Templeton Dragon Fund, Inc.

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Dear Shareholder:

This annual report for Templeton Dragon Fund, Inc. covers the fiscal year ended December 31, 2017.

Your Fund’s Goal and Main Investments

The Fund seeks long-term capital appreciation by investing at least 45% of its total assets in equity securities of “China companies.”

Performance Overview

The Fund posted cumulative total returns of +42.06% in market price terms and +38.22% in net asset value terms for the 12 months under review. You can find the Fund’s long-term performance data in the Performance Summary on page 6.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Economic and Market Overview

China’s economy, as measured by gross domestic product (GDP), expanded an estimated 6.9% in 2017, which is faster than 2016’s 6.7% rate, supported by solid growth in industrial production, services, fixed-asset investment, retail sales, and imports and exports.¹ Additionally, consumption became the major economic growth driver as per-capita income grew, with rural income growing faster than urban income. The People’s Bank of China kept its benchmark interest rate unchanged during the period.

Greater China stocks, along with other emerging market stocks, rose significantly during the 12 months under review, as corporate earnings growth and encouraging economic data from China and other emerging market countries helped offset investor concerns about the US Federal Reserve’s interest rate increases and geopolitical tensions in the Korean peninsula.

Geographic Composition

Based on Total Net Assets as of 12/31/17

Further supporting stocks were emerging market currencies’ overall strength against the US dollar and subsiding concerns about the potential for a protectionist US trade policy. Chinese stocks also benefited from a relatively stable currency, easing concern about capital outflows and MSCI’s decision to include domestic Class A shares in the MSCI Emerging Markets (EM) Investable Market Index.

In this environment, Greater China stocks, as measured by the MSCI Golden Dragon Index, generated a +44.19% total return for the 12 months ended December 31, 2017.² The MSCI China Index generated a total return of +54.33%, compared with +36.17% for the MSCI Hong Kong Index and +28.51% for the MSCI Taiwan Index.²

Investment Strategy

Our investment strategy employs a fundamental, value-oriented, long-term approach. In selecting companies for investment, we will consider overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, and raw material costs and sources. Additional considerations include profit margins, returns on investment, capital resources, government regulation, management and other factors in comparison to other companies around the world that we believe are comparable.

Our approach to selecting investments emphasizes fundamental, company-by-company analysis (rather than broader analyses of specific industries or sectors of the economy), to construct an “action list” from which we make our buy decisions. Although we will consider historical value measures, the primary factor in selecting securities for investment by the Fund will be the company’s current price relative to its long-term earnings potential.

Manager’s Discussion

During the 12 months under review, the largest contributor to the Fund’s absolute performance was our investment in the offshore fund that is managed by our team and dedicated to investments in China’s domestic A-share market. In June 2017, MSCI announced plans to include China’s domestic A shares in the MSCI EM Investable Market Index. Although the inclusion will not begin to be implemented until June 2018 and the initial inclusion will be kept at a relatively minimal percentage, this is a very positive development for the domestic market as this could increase foreign participation in the A-share market and at the same time continue to push regulators in China to enhance regulatory standards. Additionally, Chinese shares were buoyed by positive corporate earnings growth and outlook, stability in the renminbi and official statements that eased investor concerns about potential monetary policy tightening. Acceleration in domestic consumption, a revival of private investments, a recovery in export demand and easing concerns about trade friction with the US further supported sentiment in the Chinese economy. China’s 2017 GDP growth of 6.9% also confirmed continued strength in the domestic economy.

Key A-share contributors included Jiangsu Hengrui Medicine, Ping An Insurance (Group) Co. of China and China Merchants Bank. Jiangsu Hengrui Medicine is one of China’s leading chemical drug manufacturers, specializing in antineoplastic (prevention of growth and spread of malignant cells) and surgical medicines. The company benefited from solid quarterly sales and earnings over the first three quarters of 2017, as well as a strong pipeline and accelerating health care reforms. Ping An, a leading financial conglomerate involved in insurance, banking, brokerage, trust and other financial service businesses, reported strong third-quarter 2017 earnings growth compared to the prior-year period. China Merchants Bank, one of the country’s 10 largest banks, achieved solid corporate results over the first three quarters of 2017.

Other notable individual contributors to absolute performance during the reporting period included Tencent Holdings and Taiwan Semiconductor Manufacturing Co. (TSMC).

Tencent is one of the world’s largest and most widely used internet service portals. The company provides value-added internet, mobile and telecommunication services and online advertising under the strategic goal of providing users with “one-stop online lifestyle services.” Over the last decade, Tencent has maintained steady growth under its user-oriented operating strategies. Repeating a trend from previous quarters, Tencent once again announced better-than-expected financial results for 2017’s third quarter, with earnings growth driven by higher revenues from online games and advertising.

Announcements of collaborations and investments including those with JD.com³ and Vipshop Holdings,³ Spotify,⁴ Snapchat⁴ and Indonesian motorbike-sharing startup Go-Jek⁴ further supported market sentiment in the stock.

TSMC is one of the world’s leading semiconductor makers, with major global technology companies among its primary clients. Remaining on an upward trend over the year, the stock rose sharply in October as the company reported a better-than-expected third-quarter 2017 profit, primarily driven

by major mobile product launches and a healthy demand environment. The company also witnessed strength in businesses related to automotive technology, the “internet of things” (connection of everyday devices, such as cars and appliances, to the internet) and high-performance computing. The development of emerging memories to reduce power consumption and process costs also led investors to adopt a positive view on the company.

In contrast, key detractors from the Fund’s absolute performance included Jiangling Motors, Green Seal Holding and Chongqing Changan Automobile.

Jiangling Motors is a China-based automobile manufacturer primarily focused on vans, trucks and pickups across a number of brands such as Ford (through a joint venture), Isuzu and Landwind. It also produces spare parts and distributes used vehicles. Ford Motor4 is a strategic investor in Jiangling Motors with a 32% stake. The company reported weak first-half and third-quarter 2017 corporate results. Earnings recorded a double-digit percentage year-on-year decline, largely due to a deteriorating product mix and high expenses, impacting share-price performance.

Green Seal is a Taiwan-based specialty chemicals business that produces biaxial-oriented polyamide films for a wide range of packaging products. The company reported weak third-quarter 2017 corporate results with a double-digit percentage decline in revenues and deterioration in gross profit margin largely due to lower selling prices, a temporary shutdown of the company’s production facilities to upgrade facilities to meet new environmental standards, lower utilization rates and renminbi appreciation. News that a major shareholder, an investment company of Green Seal’s chairman, disposed of its stake in the business at a discount to the market price weighed on sentiment in the stock.

Chongqing Changan Automobile is one of China’s five largest automobile manufacturers. In addition to its own brands, the company operates joint ventures with Ford Motor, Mazda Motors and Suzuki Motors.⁴ Weak quarterly earnings reports over the first three quarters of 2017 pressured its stock price. Third-quarter 2017 earnings were generally impacted by losses in the domestic brand business and a double-digit percentage

year-on-year decline in joint-venture equity income. An increase in the purchase tax rate for private vehicles with smaller engine sizes to 7.5%, effective in January 2017, and to 10% in 2018 also adversely impacted vehicle purchases in 2017.

During the 12-month period, we increased the Fund’s positions in the health care and information technology (IT) sectors as we identified companies in these sectors with what we considered solid fundamentals and prospects.⁵ Key purchases included additional investments in Alibaba Group Holding, China’s largest e-commerce company, and Ginko International, a Taiwanese manufacturer and distributor of contact lenses. We also initiated investment in Sinopharm Group, which is principally engaged in distributing pharmaceutical products and medical equipment in China.

Conversely, we reduced the Fund’s holdings in the materials, consumer staples and consumer discretionary sectors as we focused on investment opportunities we considered to be more attractive in the Greater China region.6 We reduced the Fund’s investments in the domestic A-share market, which were held through the offshore China fund managed by our team after we repatriated capital gains. Key sales also included closing the Fund’s position in the aforementioned Green Seal Holding and reducing investments in Nine Dragons Paper Holdings, a Chinese containerboard paper manufacturer; Hong Kong-based pan-Asian retailer Dairy Farm International Holding; and Dah Chong Hong Holdings, a Chinese diversified business conglomerate with interests in motor vehicles, food and logistics.

Thank you for your continued participation in Templeton Dragon Fund. We look forward to serving your future

investment needs.

Sincerely,

		Eddie Chow, CFA Portfolio Manager

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2017, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

CFA^® is a trademark owned by CFA Institute.

Share Repurchase Program

The Fund’s Board has approved an open-market share repurchase program which includes an initial authorization for the Fund to repurchase up to 10% of its outstanding shares in open-market transactions, as well as up to an additional 10% of its outstanding shares, above and in addition to the initial 10% previously authorized. The timing and amount of repurchases continue to be at the discretion of the investment manager, taking into account various factors, including, but not limited to, the level of the discount, the Fund’s performance, portfolio holdings, dividend history, market conditions, cash on hand, the availability of other attractive investments and whether the sale of certain portfolio securities would be undesirable because of liquidity concerns or because the sale might subject the Fund to adverse tax consequences. Any repurchases would be made on a national securities exchange at the prevailing market price, subject to exchange requirements, federal securities laws and rules that restrict repurchases, and the terms of any outstanding leverage or borrowing of the Fund. If and when the Fund’s additional 10% threshold is reached, no further repurchases could be completed until authorized by the Board. Until the additional 10% threshold is reached, Fund management will have the flexibility to commence share repurchases if and when it is determined to be appropriate in light of prevailing circumstances. The share repurchase program is intended to benefit shareholders by enabling the Fund to repurchase shares at a discount to net asset value, thereby increasing the proportionate interest of each remaining shareholder in the Fund.

In the Notes to Consolidated Financial Statements section, please see note 2 (Capital Stock) for additional information regarding shares repurchased.

Portfolio Management

Effective April 3, 2017, Eddie Chow, director of China Strategy for Templeton Emerging Markets Group (“TEMG”), and previously co-lead portfolio manager for Templeton Dragon Fund, Inc., became sole lead portfolio manager for the Fund as its previous co-lead portfolio manager Dr. Mark Mobius stepped off the Fund’s portfolio management team. Mr. Chow has been with Franklin Templeton since 1994.

Fund By-Laws

The Fund’s Board unanimously approved amendments to the Fund’s By-Laws, effective January 1, 2018 to change to a majority of votes cast voting standard for uncontested Director elections and to a plurality voting standard for contested Director elections. In addition, the Board has unanimously adopted guidelines on director elections. Under the guidelines, any Director who is not re-elected shall tender his or her resignation to the Fund’s Nominating Committee. The Fund’s Nominating Committee will consider the tendered resignation in accordance with all factors believed relevant. The guidelines further provide that the Board will issue a press release describing its decision regarding a Director’s resignation, including the reason for rejecting the resignation offer, if applicable.

1. Organization and Significant Accounting Policies

Templeton Dragon Fund, Inc. (Fund) is registered under the Investment Company Act of 1940 (1940 Act) as a closed-end management investment company and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP).

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Fund’s Board of Directors (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.

Investments in open-end mutual funds are valued at the closing NAV.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Fund’s business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

1. Organization and Significant Accounting

Policies (continued)

a.   Financial Instrument Valuation (continued)

When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Fund’s NAV is not calculated, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b.   Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Consolidated Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c.   Investments in Templeton China Opportunities Fund, Ltd. (China Fund)

The Fund invests in certain China A-shares through its investment in the China Fund. The China Fund is a Cayman Islands exempt company, is a wholly-owned subsidiary of the Fund, and is able to invest directly in China A-shares consistent with the investment objective of the Fund. At December 31, 2017, the China Fund’s investments as well as any other assets and liabilities of the China Fund are reflected in the Fund’s Consolidated Statement of Investments and Consolidated Statement of Assets and Liabilities. At December 31, 2017, the China Fund’s investments as well as any other assets and liabilities were $220,451,473, representing 26.3% of the Fund’s consolidated net assets.

The China Fund gains access to the A-shares market through Templeton Investment Counsel, LLC (TIC), which serves as the registered Qualified Foreign Institutional Investor (QFII) for the China Fund. Investment decisions related to the China Fund A-shares are specific to the Fund and it bears the resultant economic and tax consequences of its holdings and transactions in A-shares. The China Fund is subject to certain restrictions and administrative processes relating to its ability to repatriate cash balances, investment proceeds, and earnings associated with its A-shares and may incur substantial delays in gaining access to its assets or a loss of value in the event of noncompliance with applicable Chinese rules or requirements.

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of December 31, 2017, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.

e.   Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent

differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

f.   Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

g.   Guarantees and Indemnifications

Under the Fund’s organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.