoing services to the Funds were $[____________] for the fiscal year ended August 31, 2003 and $[____________] for the fiscal year ended August 31, 2002. The Audit Committee has determined that the provision of non-audit services to the Investment Manager, and any entity controlling, controlled by or under common control with the Investment Manager that provides ongoing services to the Funds, that were not pre-approved by the Audit Committee is compatible with maintaining the independence of PwC. FURTHER INFORMATION ABOUT VOTING AND THE MEETING SOLICITATION OF PROXIES. Your vote is being solicited by the Board of Directors of the Company. The cost of soliciting proxies, including the fees of a proxy soliciting agent, will be shared [one-quarter by the Investment Manager and three-quarters] by the Company. The Company reimburses brokerage firms and others for their expenses in forwarding proxy material to the beneficial owners and soliciting them to execute proxies. [The Company has engaged _______________________ to solicit proxies from brokers, banks, other institutional holders and individual shareholders at an anticipated cost of approximately [$___________] to [$___________], including out-of-pocket expenses.] The Company expects that the solicitation will be primarily by mail, but also may include telephone, telecopy or oral solicitations. If the Company does not receive your proxy by a certain time, you may receive a telephone call from [_______________________] asking you to vote. The Company does not reimburse Directors and officers of the Company or regular employees and agents of the Investment Manager involved in the solicitation of proxies. VOTING BY BROKER DEALERS. The Company expects that, before the Meeting, broker-dealer firms holding shares of the Funds in "street name" for their customers will request voting instructions from their customers. If these instructions are not received by the date specified in the broker-dealer firms' or such depositories' proxy solicitation materials, the Company understands that the broker-dealers may vote on Proposal 1 on behalf of their customers. Certain broker-dealers may exercise discretion over shares held in their name for which no instructions are received by voting these shares in the same proportion as they vote shares for which they received instructions. QUORUM. The presence at the Meeting in person or by proxy of shareholders entitled to cast a majority of the votes entitled to be cast shall constitute a quorum. The shares over which broker-dealers have discretionary voting power, the shares that represent "broker non-votes" (i.e., shares held by brokers or nominees as to which (i) instructions have not been received from the beneficial owners or persons entitled to vote and (ii) the broker or nominee does not have discretionary voting power on a particular matter), and the shares whose proxies reflect an abstention on any item, will all be counted as shares present for purposes of determining whether the required quorum of shares exists. METHODS OF TABULATION. Shareholders of both Funds will vote together on Proposal 1. Shareholders will vote separately on Proposals 2, 3 and 4 for their respective Funds. Proposal 1, the election of Directors, requires the affirmative vote of a majority of the votes cast by shareholders of both Funds voting together. Proposal 2, to approve an Agreement and Plan of Reorganization that provides for the reorganization of the Company from a Maryland corporation to a Delaware statutory trust, requires the affirmative vote of a majority of each Fund's outstanding shares. Proposal 3, to approve amendments to certain of each Fund's fundamental investment restrictions (including eight (8) Sub-Proposals), and Proposal 4, to approve the elimination of certain of each Fund's fundamental investment policies and restrictions, each requires, with respect to each Fund, the affirmative vote of the lesser of (i) more than 50% of the outstanding shares of a Fund; or (ii) 67% or more of the outstanding shares of a Fund present at the Meeting, if the holders of more than 50% of that Fund's outstanding shares are present or represented by proxy. Abstentions and broker non-votes will be treated as votes present at the Meeting, but will not be treated as votes cast. Abstentions and broker non-votes, therefore, will have no effect on Proposal 1, which requires a majority of votes cast, but will have the same effect as a vote "against" Proposal 2, Sub-Proposals 3a-3h, and Proposal 4. ADJOURNMENT. In the event that a quorum is not present at the Meeting or, in the event that a quorum is present but sufficient votes have not been received to approve a Proposal or Sub-Proposal, the Meeting may be adjourned to permit further solicitation of proxies. The holders of a majority of shares entitled to vote at the Meeting and present in person or by proxy, whether or not sufficient to constitute a quorum, or any officer present entitled to preside or act as Secretary of the Meeting may adjourn the Meeting without determining the date of the new meeting or from time to time without further notice to a date not more than 120 days after the original record date. Any business that might have been transacted at the Meeting originally called may be transacted at such adjourned meeting at which a quorum is present. The persons designated as proxies may vote to adjourn the Meeting to permit further solicitation of proxies or for other reasons consistent with Maryland law and the Company's Charter, as amended and restated, and By-Laws, as amended and restated. Unless otherwise instructed by a shareholder granting a proxy, the persons designated as proxies may use their discretionary authority to vote on questions of adjournment. SHAREHOLDER PROPOSALS. Neither the Company nor the DE Trust is required, and they do not intend, to hold regular annual shareholders' meetings. Shareholders wishing to submit proposals for consideration for inclusion in a proxy statement for the next shareholders' meeting should send their written proposals to the offices of the Company or the DE Trust, as applicable, 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091, so they are received within a reasonable time before any such meeting. A shareholder proposal may be presented at a meeting of shareholders only if such proposal concerns a matter that may be properly brought before the meeting under applicable federal proxy rules, state law, and other governing instruments. Submission of a proposal by a shareholder does not guarantee that the proposal will be included in the Company's or the DE Trust's, as applicable, proxy statement or presented at the meeting. No business other than the matters described above is expected to come before the Meeting, but should any other matter requiring a vote of shareholders arise, including any question as to an adjournment or postponement of the Meeting, the persons designated as proxies named on the enclosed proxy card will vote on such matters in accordance with the views of management. By Order of the Board of Directors, Barbara J. Green Secretary Dated: October [], 2003 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION BETWEEN TEMPLETON FUNDS, INC. AND TEMPLETON FUNDS TRUST This Agreement and Plan of Reorganization ("Agreement") is made as of this ___ day of ________, 2003 by and between TEMPLETON FUNDS, INC., a Maryland corporation (the "Company"), and TEMPLETON FUNDS TRUST, a Delaware statutory trust (the "Trust") (the Company and the Trust are hereinafter collectively referred to as the "parties"). In consideration of the mutual promises contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. PLAN OF REORGANIZATION. (a) Upon satisfaction of the conditions precedent described in Section 3 hereof, the Company, on behalf of its series of shares designated as Templeton Foreign Fund and Templeton World Fund (the "Funds"), will convey, transfer and deliver to the Trust, on behalf of its Templeton Foreign Fund and Templeton World Fund (the "New Funds"), at the closing provided for in Section 2 (hereinafter referred to as the "Closing") all of the Company's then-existing assets, including the assets of the Funds (the "Assets"). In consideration thereof, the Trust, on behalf of each New Fund, agrees at the Closing (i) to assume and pay when due all obligations and liabilities of the corresponding Fund, existing on or after the Effective Date of the Reorganization (as defined in Section 2 hereof), whether absolute, accrued, contingent or otherwise, including all fees and expenses in connection with this Agreement, which fees and expenses shall, in turn, include, without limitation, costs of legal advice, accounting, printing, mailing, proxy solicitation and transfer taxes, if any (collectively, the "Liabilities"), such Liabilities to become the obligations and liabilities of the corresponding New Fund; and (ii) to deliver to the Company, on behalf of each Fund, in accordance with paragraph (b) of this Section 1, full and fractional shares of each class of shares of beneficial interest, without par value, of the corresponding New Fund, equal in number to the number of full and fractional shares of the corresponding class of shares of common stock, $1.00 par value per share, of the corresponding Fund outstanding at the close of regular trading on the New York Stock Exchange, Inc. ("NYSE") on the business day immediately preceding the Effective Date of the Reorganization. The reorganization contemplated hereby is intended to qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended ("Code"). The Company, on behalf of the Funds, shall distribute to the Funds' shareholders the shares of the corresponding New Funds in accordance with this Agreement and the resolutions of the Board of Directors of the Company (the "Board of Directors") authorizing the transactions contemplated by this Agreement. (b) In order to effect the delivery of shares described in Section 1(a)(ii) hereof, the Trust will establish an open account for each shareholder of each Fund and, on the Effective Date of the Reorganization, will credit to such account full and fractional shares of beneficial interest, without par value, of the appropriate class of the appropriate New Fund equal to the number of full and fractional shares of common stock such shareholder holds in the corresponding class of the corresponding Fund at the close of regular trading on the NYSE on the business day immediately preceding the Effective Date of the Reorganization. Fractional shares of the New Funds will be carried to the third decimal place. At the close of regular trading on the NYSE on the business day immediately preceding the Effective Date of the Reorganization, the net asset value per share of each class of shares of each New Fund shall be deemed to be the same as the net asset value per share of each corresponding class of shares of the corresponding Fund. On the Effective Date of the Reorganization, each certificate representing shares of a class of a Fund will be deemed to represent the same number of shares of the corresponding class of the corresponding New Fund. Simultaneously with the crediting of the shares of a New Fund to the shareholders of record of the corresponding Fund, the shares of the Fund held by such shareholders shall be cancelled. Each shareholder of each Fund will have the right to deliver their share certificates of the Fund to the Trust in exchange for share certificates of the corresponding New Fund. However, a shareholder need not deliver such certificates to the Trust unless the shareholder so desires. (c) As soon as practicable after the Effective Date of the Reorganization, the Company shall take all necessary steps under Maryland law to effect a complete dissolution of the Company. (d) The expenses of entering into and carrying out this Agreement will be borne by the Company to the extent not paid by its investment manager. 2. CLOSING AND EFFECTIVE DATE OF THE REORGANIZATION. The Closing shall consist of (i) the conveyance, transfer and delivery of the Assets to the Trust, on behalf of the New Funds, in exchange for the assumption and payment, when due, by the Trust, on behalf of the New Funds, of the Liabilities of the corresponding Funds; and (ii) the issuance and delivery of the New Funds' shares in accordance with Section 1(b), together with related acts necessary to consummate such transactions. The Closing shall occur either on (a) the business day immediately following the later of the receipt of all necessary regulatory approvals and the final adjournment of the meeting of shareholders of the Company at which this Agreement is considered and approved, or (b) such later date as the parties may mutually agree ("Effective Date of the Reorganization"). 3. CONDITIONS PRECEDENT. The obligations of the Company and the Trust to effectuate the transactions hereunder shall be subject to the satisfaction of each of the following conditions: (a) Such authority and orders from the U.S. Securities and Exchange Commission (the "Commission") and state securities commissions as may be necessary to permit the parties to carry out the transactions contemplated by this Agreement shall have been received; (b) (i) One or more post-effective amendments to the Company's Registration Statement on Form N-1A ("Registration Statement") under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended ("1940 Act"), containing such amendments to such Registration Statement as are determined under the supervision of the Board of Directors to be necessary and appropriate as a result of this Agreement, shall have been filed with the Commission; (ii) the Trust shall have adopted as its own such Registration Statement, as so amended; (iii) the most recent post-effective amendment or amendments to the Company's Registration Statement shall have become effective, and no stop order suspending the effectiveness of the Registration Statement shall have been issued, and no proceeding for that purpose shall have been initiated or threatened by the Commission (other than any such stop order, proceeding or threatened proceeding which shall have been withdrawn or terminated); and (iv) an amendment of the Form N-8A Notification of Registration filed pursuant to Section 8(a) of the 1940 Act ("Form N-8A") reflecting the change in legal form of the Company to a Delaware statutory trust shall have been filed with the Commission and the Trust shall have expressly adopted such amended Form N-8A as its own for purposes of the 1940 Act; (c) Each party shall have received an opinion of Stradley, Ronon, Stevens & Young, LLP, Philadelphia, Pennsylvania, to the effect that, assuming the reorganization contemplated hereby is carried out in accordance with this Agreement, the laws of the State of Maryland and the State of Delaware, and in accordance with customary representations provided by the parties in a certificate(s) delivered to Stradley, Ronon, Stevens & Young, LLP, the reorganization contemplated by this Agreement qualifies as a "reorganization" under Section 368 of the Code, and thus will not give rise to the recognition of income, gain or loss for federal income tax purposes to the Company, the Trust or the shareholders of the Company or the Trust; (d) The Company shall have received an opinion of Stradley, Ronon, Stevens & Young, LLP, dated the Effective Date of the Reorganization, addressed to and in form and substance reasonably satisfactory to the Company, to the effect that (i) the Trust is a statutory trust duly formed, validly existing, and in good standing under the laws of the State of Delaware; (ii) this Agreement and the transactions contemplated thereby and the execution and delivery of this Agreement have been duly authorized and approved by all requisite action of the Trust and this Agreement has been duly executed and delivered by the Trust and is a legal, valid and binding agreement of the Trust in accordance with its terms; and (iii) the shares of the Trust to be issued in the reorganization have been duly authorized and, upon issuance thereof in accordance with this Agreement, will have been validly issued and fully paid and will be nonassessable by the Trust; (e) The Trust shall have received the opinion of Stradley, Ronon, Stevens & Young, LLP, dated the Effective Date of the Reorganization, addressed to and in form and substance reasonably satisfactory to the Trust, to the effect that: (i) the Company is duly incorporated, validly existing, and in good standing under the laws of the State of Maryland; (ii) the Company is an open-end investment company of the management type registered under the 1940 Act; and (iii) this Agreement and the transactions contemplated hereby and the execution and delivery of this Agreement have been duly authorized and approved by all requisite action of the Company and this Agreement has been duly executed and delivered by the Company and is a legal, valid and binding agreement of the Company in accordance with its terms; (f) The shares of the New Funds are eligible for offering to the public in those states of the United States and jurisdictions in which the shares of the corresponding Funds are currently eligible for offering to the public so as to permit the issuance and delivery by the Trust, on behalf of the New Funds, of the shares contemplated by this Agreement to be consummated; (g) This Agreement and the transactions contemplated hereby shall have been duly adopted and approved by the appropriate action of the Board of Directors and the shareholders of the Company; (h) The shareholders of the Company shall have voted to direct the Company to vote, and the Company shall have voted, as sole shareholder of each class of each New Fund, to: (1) Elect as Trustees of the Trust the following individuals: Harris J. Ashton, Nicholas F. Brady, Frank J. Crothers, S. Joseph Fortunato, Edith E. Holiday, Charles B. Johnson, Rupert H. Johnson, Jr., Betty P. Krahmer, Gordon S. Macklin, Fred R. Millsaps, Frank A. Olson, and Constantine D. Tseretopoulos; and (2) Approve an Investment Management Agreement between Templeton Global Advisers Limited ("TGAL") and the Trust, on behalf of the New Funds, which is substantially identical to the then-current Investment Management Agreement between TGAL and the Company, on behalf of the Funds; (i) The Trustees of the Trust shall have duly adopted and approved this Agreement and the transactions contemplated hereby and shall have taken the following actions at a meeting duly called for such purposes: (1) Approval of the Investment Management Agreement described in paragraph (h)(2) of this Section 3 hereof between TGAL and the Trust, on behalf of the New Funds; (2) Approval of the assignment to the Trust, on behalf of the New Funds, of the Custody Agreements, dated June 1, 1984, as amended and restated to date, between The Chase Manhattan Bank, N.A. (now JPMorgan Chase Bank), and the Company, on behalf of each Fund; (3) Selection of PricewaterhouseCoopers LLP as the Trust's independent auditors for the fiscal year ending August 31, 2004; (4) Approval of a Fund Administration Agreement between the Trust, on behalf of each New Fund, and Franklin Templeton Services, LLC; (5) Approval of a Distribution Agreement between the Trust, on behalf of each New Fund, and Franklin/Templeton Distributors, Inc.; (6) Approval of a Form of Dealer Agreement between the Trust, on behalf of each New Fund, and Franklin/Templeton Distributors, Inc. and securities dealers dated March 1, 1998, including the Amendment to the Form of Dealer Agreement, dated May 15, 1998; (7) Approval of the following Distribution Plans by the Trust, (i) on behalf of its Templeton World Fund series, pursuant to Rule 12b-1 under the 1940 Act: (a) Class A Distribution Plan pursuant to Rule 12b-1; (b) Class B Distribution Plan pursuant to Rule 12b-1; (c) Class C Distribution Plan pursuant to Rule 12b-1; and (d) Multiple Class Plan pursuant to Rule 18f-3; and (ii) on behalf of its Templeton Foreign Fund series, pursuant to Rule 12b-1 under the 1940 Act: (a) Class A Distribution Plan pursuant to Rule 12b-1; (b) Class B Distribution Plan pursuant to Rule 12b-1; (c) Class C Distribution Plan pursuant to Rule 12b-1; (d) Class R Distribution Plan pursuant to Rule 12b-1; and (e) Multiple Class Plan pursuant to Rule 18f-3. (8) Approval of a Transfer Agency Agreement between the Trust, on behalf of the New Funds, and Franklin Templeton Investor Services, LLC; (9) [Approval of the assignment to the Trust, on behalf of its Templeton Foreign Fund series, of the Sub-Transfer Agent Agreement dated July 1, 1993 between Fidelity Investments Institutional Operations Company and the Company, on behalf of its Templeton Foreign Fund series;] (10) [Approval of the assignment to the Trust, on behalf of the New Funds, of the Sub-Transfer Agent Services Agreement between Templeton Funds Trust Company, The Shareholder Services Group, Inc. and the Company, on behalf of each Fund.] (11) [Approval of the assignment to the Trust, on behalf of each New Fund, of the Sub-Accounting Services Agreement between the Templeton Funds Trust Company, Financial Data Services, Inc., Merrill Lynch, Pierce, Fenner and Smith Inc. and the Company, on behalf of each Fund;] (12) Authorization of the issuance by the Trust, on behalf of the New Funds, prior to the Effective Date of the Reorganization, of one share of each class of shares of beneficial interest of each New Fund to the Company, on behalf of each Fund, in consideration for the payment of $1.00 for each such share for the purpose of enabling the Company to vote on the matters referred to in paragraph (h) of this Section 3 hereof; (13) Submission of the matters referred to in paragraph (h) of this Section 3 to the Company as sole shareholder of each class of each New Fund; and (14) Authorization of the issuance and delivery by the Trust, on behalf of each New Fund, of shares of each New Fund on the Effective Date of the Reorganization and the assumption by the Trust, on behalf of each New Fund, of the Liabilities of the corresponding Fund in exchange for the Assets of the corresponding Fund pursuant to the terms and provisions of this Agreement. At any time prior to the Closing, any of the foregoing conditions may be waived or amended, or any additional terms and conditions may be fixed, by the Board of Directors, if, in the judgment of such Board, such waiver, amendment, term or condition will not affect in a materially adverse way the benefits intended to be accorded the shareholders of the Company under this Agreement. 4. DISSOLUTION OF THE COMPANY. Promptly following the consummation of the distribution of each class of shares of each New Fund to holders of the corresponding class of shares of each corresponding Fund under this Agreement, the officers of the Company shall take all steps necessary under Maryland law to dissolve its corporate status, including publication of any necessary notices to creditors, receipt of any necessary pre-dissolution clearances from the State of Maryland, and filing for record with the State Department of Assessments and Taxation of Maryland of Articles of Dissolution. 5. TERMINATION. The Board of Directors may terminate this Agreement and abandon the reorganization contemplated hereby, notwithstanding approval thereof by the shareholders of the Funds, at any time prior to the Effective Date of the Reorganization if, in the judgment of such Board, the facts and circumstances make proceeding with this Agreement inadvisable. 6. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the parties hereto and there are no agreements, understandings, restrictions or warranties among the parties hereto other than those set forth herein or herein provided for. 7. FURTHER ASSURANCES. The Company and the Trust shall take such further action as may be necessary or desirable and proper to consummate the transactions contemplated hereby. 8. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 9. GOVERNING LAW. This Agreement and the transactions contemplated hereby shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. IN WITNESS WHEREOF, the Company and the Trust have each caused this Agreement and Plan of Reorganization to be executed on its behalf by its Chairman, President or a Vice President and attested by its Secretary or an Assistant Secretary, all as of the day and year first-above written. TEMPLETON FUNDS, INC. (a Maryland corporation) Attest: By /s/__________________________________ By /s/_____________________________ Name: Name: Title: Title: TEMPLETON FUNDS TRUST (a Delaware statutory trust) Attest: By /s/__________________________________ By /s/_____________________________ Name: Name: Title: Title: EXHIBIT B A COMPARISON OF GOVERNING DOCUMENTS AND STATE LAW A COMPARISON OF: THE LAW GOVERNING DELAWARE STATUTORY TRUSTS AND THE CHARTER DOCUMENTS OF TEMPLETON FUNDS TRUST UNDER SUCH LAW WITH THE LAW GOVERNING MARYLAND CORPORATIONS AND THE CHARTER DOCUMENTS OF TEMPLETON FUNDS, INC. UNDER SUCH LAW

EXHIBIT C FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS PROPOSED TO BE AMENDED OR ELIMINATED

1 This disclosure reads as follows: STRUCTURED INVESTMENTS Included among the issuers of debt securities in which the Funds may invest are entities organized and operated solely for the purpose of restructuring the investment characteristics of various securities. These entities are typically organized by investment banking firms which receive fees in connection with establishing each entity and arranging for the placement of its securities. This type of restructuring involves the deposit with or purchases by an entity, such as a corporation or trust, of specified instruments and the issuance by that entity of one or more classes of securities (structured investments) backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured investments to create securities with different investment characteristics such as varying maturities, payment priorities or interest rate provisions. The extent of the payments made with respect to structured investments is dependent on the extent of the cash flow on the underlying instruments. Because structured investments of the type in which the Funds anticipate investing typically involve no credit enhancement, their credit risk will generally be equivalent to that of the underlying instruments. The Funds are permitted to invest in a class of structured investments that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured investments typically have higher yields and present greater risks than unsubordinated structured investments. Although the Funds' purchase of subordinated structured investments would have a similar economic effect to that of borrowing against the underlying securities, the purchase will not be deemed to be leverage for purposes of the limitations placed on the extent of the Funds' assets that may be used for borrowing activities. Certain issuers of structured investments may be deemed to be "investment companies" as defined in the Investment Company Act of 1940, as amended (1940 Act). As a result, each Fund's investment in these structured investments may be limited by the restrictions contained in the 1940 Act. Structured investments are typically sold in private placement transactions, and there currently is no active trading market for structured investments. To the extent such investments are illiquid, they will be subject to the Funds' restrictions on investments in illiquid securities. 2 This disclosure reads as follows: TEMPORARY INVESTMENTS When the [Investment Manager] believes market or economic conditions are unfavorable for investors, the [Investment Manager] may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets or the securities in which the Fund normally invests, or the economies of the countries where the Fund invests. Temporary defensive investments generally may include (1) U.S. government securities; (2) bank time deposits denominated in the currency of any major nation; (3) commercial paper rated A-1 by S&P or Prime-1 by Moody's or, if unrated, issued by a company which, at the date of investment, had an outstanding debt issue rated AAA or AA by S&P or Aaa or Aa by Moody's; and (4) repurchase agreements with banks and broker-dealers. To the extent allowed by exemptions granted under the 1940 Act and the Fund's other investment policies and restrictions, the [Investment Manager] also may invest the Fund's assets in shares of one or more money market funds managed by the [Investment Manager] or its affiliates. The [Investment Manager] also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. 3 This disclosure states that if purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the [Investment Manager] are considered at or about the same time, transactions in these securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the [Investment Manager], taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. TEMPLETON FUNDS, INC. TEMPLETON WORLD FUND TEMPLETON FOREIGN FUND SPECIAL MEETING OF SHAREHOLDERS - DECEMBER [], 2003 The undersigned hereby revokes all previous proxies for his/her shares and appoints BARBARA J. GREEN, BRUCE S. ROSENBERG and ROBERT C. ROSSELOT, and each of them, proxies of the undersigned with full power of substitution to vote all shares of Templeton World Fund and Templeton Foreign Fund (each a "Fund" and together, the "Funds"), each a series of Templeton Funds, Inc. (the "Company"), that the undersigned is entitled to vote at the Funds' Special Meeting of Shareholders (the "Meeting") to be held at 500 East Broward Blvd., 12th Floor, Fort Lauderdale, Florida 33394 at 10:00 a.m., Eastern time, on the [ ] day of December 2003, including any postponements or adjournments thereof, upon the matters set forth below and instructs them to vote upon any matters that may properly be acted upon at the Meeting. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY SHALL BE VOTED FOR PROPOSALS 1 (INCLUDING ALL NOMINEES FOR DIRECTOR), 2, 3 (INCLUDING 8 SUB-PROPOSALS) AND 4. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING TO BE VOTED ON, THE PROXY HOLDERS WILL VOTE, ACT AND CONSENT ON THOSE MATTERS IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT. VOTE VIA THE INTERNET: WWW.FRANKLINTEMPLETON.COM VOTE VIA THE TELEPHONE: 1-866-241-6192 CONTROL NUMBER: 999 9999 9999 999 PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THIS PROXY. IF SIGNING FOR ESTATES, TRUSTS OR CORPORATIONS, TITLE OR CAPACITY SHOULD BE STATED. IF SHARES ARE HELD JOINTLY, EACH HOLDER SHOULD SIGN. ------------------------------------------------------ Signature ------------------------------------------------------ Signature -------------------------------------------, 2003 Dated TFI, 13522B I PLAN TO ATTEND THE MEETING. YES NO [ ] [ ] (CONTINUED ON THE OTHER SIDE) PLEASE MARK VOTES AS INDICATED IN THIS EXAMPLE [X] THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSALS 1 THROUGH 4.

TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME ON THE LINE BELOW. ------------------------------------------------------------------------- PROPOSAL 2 - To approve an Agreement and Plan of Reorganization that provides for the Reorganization of the Company from a Maryland corporation to a Delaware statutory trust. FOR AGAINST ABSTAIN [ ] [ ] [ ] PROPOSAL 3 - To approve amendments to certain fundamental investment restrictions of the Funds (includes eight (8) Sub-Proposals): Proposal 3a. To amend each Fund's fundamental investment restriction regarding diversification of investments. FOR AGAINST ABSTAIN [ ] [ ] [ ] Proposal 3b. To amend each Fund's fundamental investment restriction regarding investments in real estate. FOR AGAINST ABSTAIN [ ] [ ] [ ] Proposal 3c. To amend each Fund's fundamental investment restriction regarding investments in commodities. FOR AGAINST ABSTAIN [ ] [ ] [ ] Proposal 3d. To amend each Fund's fundamental investment restriction regarding underwriting. FOR AGAINST ABSTAIN [ ] [ ] [ ] Proposal 3e. To amend each Fund's fundamental investment restriction regarding issuing senior securities. FOR AGAINST ABSTAIN [ ] [ ] [ ] Proposal 3f. To amend each Fund's fundamental investment restriction regarding lending. FOR AGAINST ABSTAIN [ ] [ ] [ ] Proposal 3g. To amend each Fund's fundamental investment restriction regarding borrowing. FOR AGAINST ABSTAIN [ ] [ ] [ ] Proposal 3h. To amend each Fund's fundamental investment restriction regarding industry concentration. FOR AGAINST ABSTAIN [ ] [ ] [ ] PROPOSAL 4 - To approve the elimination of certain of each Fund's fundamental investment policies and restrictions. FOR AGAINST ABSTAIN [ ] [ ] [ ] IMPORTANT: PLEASE SIGN, DATE AND RETURN YOUR PROXY...TODAY