fra n k l i n t e m p l e t o n i n v e s t m e n t s · to use the handbook, simply locate your...

TAX INFORMATIONHANDBOOK

2007

Access year-end tax information at franklintempleton.com

F R A N K L I N T E M P L E T O N I N V E S T M E N T S

FUND REFERENCE GUIDE

Fiduciary Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Franklin Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Mutual Series Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Templeton Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

YEAR-END FEDERAL TAX FORMSAND STATEMENT INFORMATION

Form 1099-DIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Total Ordinary Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Qualified Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Total Capital Gain Distributions . . . . . . . . . . . . . . . . . . . . . . 7

Reporting Capital Gain Distributions . . . . . . . . . . . . . . . . . . 7

Form 1099-INT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Tax-Exempt Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Specified Private Activity Bond Interest . . . . . . . . . . . . . . . . . 9

State Income Tax and State AMT for Franklin Tax-FreeIncome Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Form 1099-B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Cost Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

FEDERAL TAX INFORMATION

Foreign Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

STATE TAX INFORMATION

U.S. Government Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Tax-Exempt Income By Jurisdiction . . . . . . . . . . . . . . . . . . . . 20

Utah Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

FEDERAL AND STATE TAX RESOURCES . . . . . . . . . . . . . . . 24

FRANKLIN TEMPLETON INVESTMENTS TAX INFORMATION HANDBOOK 2007 1

Dear Valued Shareholder:

This Tax Information Handbook contains year-end reporting informationfor all your Franklin Templeton funds.

To use the handbook, simply locate your Franklin Templeton fund(s)in the Fund Reference Guide section beginning on page 2, and use thegrid to find information applicable to your fund(s).

This handbook is not intended to be a complete discussion of all yourincome tax requirements. If you have any questions about reportingdividends and distributions, which tax forms to use or how to completethem, please contact your tax advisor, the Internal Revenue Service (IRS)or your state tax office. You can reach the IRS at 1-800/829-1040 orvisit their website, www.irs.gov. Many states also have tax informationservices on their state government websites. For additional informationon federal and state tax resources, see pages 24-25 of this handbook.

Should you have questions about any of your Franklin Templetonaccounts, please visit franklintempleton.com or call Shareholder Servicesat 1-800/632-2301. Institutional investors, please call 1-800/321-8563.Please keep in mind that Franklin Templeton cannot discuss account-specificissues with your tax advisor without your prior consent.

We hope you find the handbook helpful when preparing and filingyour 2007 income tax returns. We wish you the best in 2008.

Sincerely,

Gregory E. JohnsonPresident and Chief Executive Officer

The materials contained in this handbook are not written to provide you with tax advice, and do not purport todeal with all of the federal, state or foreign tax consequences that may be applicable to your investment in aFranklin Templeton fund. To the extent that these materials are construed as tax advice, they are not intendedor written to be used, and cannot be used, by you for the purpose of avoiding any penalties that may beimposed by the IRS. You should consult with your personal tax advisor for advice on the consequences of yourinvestment in one or more Franklin Templeton funds.

2 TAX INFORMATION HANDBOOK 2007

U.S. TAX-EXEMPTCAPITAL GAIN ALTERNATIVE FOREIGN GOVERNMENT INCOME BYDISTRIBUTIONS MINIMUM TAX1 TAX CREDIT INTEREST JURISDICTION

Page 7 Page 15 Page 18 Page 20

FIDUCIARY FUNDS

Fiduciary Large Capitalization Growthand Income •

Fiduciary Small Capitalization Equity •

FRANKLIN FUNDS

Franklin Adjustable U.S. GovernmentSecurities

Franklin Alabama Tax-Free Income •

Franklin All Cap Value2

Franklin Arizona Tax-Free Income •

Franklin Balanced • •

Franklin Balance Sheet Investment •

Franklin Biotechnology Discovery

Franklin Blue Chip3 •

Franklin California High Yield Municipal •

Franklin California Insured Tax-Free Income •

Franklin California Intermediate-TermTax-Free Income •

Franklin California Limited-TermTax-Free Income

Franklin California Tax-Exempt Money Fund •

Franklin California Tax-Free Income •

Franklin Capital Growth •

Franklin Cash Reserves

Franklin Colorado Tax-Free Income •

Franklin Connecticut Tax-Free Income •

Franklin Convertible Securities •

Franklin Double Tax-Free Income •

Franklin DynaTech •

Franklin Equity Income •

Franklin Federal Intermediate-TermTax-Free Income • •

Franklin Federal Limited-TermTax-Free Income •

Franklin Federal Tax-Free Income • •

Franklin Flex Cap Growth •

Franklin Floating Rate Daily Access

Franklin Florida Insured Tax-Free Income •

Franklin Florida Tax-Free Income • •

1. Please see the Specified Private Activity Bond Interest section on page 9.2. Franklin All Cap Value Fund started on 6/1/07.3. Franklin Blue Chip Fund merged into Franklin Growth Fund on 6/14/07.





FRANKLIN FUNDS, cont’d.

Franklin Focused Core Equity4

Franklin Georgia Tax-Free Income •

Franklin Global Communications

Franklin Global Health Care

Franklin Global Real Estate • •

Franklin Gold and Precious Metals • •

Franklin Growth

Franklin Growth Opportunities5

Franklin High Income

Franklin High Yield Tax-Free Income • •

Franklin Income •

Franklin Insured Tax-Free Income • • •

Franklin International Smaller CompaniesGrowth • •

Franklin Kentucky Tax-Free Income •

Franklin Large Cap Value •

Franklin Limited MaturityU.S. Government Securities •

Franklin Louisiana Tax-Free Income •

Franklin Low Duration Total Return •

Franklin Maryland Tax-Free Income •

Franklin Massachusetts Insured Tax-FreeIncome • •

Franklin Michigan Insured Tax-Free Income • •

Franklin MicroCap Value •

Franklin MidCap Value •

Franklin Minnesota Insured Tax-Free Income •

Franklin Missouri Tax-Free Income •

Franklin Money Fund

Franklin Natural Resources •

Franklin New Jersey Tax-Free Income •

Franklin New York Insured Tax-Free Income

Franklin New York Intermediate-TermTax-Free Income

Franklin New York Limited-TermTax-Free Income

Franklin New York Tax-Exempt Money Fund •

Franklin New York Tax-Free Income •

4. Franklin Focused Core Equity Fund started on 12/13/07.5. Formerly Franklin Aggressive Growth Fund. The fund changed its name on 11/1/07.







Franklin North Carolina Tax-Free Income •

Franklin Ohio Insured Tax-Free Income • •

Franklin Oregon Tax-Free Income •

Franklin Pennsylvania Tax-Free Income •

Franklin Real Estate Securities •

Franklin Real Return • •

Franklin Rising Dividends •

Franklin Small Cap Growth II •

Franklin Small Cap Value •

Franklin Small-Mid Cap Growth •

Franklin Strategic Income •

Franklin Strategic Mortgage Portfolio

Franklin Structured Large Cap Core Equity6 •

Franklin Structured Large Cap Growth Equity7 •

Franklin Tax-Exempt Money Fund • •

Franklin Technology

Franklin Templeton 2015 Retirement Target •




Franklin Templeton Conservative Target •

Franklin Templeton Core Fixed Income •

Franklin Templeton Core Plus Fixed Income •

Franklin Templeton Corefolio® Allocation •

Franklin Templeton Emerging MarketDebt Opportunities •

Franklin Templeton FoundingFunds Allocation •

Franklin Templeton Growth Target •

Franklin Templeton Hard Currency •

Franklin Templeton High Income •

Franklin Templeton Moderate Target •

Franklin Templeton Money Fund

Franklin Templeton Perspectives Allocation •

Franklin Tennessee Municipal Bond •

Franklin Total Return •

Franklin U.S. Government Securities

6. Franklin Structured Large Cap Core Equity Fund closed on 6/1/07.7. Franklin Structured Large Cap Growth Equity Fund closed on 6/1/07.



Page 15 Page 18 Page 20


Franklin U.S. Long-Short8

Franklin Utilities •

Franklin Virginia Tax-Free Income •

MUTUAL SERIES FUNDS

Franklin Mutual Recovery • •

Mutual Beacon • •

Mutual Discovery • • •

Mutual European • • •

Mutual Financial Services • • •

Mutual Qualified • •

Mutual Shares • •

TEMPLETON FUNDS

Templeton BRIC • • •

Templeton China World • • •

Templeton Developing Markets Trust • • •

Templeton Emerging Markets Small Cap • •

Templeton Foreign • • •

Templeton Foreign Smaller Companies • • •

Templeton Global Bond •

Templeton Global Long-Short •

Templeton Global Opportunities Trust • • •

Templeton Global Smaller Companies • • •

Templeton Growth • • •

Templeton Income • •

Templeton International Bond9

Templeton Institutional Funds, Inc. (TIFI)Emerging Markets Series • • •

Templeton Institutional Funds, Inc. (TIFI)Foreign Equity Series Primary Shares • • •

Templeton Institutional Funds, Inc. (TIFI)Foreign Equity Series Service Shares • • •

Templeton Institutional Funds, Inc. (TIFI)Foreign Smaller Companies Series • • •

Templeton International (Ex EM)10 • •

Templeton World • • •


8. Franklin U.S. Long-Short Fund merged into Templeton Global Long-Short Fund on 9/18/07.9. Templeton International Bond Fund started on 12/3/07.10. Templeton International (Ex EM) Fund merged into Templeton Foreign Fund on 4/25/07.


11. You will receive Form 1099-DIV if you received $10 or more in taxable dividends or distributions. Franklin Templeton isnot required to report taxable dividends and distributions of less than $10 unless an amount of backup withholding orforeign income tax was withheld. Although Franklin Templeton is not required to report an amount, you are generally requiredto report all dividends and most distributions on your income tax returns. Amounts not reported on Form 1099-DIV can befound on your Year-End Asset Summary Statement.12. If you do not meet the qualified dividend holding period requirements for all 2007 ex-dividend dates of your fund(s),please consult your tax advisor for assistance in determining qualified dividends that are eligible for the capital gains taxrate. If you have questions about the amount of qualified dividends paid on each fund’s distribution date, please visitfranklintempleton.com or call Shareholder Services at 1-800/632-2301.

YEAR-END FEDERAL TAX FORMS AND STATEMENT INFORMATION

FORM 1099-DIV (SEE SAMPLE ON PAGE 7)

Form 1099-DIV is used to report total ordinary dividends and total capital gaindistributions a fund paid to you during 2007. Form 1099-DIV is also used toreport qualified dividends, nondividend distributions (return of capital distributions),federal income tax withheld (backup withholding), foreign tax paid and foreignsource income, if applicable to your account.11

The Internal Revenue Service (IRS) now requires reporting of tax-exemptinterest dividends on Form 1099-INT. Therefore, your Franklin tax-free incomefund will mail a Form 1099-INT to you if the fund distributed tax-exempt interestdividends. Please see the Form 1099-INT section on page 8 for more informationabout tax-exempt interest dividend reporting.

Total Ordinary Dividends (Form 1099-DIV, Box 1a)

Box 1a reports the total of all taxable ordinary income dividends (includingqualified dividends, if any) a fund paid to you during 2007. The amountincluded in box 1a represents dividends derived from interest, dividends, netshort-term capital gains and other types of ordinary income earned by yourfund(s). These amounts must be reported as a single dividend amount andshould not be reported separately on Form 1040. For example, short-termcapital gains included in box 1a (if any) cannot be offset by other capital losseson Form 1040, Schedule D.

Qualified Dividends (Form 1099-DIV, Box 1b)

Box 1b reports the qualified dividends a fund paid to you during 2007. Thisis the portion of the ordinary dividend amount in box 1a that may be eligiblefor the 15% or 5% capital gains tax rate for individuals. The amount includedin box 1b represents ordinary dividends paid by a fund that were derivedfrom dividends it received from its investment in domestic and qualified foreigncorporations. To qualify for the lower capital gains tax rate, you must holdfund shares to which the ordinary dividend relates for at least 61 days duringthe 121-day period beginning 60 days before the ex-dividend date.12 The amountin box 1b that qualifies for the reduced capital gains tax rate is reported onForm 1040, line 9b. Please refer to Form 1040 instructions for additionalinformation on reporting and calculating tax on qualified dividends.


Total Capital Gain Distributions (Form 1099-DIV, Box 2a)

Box 2a reports the total of all long-term capital gain distributions a fund paidto you during 2007. The amount included in box 2a represents long-term capitalgains earned by a fund on the sale of its portfolio securities. Please note, net short-termcapital gains earned by a fund are distributed as ordinary dividends for tax purposesand are generally taxed at your ordinary income tax rate.

Reporting Capital Gain Distributions

Individual taxpayers with a capital gain or loss are generally required tocomplete and attach Schedule D to their Form 1040. Shareholders in tax-exemptfunds should keep in mind that while their income dividends are generallyexempt from federal income tax, any distributions of capital gains made bythese funds are taxable in accordance with the rules described previously.

• Simplified Reporting Method (See sample forms below and on pages 10 and 11)Under certain circumstances, you may not need to file Schedule D. Instead,you can enter your Franklin Templeton mutual fund capital gain distributionsdirectly on Form 1040, line 13 and check the box on that line. This simplifiedreporting is available if your only capital gains are from capital gain distributionsreported on Form 1099-DIV, box 2a.

FORM 1099-DIV AND FORM 1099-B

SAMPLE



If you meet this condition and are not required to file Schedule D, you can usethe Qualified Dividends and Capital Gain Tax Worksheet (see sample on page 11)included in the Form 1040 instructions to calculate your tax. If you have capitalgains from other investments, or from the sale of mutual fund shares, or if youare unsure whether all these conditions apply to your personal situation, pleasecontact your tax advisor for more detailed information.

FORM 1099-INT (SEE SAMPLE BELOW)

Franklin’s tax-free income funds are allowed to pass through to shareholdersthe tax-exempt interest they receive from municipal securities. Form 1099-INTis used to report total tax-exempt interest dividends a fund paid to you duringthe year.13

Form 1099-INT is also used to report federal income tax withheld (backupwithholding) and tax-exempt interest dividends on private activity bonds paidby a fund, if applicable to your account.

FORM 1099-INT

13. You will receive Form 1099-INT if you receive $10 or more in tax-exempt interest dividends. In addition, if your funddistributed $10 or more in ordinary income dividends from net short-term capital gains or capital gain distributions in thecurrent year, you will also receive a Form 1099-DIV reporting those amounts. Although Franklin Templeton is not required toreport payments of less than $10, you are generally required to report these amounts on your tax return. Dividends anddistributions not reported to you on a Form 1099 can be found on your Year-End Asset Summary Statement.

SAMPLE

Tax-Exempt Interest (Form 1099-INT, Box 8)

Box 8 reports the total of all tax-exempt interest dividends a fund paid to youduring 2007. The amount included in box 8 represents income your fund earnedfrom interest on municipal securities and is fully exempt from the federal regularincome tax. Even though this income is tax exempt, the IRS requires that youenter this amount on Form 1040, line 8b. Reporting this income on your taxreturn does not cause it to be subject to federal regular income tax.

Specified Private Activity Bond Interest (Form 1099-INT, Box 9)

Box 9 reports the private activity bond interest a fund paid to you during 2007.This is the portion of the tax-exempt interest dividend amount in box 8 earnedfrom municipal bonds issued to finance private activities. While fully exemptfrom the federal regular income tax, this amount must be included in computingthe federal alternative minimum tax (AMT). This income is taxable only toinvestors who are subject to the AMT.

The AMT is designed to ensure that taxpayers pay a minimum amount of tax ontheir economic income and, as the name implies, is an alternative method ofcomputing your tax liability. Individuals are subject to the AMT only if theirtax liability under the AMT calculation is greater than their tax liability underregular tax rules. For more information on how to calculate your federal AMT,if applicable, see IRS Form 6251, Alternative Minimum Tax–Individuals.

State Income Tax and State AMT for Franklin Tax-Free Income Funds

Interest dividends that are exempt from federal income tax may not be exemptfrom state income tax in some cases. Some states provide an exemption only formunicipal interest earned from bonds originating in that particular state, whileother states may not provide any exemption for municipal bond interest. Forstate AMT purposes, the taxability of private activity bond income varies. Formore information on the taxability and reporting requirements for tax-exemptinterest dividends and private activity bond interest in your state, please consultyour tax advisor.




FORM 1099-B (SEE SAMPLE ON PAGE 7)

Form 1099-B is used to report gross proceeds received in 2007 from sales offund shares in non-retirement accounts. You should report these transactions onForm 1040, Schedule D. Form 1099-B reports the date of sale, proceeds, federalincome tax withheld (if any) and number of shares redeemed.

Whenever you sell, redeem or exchange shares of a Franklin Templeton fund, yougenerally have a taxable transaction that must be reported to the IRS. Thesetransactions will result in short- or long-term capital gains or losses, both ofwhich must be reported on your federal income tax return (see the Cost Basissection on page 12 for more information about reporting gains and losses).

FORM 1040

SAMPLE


FORM 1040, SCHEDULE D

QUALIFIED DIVIDENDS AND CAPITAL GAIN TAX WORKSHEET

SAMPLE

SAMPLE



COST BASIS (SEE SAMPLE COST BASIS STATEMENT ON PAGE 13)

Whenever you sell or redeem shares of a Franklin Templeton fund, you generallyhave a taxable capital gain or loss transaction that must be reported to the IRSon Form 1040, Schedule D. To calculate your capital gain or loss, you need todetermine which shares were sold and the cost basis of those shares. The gain orloss is then determined by comparing this cost basis to the proceeds received onthe redemption of fund shares.

The cost basis of your shares usually includes your purchase price and any salescharges imposed on the purchase. Your cost basis also includes the value ofany shares acquired through the reinvestment of distributions paid by a fund.Determining cost basis is not difficult if all your fund shares were acquired on thesame day and for the same price. The calculation becomes more complex whenshares are acquired at various times, in various quantities and at various prices.If you receive mutual fund shares through a transfer (including inherited orgifted shares), the original basis amount of the transferred shares will be carriedover to the new or existing account. This carry-over procedure is followed for alltransfers processed at Franklin Templeton that meet basis tracking requirements.

The IRS allows you to calculate cost basis using one of the following four methods:

• First-In, First-Out (FIFO): This method assumes the first shares acquired werethe first shares redeemed. It may result in the realization of larger gains if thefirst shares you acquired were purchased at the lowest prices. The IRS assumesFIFO is used if one of the other three methods is not specified on your incometax return.

• Average Basis—Single Category: Under this method, you must divide the totalcost of shares held at the time of the sale or redemption (including reinvesteddistributions) by the total number of shares held at the time of the sale orredemption. The holding period of the shares sold is determined on a FIFO basis.This method is most commonly used by mutual funds (including FranklinTempleton) when providing cost basis information to their shareholders.

• Average Basis—Double Category: This method is very similar to the AverageBasis–Single Category method above, except that your shares are first sepa-rated into two categories, short-term shares (held one year or less) and long-term shares (held more than one year). The average cost of shares in eachcategory is then computed separately. This method results in additional recordkeeping and requires that written instructions be provided to your sellingagent in advance as to which shares are to be sold or redeemed. In addition,you must receive written confirmation of your specification from your agentwithin a reasonable time.

• Specific Share Identification: Under this method, you are required to specifi-cally identify the shares sold at the time of the sale. Although this methodallows you to identify the shares that will yield the most favorable tax result,


14. You may not receive a CBS for all Franklin Templeton accounts in which you redeemed shares. CBSs are not availablefor Franklin Class A accounts opened before 1/1/87, and Mutual Series Class Z accounts or Templeton Class A accountsopened before 1/1/93. In addition, a CBS is not provided if any of the following are true: The fund had a return of capital;an account has been charged a redemption fee; an account is not IRS reportable and therefore does not receive a Form1099-B; an account was in a money market fund; an account engaged in certain types of wash sale transactions; or anaccount was opened by a fund merger or had a merger in of shares prior to 1999.

it also results in additional record keeping. You are required to provide writteninstructions to your selling agent in advance of any redemption as to whichshares are to be sold. In addition, you must receive written confirmation ofyour specification from your agent within a reasonable time.

COST BASIS STATEMENT

Once you have selected a method for calculating the cost basis for a particularfund, you generally cannot change to another cost basis method without theapproval of the IRS. However, you can select different methods for other fundsyou may own. For additional information on the four available methods, pleaserefer to IRS Publication 564, Mutual Fund Distributions.

As a service to shareholders, Franklin Templeton provides a Cost Basis Statement(CBS) to eligible shareholders for 2007.14 Your CBS provides the informationyou need to report gains or losses from redeemed or exchanged shares under theAverage Basis—Single Category method. Please consult your tax advisor todetermine if the Average Basis—Single Category method is available to you and,if so, whether it is appropriate for your income tax purposes.

SAMPLE



The CBS summarizes the average cost basis and determines the amount ofcapital gain or loss from a sale, exchange or redemption of your FranklinTempleton fund shares during 2007.15 These calculations are based on youraccount transactions processed through December 31, 2007. If you havetransactions processed after this date through January 30, 2008 (for example,a wash sale applicable to the 2007 calendar year), an amended CBS will besent to you in February 2008.

Franklin Templeton does not forward the CBS to the IRS or any state taxingauthority. A copy of your CBS is sent to your financial advisor, however. If youwould like a complete list of your account transactions and the average cost basisof each transaction, you may request a Statement of Average Cost (see samplebelow) by calling Franklin Templeton Shareholder Services at 1-800/632-2301.Institutional investors, please call Institutional Services at 1-800/321-8563.

STATEMENT OF AVERAGE COST

15. If you redeem shares that are subject to a contingent deferred sales charge (CDSC), you may need to use your CBS incombination with your Form 1099-B and a Statement of Average Cost to calculate your Net Capital Gain/Loss. Shares, CostBasis of Shares Redeemed and Net Capital Gain/Loss balances on the CBS do not reflect information relating to shares soldto pay a CDSC. Please contact your tax advisor for assistance in determining your taxable gain or loss in this situation.

SAMPLE



FOREIGN TAX INFORMATION

Foreign Tax PaidConsistent with its investment goals, a fund may invest in securities of foreigncorporations. In many cases, foreign countries impose a withholding tax ondividends these corporations pay to the fund. This means the dividends are taxedat the time the fund receives them. A fund that invests in foreign securities maypass through to its shareholders the benefit of the taxes paid to foreign countries.

The amount reported as Foreign Tax Paid (if any) on Form 1099-DIV, box 6,represents your proportionate share of foreign taxes paid by a fund. This amountis also included in box 1a, Total Ordinary Dividends. The amount of incomedividends a fund paid to you that is attributable to foreign securities, plus anyforeign taxes a fund passed through to you, will equal your allotted share ofForeign Source Income, as shown on your Form 1099-DIV.

Individual shareholders may be entitled to claim foreign tax paid either as aforeign tax credit, or as an itemized deduction on their federal income tax return.

FORM 1099-DIV

Foreign Tax Credit

To claim the foreign tax credit, you must have held your shares in a fund fora minimum of 16 days during the 31-day period beginning 15 days before theex-dividend date of the fund’s distribution to which the foreign taxes relate.Additionally, if you claim the foreign tax credit, a limit may apply to the amountof credit available to you. Individuals may need to file IRS Form 1116, ForeignTax Credit, to claim a foreign tax credit on their federal income tax return.

SAMPLE



Simplified Method for Individuals—Election to Claim the Foreign Tax Creditwithout Filing Form 1116

If you are an individual shareholder, you may claim the foreign tax creditwithout filing Form 111616 if you meet all of the following conditions:

1. All of your foreign source gross income for the tax year is passive incomesuch as dividends or interest, and is reported to you on Form 1099-DIV.17

2. Your total qualified foreign taxes as reported on Form 1099-DIV are notmore than $300 ($600 if married filing jointly).

If you meet these conditions, you are eligible to claim your foreign tax creditdirectly on Form 1040, line 51, without regard to foreign tax credit limits andwithout filing Form 1116.

FORM 1040

SAMPLE

16. If you have any excess foreign tax credits from prior years, you will not be able to carry these excess credits over into thecurrent year unless you file Form 1116.17. If you have foreign taxes paid that were reported to you on a qualified payee statement (Form 1099-INT, Form 1099-DIVfrom other companies or Schedule K-1 for trusts, partnerships or S corporations) from other investments, you must ensure thatall of your foreign taxes are eligible for the credit. Please see the instructions for IRS Form 1116 or consult your tax advisor.


Filing Form 1116

If you choose to claim a foreign tax credit and are required to file Form 1116,you are required to report your share of foreign taxes paid and foreign sourceincome.18 Your portion of the foreign taxes paid and foreign source income isincluded on your Form 1099-DIV. Shareholders may also visit the Tax Center atfranklintempleton.com to obtain a listing of foreign tax paid per share, foreignsource income per share and foreign source qualified dividends per share asdesignated by a fund. Foreign source qualified dividends per share is not includedon your Form 1099-DIV, and is only available at franklintempleton.com.19 Youshould use the information obtained at franklintempleton.com and on yourForm 1099-DIV to calculate your foreign tax credit.

FORM 1116

Foreign Tax Deduction

Individual taxpayers who prefer to take foreign tax paid as an itemized deduc-tion may report the Form 1099-DIV, box 6 amount on Form 1040, Schedule A.You are not required to complete Form 1116 if you claim foreign tax paid as adeduction on your tax return.

For additional questions about reporting foreign taxes on your tax return, pleasecontact your tax advisor or refer to the IRS instructions for Form 1116, ForeignTax Credit, and Form 1040.

SAMPLE

18. Final tax regulations were issued in 2007 that generally eliminate the need for a fund to provide country-by-countryreporting of foreign taxes paid and foreign source income to its shareholders. Instead, a fund is now required only to provideshareholders with their share of foreign taxes paid and foreign source income.19. To find 2007 or prior year-end tax information for your fund, visit franklintempleton.com and click the “Products &Services” tab, then click “Tax Center.” Once you are on the Tax Center home page, click the “fund search” link and locateyour fund by name. If your fund has elected to pass through the Foreign Taxes it has paid, you will find this information inthe section under Foreign Tax Credit Information. Not all funds are listed on franklintempleton.com. If you are unable toaccess this information on our website, please call Shareholder Services at 1-800/632-2301. Institutional investors, pleasecall Institutional Services at 1-800/321-8563.


20. The percentage of direct U.S. government obligation interest available for tax-exempt treatment may be limited in statesthat require a fund to meet certain minimum investment thresholds. Please contact your tax advisor to determine theavailability of tax-exempt treatment in your state.


U.S. GOVERNMENT INTEREST

States generally grant tax-free status to interest income earned from directobligations of the U.S. government. This tax-free status may also apply todividend distributions mutual fund shareholders receive from a mutual fund’sinvestment in such obligations.

Direct obligations of the U.S. government include U.S. Treasury bonds, notes,bills and certificates, U.S. savings bonds and many obligations issued by agenciesof the U.S. government (such as the Federal Home Loan Bank, the Federal DepositInsurance Corporation [FDIC] and many other federal agencies).

The income on repurchase agreements and mortgage-backed securities (includingGinnie Mae and Fannie Mae securities) does not qualify for tax-free treatment.

Depending upon your state’s laws, you may be entitled to declare a percentageof your income dividends as tax-exempt income on your 2007 state personalincome tax return.20 Corporate shareholders may be subject to different stateincome tax return requirements and should consult their tax advisors regardingthese requirements.

The table on the next page identifies the percentage of income your fund earnedand paid to you from direct U.S. government obligations for the 2007 calendaryear. To determine the amount of your income derived from these obligations,locate your fund’s percentage of direct U.S. government obligation interestincome and multiply it by the Total Ordinary Dividends you received during thecalendar year, as reported on your Form 1099-DIV, box 1a.


U.S. GOVERNMENT INCOME INFORMATION % of Income Attributableto Direct U.S. Gov’t. Obligations20, 21

FRANKLIN FUNDS

Franklin Balanced 6.10%

Franklin Limited Maturity U.S. Government Securities 16.39%

Franklin Low Duration Total Return 18.60%

Franklin Real Return 70.96%

Franklin Strategic Income 3.62%

Franklin Templeton Core Fixed Income 18.47%

Franklin Templeton Core Plus Fixed Income 19.42%

Franklin Templeton Hard Currency 23.18%

Franklin Total Return 3.91%

MUTUAL SERIES FUNDS

Franklin Mutual Recovery 4.38%

Mutual Beacon 4.70%

Mutual Discovery 6.94%

Mutual European 2.59%

Mutual Financial Services 2.65%

Mutual Qualified 8.22%

Mutual Shares 6.16%

TEMPLETON FUNDS

Templeton BRIC 3.18%

Templeton China World 2.26%

Templeton Developing Markets Trust 1.71%

Templeton Foreign 1.59%

Templeton Foreign Smaller Companies 9.06%

Templeton Global Opportunities Trust 16.36%

Templeton Global Smaller Companies 4.57%

Templeton Growth 2.69%

Templeton International (Ex EM) 1.38%

Templeton World 3.24%

TIFI Emerging Market Series 1.57%

TIFI Foreign Equity Series Primary Shares 3.87%

TIFI Foreign Equity Series Service Shares 3.87%

TIFI Foreign Smaller Companies Series 4.67%

21. The percentage of direct U.S. government obligation interest for each income distribution that Franklin Templeton fundspaid during 2007 may also be available. To obtain this information, please call Shareholder Services at 1-800/632-2301.Institutional investors, please call Institutional Services at 1-800/321-8563.



TAX-EXEMPT INCOME BY JURISDICTIONThe 2007 income dividends you received from your Franklin tax-free incomefund(s) are fully exempt from the federal regular income tax. Based on incomethe fund earned from state tax-exempt obligations, a portion of such dividendsmay also be exempt from your state’s personal income tax.22 The following tablelists the percentage of your 2007 income dividends that may qualify for exemp-tion in your state. This percentage should be multiplied by the amount of Tax-Exempt Income paid by each fund as reported on your Form 1099-INT.

Important MessagesCalifornia Shareholders: Each fund is required to report to the Franchise TaxBoard by June 1, 2008, your total 2007 payment of interest dividends exemptfrom federal tax, and the percentage of this total that is attributable to bonds ofCalifornia and U.S. territories.

Utah Shareholders: If you are a Utah resident and own shares in Franklin tax-free income funds, a portion of your tax-exempt dividends may be subject toUtah income tax. See page 22 for additional information.

TAX-EXEMPT INCOME BY JURISDICTION

FRANKLIN FUNDSFederal Fed. Inter.-Term High Yield Insured Tax- Tax-Exempt Fed. Limited-TermTax-Free Income Tax-Free Income Tax-Free Income Free Income Money Fund Tax-Free Income

STATEAlabama 1.55% 4.57% 0.35% 8.61% 0.00% 1.05%Alaska 0.38% 0.00% 0.17% 0.28% 0.00% 0.00%Arizona 2.43% 4.74% 4.12% 3.14% 2.44% 0.00%Arkansas 1.49% 1.54% 0.38% 2.34% 0.00% 0.00%California23 7.72% 5.94% 18.51% 4.48% 0.03% 1.37%Colorado 3.02% 3.72% 3.59% 2.81% 7.68% 2.76%Connecticut22 0.33% 0.08% 1.70% 0.03% 0.00% 1.16%Delaware 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%District of Columbia 1.64% 0.00% 1.49% 0.01% 0.00% 0.00%Florida 5.12% 8.61% 8.39% 10.47% 6.51% 5.57%Georgia 3.75% 1.96% 2.27% 6.46% 7.24% 0.24%Hawaii 0.95% 0.44% 0.52% 0.55% 0.61% 0.00%Idaho 0.00% 0.00% 0.36% 0.00% 0.00% 0.00%Illinois24 4.91% 1.93% 2.87% 1.06% 2.98% 0.11%Indiana 1.45% 0.00% 1.80% 0.00% 2.11% 1.13%Iowa24 0.00% 0.00% 0.00% 0.00% 1.70% 0.00%Kansas24, 25 0.65% 0.00% 0.15% 0.12% 0.00% 2.55%

22. Corporate shareholders may be subject to different state income tax requirements and should consult with their tax advisors.23. This state allows the pass-through of exempt interest if a fund meets certain minimum investment requirements. Thefunds listed above did not meet the minimum investment requirements for this state.24. This state allows the pass-through of exempt interest only on specific, state-designated obligations. Please contact yourtax advisor to determine the taxability of this income in your state.25. An investment in the funds listed above may be exempt (partially or completely) from any intangible personal propertytaxes that may be assessed in these states.

26. Consult your tax advisor to determine if you can exclude the income from obligations of these U.S. territories.


FRANKLIN FUNDSFederal Fed. Inter.-Term High Yield Insured Tax- Tax-Exempt Fed. Limited-TermTax-Free Income Tax-Free Income Tax-Free Income Free Income Money Fund Tax-Free Income

STATE, cont’d.Kentucky 1.33% 0.51% 0.02% 1.93% 1.98% 2.20%Louisiana 2.96% 3.32% 2.34% 1.24% 2.67% 7.58%Maine 0.21% 0.00% 0.67% 0.01% 0.00% 0.00%Maryland 0.64% 2.42% 0.91% 1.56% 1.11% 0.40%Massachusetts 3.99% 1.99% 1.11% 4.29% 11.50% 4.60%Michigan 3.82% 8.90% 3.94% 10.45% 5.28% 0.20%Minnesota23 2.15% 3.76% 1.51% 4.37% 2.37% 0.07%Mississippi 1.63% 0.00% 0.64% 0.52% 0.69% 0.38%Missouri 1.21% 4.24% 0.32% 0.15% 3.79% 1.51%Montana 0.53% 0.00% 0.14% 0.56% 0.00% 0.00%Nebraska 1.29% 0.00% 0.20% 1.22% 0.00% 0.09%Nevada 1.84% 0.61% 2.20% 0.80% 1.57% 3.53%New Hampshire 0.30% 0.00% 0.40% 0.00% 2.06% 0.00%New Jersey 2.30% 4.73% 5.93% 1.73% 6.58% 0.00%New Mexico 0.02% 0.00% 2.52% 0.00% 2.46% 0.00%New York 10.06% 12.61% 9.60% 4.43% 2.86% 17.24%North Carolina 3.23% 4.63% 1.93% 0.71% 3.11% 0.09%North Dakota 0.12% 0.00% 0.07% 0.18% 0.00% 0.00%Ohio 3.13% 4.86% 1.33% 5.19% 1.55% 3.45%Oklahoma24 0.10% 0.27% 0.24% 0.11% 0.00% 0.00%Oregon 1.06% 2.61% 0.36% 0.63% 1.67% 0.32%Pennsylvania24 4.39% 1.37% 5.47% 1.71% 9.06% 1.75%Rhode Island 1.16% 0.00% 0.23% 0.84% 0.00% 0.23%South Carolina 1.75% 1.21% 0.91% 0.74% 0.00% 0.00%South Dakota 0.36% 0.00% 0.00% 0.69% 0.00% 1.33%Tennessee 1.15% 2.18% 1.14% 0.59% 3.31% 0.13%Texas 5.63% 3.90% 2.93% 9.32% 2.76% 4.94%Utah 0.48% 0.48% 0.00% 0.61% 0.36% 0.58%Vermont 0.49% 0.00% 0.27% 0.00% 0.00% 0.00%Virginia 0.52% 0.00% 1.42% 0.66% 0.00% 3.20%Washington 3.66% 0.73% 1.08% 2.23% 1.62% 14.49%West Virginia 0.58% 0.05% 0.21% 1.97% 0.00% 0.27%Wisconsin24 0.66% 0.00% 1.00% 0.20% 0.00% 0.00%Wyoming 0.00% 0.00% 0.00% 0.00% 0.00% 2.59%TERRITORIES26

American Samoa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Guam 0.00% 0.00% 0.69% 0.00% 0.00% 0.73%N. Marianas 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Puerto Rico 1.73% 0.00% 0.97% 0.00% 0.34% 12.16%Virgin Islands 0.13% 1.09% 0.63% 0.00% 0.00% 0.00%


27. Please note that this income is exempt from federal income tax.


UTAH TAX INFORMATION

The state of Utah provides that income earned from non-federal governmentalentities outside of Utah (non-Utah municipal bonds) is subject to Utah incometax27 unless at least one of the following applies:

If the income is derived from:

• Bonds purchased prior to January 1, 2003; or

• Utah obligations; or

• Federal government obligations, including those of U.S. territories; or

• Obligations of another state that does not tax Utah obligations.

The Utah State Tax Commission lists the states and political subdivisions thatdo not tax Utah obligations as Alaska, District of Columbia, Florida, Indiana,Nevada, North Dakota, South Dakota, Texas, Washington and Wyoming. ThisReciprocity List is available on the Utah State Tax Commission website atwww.tax.utah.gov.

The table on the following page lists the percentage of income taxable under Utahlaw for a number of Franklin tax-free income funds. To determine the amount tobe included in your Utah income for 2007, multiply your fund’s percentage ofUtah taxable income by the total Tax-Exempt Income Dividends you receivedfrom the fund as shown on your Form 1099-INT.

For further information about how to report this information on your Utahindividual tax return, please contact your tax advisor.


UTAH TAXABLE INCOME INFORMATION

% of IncomeSubject to Utah Tax

FRANKLIN TAX-FREE INCOME FUNDS

Franklin Arizona Tax-Free Income 43.62%

Franklin California High Yield Municipal 65.12%

Franklin California Insured Tax-Free Income 31.46%

Franklin California Tax-Exempt Money 82.99%

Franklin California Tax-Free Income 35.56%

Franklin Colorado Tax-Free Income 50.26%

Franklin Double Tax-Free Income 0.00%

Franklin Federal Intermediate-Term Tax-Free Income 55.10%

Franklin Federal Tax-Free Income 29.12%

Franklin Florida Insured Tax-Free Income 0.00%

Franklin Florida Tax-Free Income 0.00%

Franklin High Yield Tax-Free Income 36.70%

Franklin Insured Tax-Free Income 35.09%

Franklin Michigan Insured Tax-Free Income 29.16%

Franklin New York Tax-Free Income 38.34%

Franklin Pennsylvania Tax-Free Income 38.44%

Franklin Tax-Exempt Money 76.47%

Utah taxable percentages for additional Franklin tax-free income funds areavailable by request. Please call Shareholder Services at 1-800/632-2301 torequest this information.


FEDERAL AND STATE TAX RESOURCES

FEDERAL TAX RESOURCES

The IRS has several publications that may assist mutual fund shareholders. Youcan order these publications directly from the IRS by calling 1-800/TAX-FORM(1-800/829-3676). You can also download these publications as well as IRS formsfrom the IRS website, www.irs.gov.

PUBLICATION NAME NUMBER

Individual Retirement Arrangements (IRAs) . . . . . . . . . . . . . . . . . . . . . . . . . . 590

Investment Income and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550

Mutual Fund Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564

Pension and Annuity Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575

Retirement Plans for Small Business(SEP, SIMPLE and Qualified Plans) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560

Tax Benefits for Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970

Tax-Sheltered Annuity Plans (403(b) Plans) for Employeesof Public Schools and Certain Tax-Exempt Organizations . . . . . . . . . . . . . . . 571

U.S. Tax Guide for Aliens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519

Withholding of Tax on Nonresident Aliens andForeign Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515


FEDERAL AND STATE TAX RESOURCES

STATE TAX RESOURCES

Several state tax resources are listed below. If your state is not listed or youhave additional state-specific questions, please contact your tax advisor orrefer to your state’s instructions for preparing income tax returns.

California Franchise Tax Board1-800/852-5711www.ftb.ca.gov

Florida Department of Revenue1-800/352-3671www.myflorida.com/dor

Illinois Department of Revenue1-800/732-8866 or 1-217/782-3336www.revenue.state.il.us

Massachusetts Department of Revenue1-800/392-6089 or 1-617/887-6367www.massdor.com

Michigan Department of Treasury1-800/827-4000 or 1-517/373-3200www.michigan.gov/treasury

New Jersey Division of Taxation1-609/292-6400www.state.nj.us/treasury/taxation

New York State Department ofTaxation and Finance1-800/225-5829www.tax.state.ny.us

Ohio Department of Taxation1-800/282-1780www.tax.ohio.gov

Pennsylvania Department of Revenue1-888/728-2937 or 1-717/787-8201www.revenue.state.pa.us

Utah State Tax Commission1-800/662-4335 or 1-801/297-2200www.tax.utah.gov

TAX BK 01/08

Please visit the Tax Center at franklintempleton.com to find:

• Helpful hints on preparing tax returns

• Calendar of mailing dates for tax forms

• Answers to frequently asked questions

Franklin Templeton Distributors, Inc.One Franklin Parkway, San Mateo, CA 94403-19061-800/632-2301TDD (Hearing Impaired) 1-800/851-0637franklintempleton.com

Institutional investors, please call Institutional Services at 1-800/321-8563.

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