INTERNATIONAL

T EMPLETON E MERGING M ARKETS S MALL C AP F UND

12/31/07

FUND GOAL
The fund seeks long-term capital appreciation by investing at least 80% of its net assets in securities of small-cap companies (market capitalization between $100 million and $1 billion) located in emerging market countries. This includes small-cap companies whose principal securities trading markets are in emerging market countries or that derive significant revenue or profits from emerging market countries.

REASONS TO CONSIDER TEMPLETON EMERGING MARKETS SMALL CAP FUND
• Undiscovered opportunities. With over 25 analysts located throughout the world, Templeton’s emerging markets team has an active research presence in local markets that affords them access to information that may not be readily available to those residing elsewhere. This local presence often helps them find value opportunities others fail to uncover. • Solid growth potential. The World Bank forecasts that emerging market economies will grow 7.10% in 2008, in contrast to only a 2.20% projected growth for developed economies.1 Economic growth may translate into a continuation of strong market performance. Emerging Markets Small-Cap Stocks vs. Developed Markets Stocks Index Returns2
Five Years Ended December 31, 2007

348.86%

FUND DATA
Inception .................................. 10/2/06 Dividends ....................... Annually in May Minimum Initial Investment ......... $1,000 235.74% 175.20% 171.20% 112.26% 82.86%

Symbol/CUSIP
Class A TEMMX Class C TCEMX Class R Advisor 880 19R 716 880 19R 690

MAXIMUM SALES CHARGES
Class A Class C 5.75% initial sales charge 1% contingent deferred sales charge (CDSC) in the first year only The fund can charge a 2% fee on redemptions made within seven days.

Emerging Markets International Small-Cap Stocks Developed Markets Small-Cap Stocks

Global Developed Market Small-Cap Stocks

Developed Markets Large-Cap Stocks

U.S. Small-Cap Stocks

U.S. Stocks

For illustrative purposes only; not representative of the past or future performance of any Franklin Templeton fund. Past performance does not guarantee future results. • Compelling valuations. As bargain hunters, Templeton is always looking for stocks that are selling at prices lower than their appraisal of their value. Small-cap companies within emerging markets often can offer greater value opportunities than their small-cap counterparts in developed regions.3 Valuations 3 (As of December 31, 2007)

1. Source: The World Bank, based on GDP growth forecasts for 2008. 2. Source: S&P Micropal, as of 12/31/07. Emerging market small-cap stocks are represented by the S&P/Citigroup Emerging Markets <$2 Billion Index. Global developed market small-cap stocks are represented by the S&P/Citigroup World <$2 Billion Index. Developed markets large-cap stocks are represented by the MSCI EAFE Index. U.S. small-cap stocks are represented by the Russell 2000® Index. U.S. stocks are represented by the S&P 500 Index. Indexes are unmanaged and one cannot invest directly in an index. 3. Source: FactSet, (Compustat Industrials, MSCI, World Scope). Price-to-earnings (P/E) ratio is the ratio of a company’s share price to earnings per share. Emerging market small-cap stocks are represented by the S&P/Citigroup Emerging Markets <$2 Billion Index. International developed market small-cap stocks are represented by the S&P/Citigroup EPAC <$2 Billion Index. Global developed market small-cap stocks are represented by the S&P/Citigroup World <$2 Billion Index. U.S. small-cap stocks are represented by the Russell 2000® Index. Indexes are unmanaged and one cannot invest directly in an index. 4. Source: S&P Micropal. The portfolio is rebalanced annually. Risk is measured by the annualized standard deviation of monthly total returns. U.S. equity portfolio represented by the S&P 500 Index. Emerging market small-cap stocks are represented by the S&P/Citigroup Emerging Markets <$2 Billion Index. Indexes are unmanaged and one cannot invest directly in an index.

P/E3
Emerging Market Small Cap Stocks International Developed Market Small Cap Stocks Global Developed Market Small Cap Stocks Developed Markets Large Cap Stocks U.S. Stocks U.S. Small Cap Stocks 11.85 13.03 14.78 14.20 16.54 18.21

• Potential risk/reward profile enhancement. As shown below, for the five-year period ended December 31, 2007, by adding emerging market small-cap exposure to a U.S. equity portfolio, returns of a hypothetical portfolio improved while the overall risk profile increased only modestly.4 Blended Portfolios4 Risk vs. Return (Five Years Ended December 31, 2007)
Return 30% 20%
Return: 17.31% Risk: 9.23% Return: 21.77% Risk: 10.53% Return: 12.83% Risk: 8.54%

10%

Not FDIC Insured | May Lose Value | No Bank Guarantee
0% 0% 10% Risk
60% S&P 500 Index, 40% S&P/Citigroup Emerging Markets <$2 Billion Index 80% S&P 500 Index, 20% S&P/Citigroup Emerging Markets <$2 Billion Index 100% S&P 500 Index

20%

30%

For illustrative purposes only; not representative of the past or future performance of any Franklin Templeton fund. Past performance does not guarantee future results. For standardized performance of any Franklin Templeton fund, please call Franklin Templeton Investments at 1-800/DIAL BEN (1-800/342-5236) or visit franklintempleton.com.

PORTFOLIO MANAGERS
Mark Mobius, Ph.D. Since 2006; joined Franklin Templeton in 1987 Dennis Lim Since 2006; joined Franklin Templeton in 1990 Tom Wu Since 2006; joined Franklin Templeton in 1987

MANAGER’S PERSPECTIVE
“Investments in emerging market small-cap stocks are consistent with Templeton’s time-tested philosophy of investing in overlooked and under-researched companies until their intrinsic values are reached. We believe this greatly unexplored asset class provides a substantial opportunity for us to apply our vast global research capabilities.” — Dr. Mark Mobius, Portfolio Manager

WHAT ARE THE RISKS?
Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Smaller-company stocks have historically had more price volatility than large-company stocks, particularly over the short term. Because the fund is non-diversified and may invest a greater portion of its assets in the securities of one issuer than a diversified fund, it may be more sensitive to economic, business, political or other changes affecting similar issuers or securities. All investments in the fund should be thought of as long-term investments that could experience significant price volatility in any given year. The fund is designed for the aggressive portion of a well-diversified portfolio. These and other risk considerations are discussed in the fund’s prospectus.

TEMPLETON—A PIONEER IN EMERGING MARKETS
Templeton was a pioneer in emerging markets investing when, in 1987, it launched Templeton Emerging Markets Fund—the first closed-end fund dedicated to emerging markets.5 Dr. Mobius, who has been president and portfolio manager of that fund since its inception, brings over 30 years of emerging markets experience to Templeton Emerging Markets Small Cap Fund. He continues to lead Templeton’s efforts in the emerging markets asset class. In addition, he has authored four books on the topic, and is widely recognized as an expert in the field. Templeton has one of the most sophisticated teams in emerging markets investing with well-established research offices and experienced analysts located around the globe. Analysts and portfolio managers typically venture to some 30 emerging markets countries each year, visiting nearly 1,200 companies. Templeton has consistently adhered to a bottom-up stock selection process and strict value discipline throughout its 60-year history, enduring many different market cycles.

THE TEMPLETON STRATEGY
• Value-Oriented Approach. The hunt for bargains is a primary goal at Templeton. Managers and analysts consider many measures during stock selection, including a company’s price/earnings ratio and profit margins. • Bottom-Up Research. The fund’s managers strongly believe in onsite visits to issuers of prospective investments to assess critical factors such as management strength and local conditions. • Long-Term Investing. Templeton has always taken a long-term perspective, evaluating a company’s potential for earnings and growth over a five-year investment horizon.

Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a prospectus, which contains this and other information, talk to your financial advisor, call 1-800/DIAL BEN (1-800/342-5236) or visit franklintempleton.com. Please carefully read the prospectus before you invest or send money.

GAIN FROM OUR PERSPECTIVE ®
Franklin Templeton’s distinct multi-manager structure combines the specialized expertise of three world-class investment management groups—Franklin, Templeton and Mutual Series. Specialized Expertise Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. • Franklin. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. • Templeton. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry’s oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. • Mutual Series. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. 5. Templeton Emerging Markets Fund is a closed-end fund not offered through Franklin Templeton Distributors, Inc.

UPD 05/08

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UPD

Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, California 94403-1906 1-800/DIAL BEN® (1-800/342-5236) TDD (Hearing Impaired) 1-800/851-0637 franklintempleton.com

426 FF 12/07 08/06

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