N-CSR 1 ancsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07851 --------- FRANKLIN TEMPLETON FUND ALLOCATOR SERIES ---------------------------------------- (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------ (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 -------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (650) 312-2000 -------------- Date of fiscal year end: 12/31 ----- Date of reporting period: 12/31/06 -------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] -------------------------------------------------------------------------------- DECEMBER 31, 2006 -------------------------------------------------------------------------------- Franklin Templeton Conservative Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Growth Target Fund -------------------------------------------------------------------------------- ANNUAL REPORT AND SHAREHOLDER LETTER ASSET ALLOCATION -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN TEMPLETON FUND ALLOCATOR SERIES Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. -------------------------------------------------------------------------------- [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN o TEMPLETON o MUTUAL SERIES Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) 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 aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. ------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS ------------------------------------------------------------------------------- [GRAPHIC OMITTED] Annual Report Economic and Market Overview During the 12 months ended December 31, 2006, the U.S. economy advanced at a moderate but slowing pace. Although first quarter 2006 gross domestic product (GDP) grew an annualized 5.6%, fourth quarter GDP growth was an estimated annualized 3.5%. The housing market weakened during the year, while corporate profits and consumer and government spending generally remained robust. Exports picked up some momentum, but the trade deficit stayed in record territory. Labor costs rose and hiring generally increased as the unemployment rate fell from 4.9% to 4.5%. 1 Although energy and other commodity prices fell in the second half of the year, they remained historically high and were a primary economic concern for much of the period. Oil prices reached a record high of $77 per barrel in July before declining to $61 at year-end. Oil price volatility appeared to raise the anxiety level among consumers and businesses alike. Consumers curbed spending on large purchases, such as homes and cars. Home prices fell in many parts of the country, mortgage rates crept up, and borrowing against home equity flattened. Overall, the core Consumer Price Index (CPI) rose 2.6% for the 12 months ended December 31, 2006, which was higher than the 2.2% 10-year average. 2 The Federal Reserve Board (Fed) raised the federal funds target rate incrementally from 4.25% at the beginning of the year to 5.25% on June 30. Since June, however, the Fed left the rate unchanged, citing a slowing economy, widespread cooling in the housing market and the lagging effect of prior tightening. The Fed stated that even with lower oil prices toward period-end, inflation risks remained. Outside the U.S., the economy continued to grow. The economic drivers remained consistent over the past four years: strong corporate and consumer demand, reasonably low inflation, a tight or improving labor market, and a relatively moderate interest rate environment, despite recent interest rate hikes by many of the world's central banks. However, the global economy also faced headwinds from elevated energy prices, higher global interest rates and a weaker U.S. housing market. These factors dampened investor confidence mid-year, when many equity markets declined before rebounding later in the year. 1. Source: Bureau of Labor Statistics. 2. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. Annual Report | 3 Despite such challenges, global economic activity was healthy. Strong global liquidity -- whether petrodollars, corporate cash, private equity, household savings or central banks' reserves -- continued to search for a home. Record global merger and acquisition activity in 2006 also reflected the abundance of cash in the capital markets. Bond yield spreads over U.S. Treasuries narrowed, and global equity and commodity markets rose in the latter part of the year. U.S. equity markets performed well for the year in this environment. The blue chip stocks of the Dow Jones Industrial Average posted a 12-month total return of +19.05%, and the broader Standard & Poor's 500 Index (S&P 500) returned +15.78%, while the technology-heavy NASDAQ Composite Index had a total return of +11.27%. 3 Non-U.S. equity markets ended 2006 on a stronger note, and all major non-U.S. regions delivered double-digit total returns for the year. Stock market indexes in the U.S. and most European countries reached six-year highs in the fourth quarter, and many emerging market indexes in Asia, Europe and Latin America neared or reached all-time highs. Fixed income markets, on the other hand, were somewhat constrained by higher interest rates, threats of climbing inflation and the robust equity markets. 3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2006. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 4 | Annual Report Franklin Templeton Conservative Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Conservative Target Fund seeks the highest level of long-term total return consistent with a lower level of risk. 1 -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton Conservative Target Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ................................................. 28.6% Domestic Fixed Income ........................................... 26.8% Foreign Equity .................................................. 12.7% Foreign Fixed Income ............................................ 12.6% Short-Term Investments & Other Net Assets ....................... 19.3% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- This annual report for Franklin Templeton Conservative Target Fund covers the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton Conservative Target Fund - Class A posted a +9.92% cumulative total return for the 12 months under review. The Fund underperformed its hybrid benchmark, which comprised a weighted combination of the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Lehman Brothers (LB) U.S. Aggregate Index for fixed income, and the 1. The risk/reward potential is based on the Fund's goal and level of risk. It is not indicative of the Fund's actual or implied performance or portfolio composition, which may change on a continuous basis. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI. THE SOI BEGINS ON PAGE 40. Annual Report | 5 TOP 10 FUND HOLDINGS Franklin Templeton Conservative Target Fund 12/31/06 ------------------------------------------------------------------------------ % OF TOTAL NET ASSETS ------------------------------------------------------------------------------ Templeton Global Bond Fund 12.6% - Advisor Class ------------------------------------------------------------------------------ Franklin U.S. Government Securities 10.5% Fund - Advisor Class ------------------------------------------------------------------------------ Franklin Total Return Fund 8.8% - Advisor Class ------------------------------------------------------------------------------ Franklin Small Cap Growth Fund II 8.4% - Advisor Class ------------------------------------------------------------------------------ Franklin Flex Cap Growth Fund 7.7% - Advisor Class ------------------------------------------------------------------------------ Franklin Strategic Mortgage Portfolio 7.5% ------------------------------------------------------------------------------ Mutual Shares Fund 6.5% - Class Z ------------------------------------------------------------------------------ Mutual European Fund 6.4% - Class Z ------------------------------------------------------------------------------ Templeton Foreign Fund 2.3% - Advisor Class ------------------------------------------------------------------------------ Franklin Gold and Precious Metals Fund 2.2% - Advisor Class ------------------------------------------------------------------------------ P&R 90 Day U.S. T-Bill Index for short-term investments and other net assets. For the reporting period, the hybrid benchmark returned +10.15%. 2 You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. INVESTMENT STRATEGY Whenever possible, we attempt to hold the same underlying Franklin Templeton funds in each Target Fund's portfolio. We generally diversify the Target Funds' broad equity allocations across investment styles, market capitalization sizes and countries of origin. Maintaining similarity of the underlying Franklin Templeton fund investments across the Allocator Series is intended to increase the consistency of the Target Funds' results relative to one another. For your reference, Franklin Templeton Conservative Target Fund seeks to maintain the following asset class allocations: 40% equity funds, 40% fixed income funds, and 20% short-term investments and other net assets. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to maintaining a static allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. At period-end, Franklin Templeton Conservative Target Fund's domestic equity exposure was 69.2% of its total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2006, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Small Cap Growth Fund II - Advisor Class, representing 8.4% 2. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond markets, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The benchmark index's weightings are as follows: S&P 500 28%, MSCI EAFE 12%, LB U.S. Aggregate 40% and P&R 90 Day U.S. T-Bill 20%. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 6 | Annual Report of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 68.1% of the Fund's total income weighting, with the balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 12.6% of total net assets. Our largest domestic growth fund holding, Franklin Small Cap Growth Fund II - Advisor Class, underperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500. Our largest foreign equity fund holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class outperformed the LB U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton Conservative Target Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton Conservative Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. Annual Report | 7 Performance Summary as of 12/31/06 FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: FTCIX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.59 $13.33 $12.74 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.4215 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0108 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2287 -------------------------------------------------------------------------------- TOTAL $0.6610 -------------------------------------------------------------------------------- CLASS B (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.58 $13.29 $12.71 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.3235 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0108 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2287 -------------------------------------------------------------------------------- TOTAL $0.5630 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FTCCX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.58 $13.18 $12.60 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.3270 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0108 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2287 -------------------------------------------------------------------------------- TOTAL $0.5665 -------------------------------------------------------------------------------- CLASS R (SYMBOL: FTCRX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.59 $13.30 $12.71 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.3869 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0108 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2287 -------------------------------------------------------------------------------- TOTAL $0.6264 -------------------------------------------------------------------------------- 8 | Annual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.59 $13.31 $12.72 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.4540 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0108 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2287 -------------------------------------------------------------------------------- TOTAL $0.6935 -------------------------------------------------------------------------------- PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. -------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return 2 +9.92% +40.31% +97.92% -------------------------------------------------------------------------------- Average Annual Total Return 3 +3.57% +5.75% +6.43% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,357 $13,228 $18,654 -------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (12/1/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +9.05% +21.48% +23.55% -------------------------------------------------------------------------------- Average Annual Total Return 3 +5.05% +5.82% +6.25% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,505 $11,848 $12,055 -------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return 2 +9.16% +35.05% +83.12% -------------------------------------------------------------------------------- Average Annual Total Return 3 +8.16% +6.19% +6.24% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,816 $13,505 $18,312 -------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) -------------------------------------------------------------------------------- Cumulative Total Return 2 +9.73% +23.39% +38.55% -------------------------------------------------------------------------------- Average Annual Total Return 3 +9.73% +7.26% +6.75% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,973 $12,339 $13,855 -------------------------------------------------------------------------------- ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return 2 +10.28% +40.66% +98.43% -------------------------------------------------------------------------------- Average Annual Total Return 3 +10.28% +7.06% +7.09% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,028 $14,066 $19,843 -------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 9 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN ------------------------------------- CLASS A 12/31/06 ------------------------------------- 1-Year +3.57% ------------------------------------- 5-Year +5.75% ------------------------------------- 10-Year +6.43% ------------------------------------- CLASS A (1/1/97-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Conservative MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ---------------------------------------------------------------------------------------------------------------------------- 1/1/1997 $ 9,425 $10,000 $10,000 $10,000 $10,000 1/31/1997 $ 9,576 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $ 9,585 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $ 9,474 $10,269 $ 9,850 $ 9,944 $10,126 4/30/1997 $ 9,502 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $ 9,814 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,028 $12,060 $11,136 $10,309 $10,261 7/31/1997 $10,293 $13,019 $11,319 $10,587 $10,305 8/31/1997 $10,189 $12,290 $10,476 $10,497 $10,351 9/30/1997 $10,570 $12,963 $11,065 $10,652 $10,399 10/31/1997 $10,351 $12,531 $10,217 $10,806 $10,438 11/30/1997 $10,408 $13,110 $10,115 $10,856 $10,484 12/31/1997 $10,513 $13,335 $10,206 $10,965 $10,530 1/31/1998 $10,503 $13,482 $10,675 $11,106 $10,582 2/28/1998 $10,797 $14,454 $11,362 $11,098 $10,623 3/31/1998 $11,036 $15,194 $11,715 $11,136 $10,675 4/30/1998 $11,095 $15,347 $11,810 $11,194 $10,725 5/31/1998 $10,987 $15,083 $11,756 $11,300 $10,771 6/30/1998 $10,988 $15,695 $11,847 $11,396 $10,815 7/31/1998 $10,850 $15,529 $11,970 $11,420 $10,862 8/31/1998 $10,219 $13,286 $10,490 $11,606 $10,914 9/30/1998 $10,397 $14,137 $10,171 $11,878 $10,970 10/31/1998 $10,526 $15,286 $11,234 $11,815 $11,013 11/30/1998 $10,715 $16,212 $11,812 $11,882 $11,048 12/31/1998 $10,826 $17,146 $12,281 $11,918 $11,094 1/31/1999 $10,898 $17,862 $12,247 $12,003 $11,137 2/28/1999 $10,754 $17,307 $11,958 $11,794 $11,172 3/31/1999 $10,916 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,185 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,092 $18,256 $12,303 $11,792 $11,305 6/30/1999 $11,273 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,200 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,211 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,196 $18,066 $13,356 $11,834 $11,488 10/31/1999 $11,501 $19,209 $13,859 $11,878 $11,533 11/30/1999 $12,123 $19,600 $14,343 $11,877 $11,579 12/31/1999 $13,021 $20,753 $15,633 $11,820 $11,632 1/31/2000 $12,881 $19,711 $14,643 $11,781 $11,677 2/29/2000 $13,950 $19,338 $15,040 $11,924 $11,730 3/31/2000 $13,756 $21,228 $15,626 $12,081 $11,789 4/30/2000 $13,245 $20,590 $14,806 $12,046 $11,849 5/31/2000 $12,962 $20,169 $14,448 $12,041 $11,913 6/30/2000 $13,335 $20,666 $15,016 $12,291 $11,964 7/31/2000 $13,302 $20,343 $14,389 $12,403 $12,019 8/31/2000 $13,818 $21,606 $14,517 $12,583 $12,082 9/30/2000 $13,675 $20,466 $13,813 $12,662 $12,148 10/31/2000 $13,487 $20,379 $13,490 $12,746 $12,209 11/30/2000 $12,999 $18,773 $12,987 $12,954 $12,276 12/31/2000 $13,418 $18,865 $13,451 $13,194 $12,347 1/31/2001 $13,781 $19,534 $13,445 $13,410 $12,428 2/28/2001 $13,348 $17,754 $12,438 $13,527 $12,478 3/31/2001 $13,004 $16,630 $11,614 $13,595 $12,540 4/30/2001 $13,416 $17,922 $12,429 $13,538 $12,592 5/31/2001 $13,498 $18,042 $12,000 $13,620 $12,641 6/30/2001 $13,439 $17,603 $11,514 $13,671 $12,678 7/31/2001 $13,380 $17,429 $11,305 $13,977 $12,720 8/31/2001 $13,214 $16,339 $11,021 $14,137 $12,762 9/30/2001 $12,493 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $12,839 $15,307 $10,161 $14,601 $12,851 11/30/2001 $13,150 $16,481 $10,536 $14,400 $12,878 12/31/2001 $13,295 $16,625 $10,599 $14,308 $12,899 1/31/2002 $13,283 $16,383 $10,037 $14,424 $12,917 2/28/2002 $13,271 $16,067 $10,107 $14,564 $12,934 3/31/2002 $13,544 $16,671 $10,659 $14,322 $12,953 4/30/2002 $13,581 $15,661 $10,736 $14,599 $12,973 5/31/2002 $13,532 $15,546 $10,882 $14,723 $12,993 6/30/2002 $13,141 $14,439 $10,453 $14,851 $13,012 7/31/2002 $12,611 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $12,698 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $12,306 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $12,541 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $12,876 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $12,792 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $12,742 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $12,704 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $12,687 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $13,152 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $13,654 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $13,732 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $13,745 $14,730 $10,059 $15,844 $13,217 8/31/2003 $14,047 $15,016 $10,304 $15,949 $13,227 9/30/2003 $14,142 $14,857 $10,623 $16,372 $13,239 10/31/2003 $14,484 $15,697 $11,286 $16,219 $13,249 11/30/2003 $14,712 $15,835 $11,539 $16,258 $13,260 12/31/2003 $15,011 $16,665 $12,441 $16,423 $13,270 1/31/2004 $15,126 $16,971 $12,617 $16,555 $13,281 2/29/2004 $15,266 $17,207 $12,911 $16,734 $13,290 3/31/2004 $15,288 $16,947 $12,989 $16,860 $13,301 4/30/2004 $14,904 $16,682 $12,706 $16,421 $13,311 5/31/2004 $14,993 $16,910 $12,761 $16,355 $13,320 6/30/2004 $15,172 $17,239 $13,046 $16,448 $13,326 7/31/2004 $14,967 $16,668 $12,624 $16,611 $13,338 8/31/2004 $15,082 $16,735 $12,683 $16,928 $13,352 9/30/2004 $15,329 $16,916 $13,016 $16,974 $13,367 10/31/2004 $15,548 $17,175 $13,461 $17,116 $13,382 11/30/2004 $15,948 $17,870 $14,384 $16,979 $13,395 12/31/2004 $16,209 $18,477 $15,016 $17,136 $13,421 1/31/2005 $16,001 $18,027 $14,741 $17,243 $13,440 2/28/2005 $16,248 $18,406 $15,381 $17,142 $13,461 3/31/2005 $16,028 $18,081 $15,001 $17,053 $13,492 4/30/2005 $15,859 $17,738 $14,665 $17,284 $13,521 5/31/2005 $16,093 $18,302 $14,688 $17,471 $13,552 6/30/2005 $16,238 $18,328 $14,888 $17,567 $13,582 7/31/2005 $16,486 $19,009 $15,346 $17,407 $13,612 8/31/2005 $16,552 $18,836 $15,738 $17,630 $13,649 9/30/2005 $16,674 $18,988 $16,442 $17,448 $13,688 10/31/2005 $16,424 $18,672 $15,963 $17,310 $13,720 11/30/2005 $16,766 $19,377 $16,358 $17,387 $13,765 12/31/2005 $16,971 $19,384 $17,120 $17,552 $13,809 1/31/2006 $17,491 $19,897 $18,172 $17,553 $13,848 2/28/2006 $17,491 $19,951 $18,135 $17,611 $13,892 3/31/2006 $17,676 $20,199 $18,742 $17,438 $13,946 4/30/2006 $17,863 $20,470 $19,651 $17,407 $13,996 5/31/2006 $17,502 $19,882 $18,911 $17,388 $14,051 6/30/2006 $17,514 $19,908 $18,918 $17,425 $14,104 7/31/2006 $17,514 $20,031 $19,108 $17,661 $14,162 8/31/2006 $17,758 $20,507 $19,638 $17,931 $14,224 9/30/2006 $17,826 $21,035 $19,672 $18,089 $14,287 10/31/2006 $18,208 $21,720 $20,439 $18,208 $14,342 11/30/2006 $18,577 $22,133 $21,056 $18,419 $14,403 12/31/2006 $18,654 $22,443 $21,718 $18,313 $14,465
AVERAGE ANNUAL TOTAL RETURN -------------------------------------------- CLASS B 12/31/06 -------------------------------------------- 1-Year +5.05% -------------------------------------------- 3-Year +5.82% -------------------------------------------- Since Inception (12/1/03) +6.25% -------------------------------------------- CLASS B (12/1/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Conservative MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 --------------------------------------------------------------------------------------------------------------------------- 12/1/2003 $10,000 $10,000 $10,000 $10,000 $10,000 12/31/2003 $10,170 $10,524 $10,782 $10,102 $10,008 1/31/2004 $10,239 $10,717 $10,935 $10,183 $10,016 2/29/2004 $10,326 $10,866 $11,189 $10,293 $10,023 3/31/2004 $10,337 $10,702 $11,257 $10,370 $10,031 4/30/2004 $10,068 $10,534 $11,012 $10,101 $10,038 5/31/2004 $10,129 $10,679 $11,059 $10,060 $10,045 6/30/2004 $10,237 $10,886 $11,306 $10,117 $10,050 7/31/2004 $10,098 $10,526 $10,941 $10,217 $10,059 8/31/2004 $10,168 $10,568 $10,991 $10,412 $10,069 9/30/2004 $10,329 $10,683 $11,280 $10,440 $10,080 10/31/2004 $10,468 $10,846 $11,666 $10,528 $10,092 11/30/2004 $10,738 $11,285 $12,466 $10,444 $10,102 12/31/2004 $10,908 $11,668 $13,013 $10,540 $10,122 1/31/2005 $10,751 $11,384 $12,775 $10,606 $10,136 2/28/2005 $10,917 $11,624 $13,330 $10,544 $10,151 3/31/2005 $10,757 $11,418 $13,001 $10,489 $10,175 4/30/2005 $10,643 $11,201 $12,710 $10,631 $10,196 5/31/2005 $10,792 $11,558 $12,729 $10,746 $10,220 6/30/2005 $10,878 $11,574 $12,903 $10,805 $10,243 7/31/2005 $11,045 $12,004 $13,299 $10,707 $10,265 8/31/2005 $11,080 $11,895 $13,639 $10,844 $10,293 9/30/2005 $11,150 $11,991 $14,250 $10,732 $10,323 10/31/2005 $10,982 $11,791 $13,834 $10,647 $10,347 11/30/2005 $11,194 $12,237 $14,177 $10,694 $10,381 12/31/2005 $11,330 $12,241 $14,837 $10,796 $10,414 1/31/2006 $11,669 $12,565 $15,749 $10,797 $10,443 2/28/2006 $11,669 $12,599 $15,717 $10,833 $10,477 3/31/2006 $11,779 $12,756 $16,243 $10,726 $10,518 4/30/2006 $11,886 $12,927 $17,030 $10,707 $10,555 5/31/2006 $11,645 $12,555 $16,389 $10,695 $10,597 6/30/2006 $11,650 $12,572 $16,395 $10,718 $10,637 7/31/2006 $11,632 $12,650 $16,560 $10,863 $10,680 8/31/2006 $11,795 $12,950 $17,019 $11,029 $10,727 9/30/2006 $11,835 $13,284 $17,049 $11,126 $10,774 10/31/2006 $12,071 $13,716 $17,714 $11,200 $10,816 11/30/2006 $12,316 $13,977 $18,248 $11,330 $10,862 12/31/2006 $12,055 $14,173 $18,822 $11,264 $10,909
10 | Annual Report Performance Summary (CONTINUED) CLASS C (1/1/97-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Conservative MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ---------------------------------------------------------------------------------------------------------------------- 1/1/1997 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1997 $10,160 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $10,150 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $ 9,998 $10,269 $ 9,850 $ 9,944 $10,126 4/30/1997 $10,028 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,359 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,577 $12,060 $11,136 $10,309 $10,261 7/31/1997 $10,848 $13,019 $11,319 $10,587 $10,305 8/31/1997 $10,717 $12,290 $10,476 $10,497 $10,351 9/30/1997 $11,111 $12,963 $11,065 $10,652 $10,399 10/31/1997 $10,879 $12,531 $10,217 $10,806 $10,438 11/30/1997 $10,940 $13,110 $10,115 $10,856 $10,484 12/31/1997 $11,042 $13,335 $10,206 $10,965 $10,530 1/31/1998 $11,021 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,321 $14,454 $11,362 $11,098 $10,623 3/31/1998 $11,570 $15,194 $11,715 $11,136 $10,675 4/30/1998 $11,621 $15,347 $11,810 $11,194 $10,725 5/31/1998 $11,507 $15,083 $11,756 $11,300 $10,771 6/30/1998 $11,499 $15,695 $11,847 $11,396 $10,815 7/31/1998 $11,343 $15,529 $11,970 $11,420 $10,862 8/31/1998 $10,678 $13,286 $10,490 $11,606 $10,914 9/30/1998 $10,857 $14,137 $10,171 $11,878 $10,970 10/31/1998 $10,983 $15,286 $11,234 $11,815 $11,013 11/30/1998 $11,171 $16,212 $11,812 $11,882 $11,048 12/31/1998 $11,283 $17,146 $12,281 $11,918 $11,094 1/31/1999 $11,348 $17,862 $12,247 $12,003 $11,137 2/28/1999 $11,196 $17,307 $11,958 $11,794 $11,172 3/31/1999 $11,363 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,623 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,525 $18,256 $12,303 $11,792 $11,305 6/30/1999 $11,701 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,625 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,625 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,608 $18,066 $13,356 $11,834 $11,488 10/31/1999 $11,916 $19,209 $13,859 $11,878 $11,533 11/30/1999 $12,542 $19,600 $14,343 $11,877 $11,579 12/31/1999 $13,472 $20,753 $15,633 $11,820 $11,632 1/31/2000 $13,314 $19,711 $14,643 $11,781 $11,677 2/29/2000 $14,417 $19,338 $15,040 $11,924 $11,730 3/31/2000 $14,201 $21,228 $15,626 $12,081 $11,789 4/30/2000 $13,669 $20,590 $14,806 $12,046 $11,849 5/31/2000 $13,375 $20,169 $14,448 $12,041 $11,913 6/30/2000 $13,738 $20,666 $15,016 $12,291 $11,964 7/31/2000 $13,704 $20,343 $14,389 $12,403 $12,019 8/31/2000 $14,216 $21,606 $14,517 $12,583 $12,082 9/30/2000 $14,066 $20,466 $13,813 $12,662 $12,148 10/31/2000 $13,871 $20,379 $13,490 $12,746 $12,209 11/30/2000 $13,353 $18,773 $12,987 $12,954 $12,276 12/31/2000 $13,777 $18,865 $13,451 $13,194 $12,347 1/31/2001 $14,140 $19,534 $13,445 $13,410 $12,428 2/28/2001 $13,692 $17,754 $12,438 $13,527 $12,478 3/31/2001 $13,330 $16,630 $11,614 $13,595 $12,540 4/30/2001 $13,743 $17,922 $12,429 $13,538 $12,592 5/31/2001 $13,816 $18,042 $12,000 $13,620 $12,641 6/30/2001 $13,743 $17,603 $11,514 $13,671 $12,678 7/31/2001 $13,682 $17,429 $11,305 $13,977 $12,720 8/31/2001 $13,499 $16,339 $11,021 $14,137 $12,762 9/30/2001 $12,755 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $13,100 $15,307 $10,161 $14,601 $12,851 11/30/2001 $13,408 $16,481 $10,536 $14,400 $12,878 12/31/2001 $13,560 $16,625 $10,599 $14,308 $12,899 1/31/2002 $13,522 $16,383 $10,037 $14,424 $12,917 2/28/2002 $13,497 $16,067 $10,107 $14,564 $12,934 3/31/2002 $13,775 $16,671 $10,659 $14,322 $12,953 4/30/2002 $13,800 $15,661 $10,736 $14,599 $12,973 5/31/2002 $13,737 $15,546 $10,882 $14,723 $12,993 6/30/2002 $13,338 $14,439 $10,453 $14,851 $13,012 7/31/2002 $12,795 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $12,884 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $12,475 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $12,703 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $13,032 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $12,943 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $12,879 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $12,841 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $12,815 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $13,263 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $13,775 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $13,845 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $13,845 $14,730 $10,059 $15,844 $13,217 8/31/2003 $14,140 $15,016 $10,304 $15,949 $13,227 9/30/2003 $14,226 $14,857 $10,623 $16,372 $13,239 10/31/2003 $14,560 $15,697 $11,286 $16,219 $13,249 11/30/2003 $14,778 $15,835 $11,539 $16,258 $13,260 12/31/2003 $15,073 $16,665 $12,441 $16,423 $13,270 1/31/2004 $15,177 $16,971 $12,617 $16,555 $13,281 2/29/2004 $15,306 $17,207 $12,911 $16,734 $13,290 3/31/2004 $15,324 $16,947 $12,989 $16,860 $13,301 4/30/2004 $14,922 $16,682 $12,706 $16,421 $13,311 5/31/2004 $15,013 $16,910 $12,761 $16,355 $13,320 6/30/2004 $15,165 $17,239 $13,046 $16,448 $13,326 7/31/2004 $14,957 $16,668 $12,624 $16,611 $13,338 8/31/2004 $15,061 $16,735 $12,683 $16,928 $13,352 9/30/2004 $15,309 $16,916 $13,016 $16,974 $13,367 10/31/2004 $15,517 $17,175 $13,461 $17,116 $13,382 11/30/2004 $15,907 $17,870 $14,384 $16,979 $13,395 12/31/2004 $16,158 $18,477 $15,016 $17,136 $13,421 1/31/2005 $15,923 $18,027 $14,741 $17,243 $13,440 2/28/2005 $16,171 $18,406 $15,381 $17,142 $13,461 3/31/2005 $15,943 $18,081 $15,001 $17,053 $13,492 4/30/2005 $15,773 $17,738 $14,665 $17,284 $13,521 5/31/2005 $15,983 $18,302 $14,688 $17,471 $13,552 6/30/2005 $16,124 $18,328 $14,888 $17,567 $13,582 7/31/2005 $16,360 $19,009 $15,346 $17,407 $13,612 8/31/2005 $16,413 $18,836 $15,738 $17,630 $13,649 9/30/2005 $16,519 $18,988 $16,442 $17,448 $13,688 10/31/2005 $16,269 $18,672 $15,963 $17,310 $13,720 11/30/2005 $16,585 $19,377 $16,358 $17,387 $13,765 12/31/2005 $16,776 $19,384 $17,120 $17,552 $13,809 1/31/2006 $17,296 $19,897 $18,172 $17,553 $13,848 2/28/2006 $17,282 $19,951 $18,135 $17,611 $13,892 3/31/2006 $17,461 $20,199 $18,742 $17,438 $13,946 4/30/2006 $17,621 $20,470 $19,651 $17,407 $13,996 5/31/2006 $17,247 $19,882 $18,911 $17,388 $14,051 6/30/2006 $17,267 $19,908 $18,918 $17,425 $14,104 7/31/2006 $17,240 $20,031 $19,108 $17,661 $14,162 8/31/2006 $17,470 $20,507 $19,638 $17,931 $14,224 9/30/2006 $17,532 $21,035 $19,672 $18,089 $14,287 10/31/2006 $17,899 $21,720 $20,439 $18,208 $14,342 11/30/2006 $18,252 $22,133 $21,056 $18,419 $14,403 12/31/2006 $18,312 $22,443 $21,718 $18,313 $14,465
AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------ CLASS C 12/31/06 ------------------------------------------------ 1-Year +8.16% ------------------------------------------------ 5-Year +6.19% ------------------------------------------------ 10-Year +6.24% ------------------------------------------------ CLASS R (1/1/02-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Conservative MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 --------------------------------------------------------------------------------------------------------------------------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/2002 $ 9,982 $ 9,854 $ 9,469 $10,081 $10,014 2/28/2002 $ 9,972 $ 9,664 $ 9,536 $10,179 $10,027 3/31/2002 $10,178 $10,028 $10,057 $10,009 $10,042 4/30/2002 $10,196 $ 9,420 $10,130 $10,203 $10,057 5/31/2002 $10,159 $ 9,351 $10,267 $10,290 $10,073 6/30/2002 $ 9,869 $ 8,685 $ 9,862 $10,379 $10,088 7/31/2002 $ 9,461 $ 8,008 $ 8,889 $10,504 $10,102 8/31/2002 $ 9,526 $ 8,061 $ 8,871 $10,682 $10,117 9/30/2002 $ 9,232 $ 7,185 $ 7,921 $10,855 $10,133 10/31/2002 $ 9,409 $ 7,817 $ 8,347 $10,805 $10,149 11/30/2002 $ 9,650 $ 8,277 $ 8,727 $10,802 $10,165 12/31/2002 $ 9,591 $ 7,791 $ 8,434 $11,025 $10,175 1/31/2003 $ 9,554 $ 7,587 $ 8,083 $11,035 $10,186 2/28/2003 $ 9,516 $ 7,473 $ 7,898 $11,188 $10,195 3/31/2003 $ 9,510 $ 7,545 $ 7,749 $11,179 $10,207 4/30/2003 $ 9,850 $ 8,167 $ 8,517 $11,271 $10,217 5/31/2003 $10,228 $ 8,596 $ 9,041 $11,481 $10,227 6/30/2003 $10,284 $ 8,706 $ 9,265 $11,459 $10,240 7/31/2003 $10,293 $ 8,860 $ 9,491 $11,073 $10,247 8/31/2003 $10,511 $ 9,032 $ 9,721 $11,147 $10,255 9/30/2003 $10,584 $ 8,937 $10,023 $11,442 $10,263 10/31/2003 $10,831 $ 9,442 $10,648 $11,335 $10,272 11/30/2003 $11,002 $ 9,525 $10,887 $11,362 $10,280 12/31/2003 $11,228 $10,024 $11,738 $11,478 $10,288 1/31/2004 $11,314 $10,208 $11,904 $11,570 $10,297 2/29/2004 $11,410 $10,350 $12,181 $11,696 $10,303 3/31/2004 $11,431 $10,194 $12,255 $11,783 $10,312 4/30/2004 $11,134 $10,034 $11,988 $11,477 $10,319 5/31/2004 $11,210 $10,171 $12,040 $11,431 $10,326 6/30/2004 $11,328 $10,369 $12,308 $11,495 $10,331 7/31/2004 $11,174 $10,026 $11,911 $11,609 $10,341 8/31/2004 $11,260 $10,066 $11,966 $11,831 $10,351 9/30/2004 $11,449 $10,175 $12,280 $11,863 $10,363 10/31/2004 $11,604 $10,331 $12,700 $11,962 $10,375 11/30/2004 $11,902 $10,749 $13,571 $11,867 $10,385 12/31/2004 $12,098 $11,114 $14,167 $11,976 $10,405 1/31/2005 $11,932 $10,843 $13,908 $12,051 $10,420 2/28/2005 $12,117 $11,071 $14,512 $11,980 $10,436 3/31/2005 $11,948 $10,876 $14,153 $11,919 $10,460 4/30/2005 $11,821 $10,669 $13,837 $12,080 $10,482 5/31/2005 $11,996 $11,009 $13,858 $12,211 $10,506 6/30/2005 $12,097 $11,024 $14,047 $12,277 $10,530 7/31/2005 $12,283 $11,434 $14,479 $12,165 $10,553 8/31/2005 $12,332 $11,330 $14,849 $12,321 $10,582 9/30/2005 $12,415 $11,422 $15,513 $12,194 $10,612 10/31/2005 $12,228 $11,231 $15,061 $12,098 $10,636 11/30/2005 $12,474 $11,655 $15,433 $12,151 $10,672 12/31/2005 $12,627 $11,660 $16,153 $12,267 $10,705 1/31/2006 $13,013 $11,968 $17,145 $12,268 $10,736 2/28/2006 $13,013 $12,001 $17,110 $12,308 $10,770 3/31/2006 $13,155 $12,150 $17,683 $12,188 $10,812 4/30/2006 $13,284 $12,313 $18,540 $12,165 $10,851 5/31/2006 $13,005 $11,959 $17,843 $12,152 $10,893 6/30/2006 $13,025 $11,975 $17,849 $12,178 $10,934 7/31/2006 $13,015 $12,049 $18,028 $12,343 $10,979 8/31/2006 $13,197 $12,335 $18,528 $12,532 $11,028 9/30/2006 $13,239 $12,653 $18,561 $12,642 $11,076 10/31/2006 $13,524 $13,065 $19,284 $12,726 $11,119 11/30/2006 $13,798 $13,313 $19,866 $12,873 $11,166 12/31/2006 $13,855 $13,500 $20,491 $12,798 $11,215
AVERAGE ANNUAL TOTAL RETURN --------------------------------------------- CLASS R 12/31/06 --------------------------------------------- 1-Year +9.73% --------------------------------------------- 3-Year +7.26% --------------------------------------------- Since Inception (1/1/02) +6.75% --------------------------------------------- Annual Report | 11 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN -------------------------------------------- ADVISOR CLASS 5 12/31/06 -------------------------------------------- 1-Year +10.28% -------------------------------------------- 5-Year +7.06% -------------------------------------------- 10-Year +7.09% -------------------------------------------- ADVISOR CLASS (1/1/97-12/31/06) 5 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Conservative MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ----------------------------------------------------------------------------------------------------------------- 1/1/1997 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1997 $10,160 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $10,170 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $10,051 $10,269 $ 9,850 $9,944 $10,126 4/30/1997 $10,082 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,413 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,639 $12,060 $11,136 $10,309 $10,261 7/31/1997 $10,921 $13,019 $11,319 $10,587 $10,305 8/31/1997 $10,810 $12,290 $10,476 $10,497 $10,351 9/30/1997 $11,215 $12,963 $11,065 $10,652 $10,399 10/31/1997 $10,982 $12,531 $10,217 $10,806 $10,438 11/30/1997 $11,043 $13,110 $10,115 $10,856 $10,484 12/31/1997 $11,155 $13,335 $10,206 $10,965 $10,530 1/31/1998 $11,144 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,456 $14,454 $11,362 $11,098 $10,623 3/31/1998 $11,709 $15,194 $11,715 $11,136 $10,675 4/30/1998 $11,771 $15,347 $11,810 $11,194 $10,725 5/31/1998 $11,657 $15,083 $11,756 $11,300 $10,771 6/30/1998 $11,659 $15,695 $11,847 $11,396 $10,815 7/31/1998 $11,512 $15,529 $11,970 $11,420 $10,862 8/31/1998 $10,842 $13,286 $10,490 $11,606 $10,914 9/30/1998 $11,031 $14,137 $10,171 $11,878 $10,970 10/31/1998 $11,168 $15,286 $11,234 $11,815 $11,013 11/30/1998 $11,369 $16,212 $11,812 $11,882 $11,048 12/31/1998 $11,486 $17,146 $12,281 $11,918 $11,094 1/31/1999 $11,563 $17,862 $12,247 $12,003 $11,137 2/28/1999 $11,410 $17,307 $11,958 $11,794 $11,172 3/31/1999 $11,582 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,868 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,769 $18,256 $12,303 $11,792 $11,305 6/30/1999 $11,961 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,884 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,895 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,879 $18,066 $13,356 $11,834 $11,488 10/31/1999 $12,203 $19,209 $13,859 $11,878 $11,533 11/30/1999 $12,862 $19,600 $14,343 $11,877 $11,579 12/31/1999 $13,815 $20,753 $15,633 $11,820 $11,632 1/31/2000 $13,666 $19,711 $14,643 $11,781 $11,677 2/29/2000 $14,801 $19,338 $15,040 $11,924 $11,730 3/31/2000 $14,595 $21,228 $15,626 $12,081 $11,789 4/30/2000 $14,053 $20,590 $14,806 $12,046 $11,849 5/31/2000 $13,753 $20,169 $14,448 $12,041 $11,913 6/30/2000 $14,149 $20,666 $15,016 $12,291 $11,964 7/31/2000 $14,114 $20,343 $14,389 $12,403 $12,019 8/31/2000 $14,661 $21,606 $14,517 $12,583 $12,082 9/30/2000 $14,509 $20,466 $13,813 $12,662 $12,148 10/31/2000 $14,309 $20,379 $13,490 $12,746 $12,209 11/30/2000 $13,792 $18,773 $12,987 $12,954 $12,276 12/31/2000 $14,237 $18,865 $13,451 $13,194 $12,347 1/31/2001 $14,622 $19,534 $13,445 $13,410 $12,428 2/28/2001 $14,162 $17,754 $12,438 $13,527 $12,478 3/31/2001 $13,798 $16,630 $11,614 $13,595 $12,540 4/30/2001 $14,234 $17,922 $12,429 $13,538 $12,592 5/31/2001 $14,322 $18,042 $12,000 $13,620 $12,641 6/30/2001 $14,259 $17,603 $11,514 $13,671 $12,678 7/31/2001 $14,196 $17,429 $11,305 $13,977 $12,720 8/31/2001 $14,020 $16,339 $11,021 $14,137 $12,762 9/30/2001 $13,255 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $13,622 $15,307 $10,161 $14,601 $12,851 11/30/2001 $13,952 $16,481 $10,536 $14,400 $12,878 12/31/2001 $14,106 $16,625 $10,599 $14,308 $12,899 1/31/2002 $14,093 $16,383 $10,037 $14,424 $12,917 2/28/2002 $14,080 $16,067 $10,107 $14,564 $12,934 3/31/2002 $14,370 $16,671 $10,659 $14,322 $12,953 4/30/2002 $14,409 $15,661 $10,736 $14,599 $12,973 5/31/2002 $14,357 $15,546 $10,882 $14,723 $12,993 6/30/2002 $13,942 $14,439 $10,453 $14,851 $13,012 7/31/2002 $13,381 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $13,472 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $13,056 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $13,306 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $13,661 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $13,572 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $13,519 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $13,479 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $13,461 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $13,954 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $14,487 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $14,570 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $14,583 $14,730 $10,059 $15,844 $13,217 8/31/2003 $14,904 $15,016 $10,304 $15,949 $13,227 9/30/2003 $15,005 $14,857 $10,623 $16,372 $13,239 10/31/2003 $15,367 $15,697 $11,286 $16,219 $13,249 11/30/2003 $15,609 $15,835 $11,539 $16,258 $13,260 12/31/2003 $15,927 $16,665 $12,441 $16,423 $13,270 1/31/2004 $16,049 $16,971 $12,617 $16,555 $13,281 2/29/2004 $16,198 $17,207 $12,911 $16,734 $13,290 3/31/2004 $16,220 $16,947 $12,989 $16,860 $13,301 4/30/2004 $15,813 $16,682 $12,706 $16,421 $13,311 5/31/2004 $15,908 $16,910 $12,761 $16,355 $13,320 6/30/2004 $16,098 $17,239 $13,046 $16,448 $13,326 7/31/2004 $15,880 $16,668 $12,624 $16,611 $13,338 8/31/2004 $16,002 $16,735 $12,683 $16,928 $13,352 9/30/2004 $16,264 $16,916 $13,016 $16,974 $13,367 10/31/2004 $16,497 $17,175 $13,461 $17,116 $13,382 11/30/2004 $16,921 $17,870 $14,384 $16,979 $13,395 12/31/2004 $17,198 $18,477 $15,016 $17,136 $13,421 1/31/2005 $16,978 $18,027 $14,741 $17,243 $13,440 2/28/2005 $17,239 $18,406 $15,381 $17,142 $13,461 3/31/2005 $17,006 $18,081 $15,001 $17,053 $13,492 4/30/2005 $16,826 $17,738 $14,665 $17,284 $13,521 5/31/2005 $17,075 $18,302 $14,688 $17,471 $13,552 6/30/2005 $17,228 $18,328 $14,888 $17,567 $13,582 7/31/2005 $17,492 $19,009 $15,346 $17,407 $13,612 8/31/2005 $17,562 $18,836 $15,738 $17,630 $13,649 9/30/2005 $17,691 $18,988 $16,442 $17,448 $13,688 10/31/2005 $17,426 $18,672 $15,963 $17,310 $13,720 11/30/2005 $17,788 $19,377 $16,358 $17,387 $13,765 12/31/2005 $17,993 $19,384 $17,120 $17,552 $13,809 1/31/2006 $18,559 $19,897 $18,172 $17,553 $13,848 2/28/2006 $18,559 $19,951 $18,135 $17,611 $13,892 3/31/2006 $18,763 $20,199 $18,742 $17,438 $13,946 4/30/2006 $18,962 $20,470 $19,651 $17,407 $13,996 5/31/2006 $18,578 $19,882 $18,911 $17,388 $14,051 6/30/2006 $18,603 $19,908 $18,918 $17,425 $14,104 7/31/2006 $18,603 $20,031 $19,108 $17,661 $14,162 8/31/2006 $18,862 $20,507 $19,638 $17,931 $14,224 9/30/2006 $18,946 $21,035 $19,672 $18,089 $14,287 10/31/2006 $19,352 $21,720 $20,439 $18,208 $14,342 11/30/2006 $19,744 $22,133 $21,056 $18,419 $14,403 12/31/2006 $19,843 $22,443 $21,718 $18,313 $14,465
ENDNOTES THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT INVESTS IN A LIMITED NUMBER OF MUTUAL FUNDS. BECAUSE THE FUND INVESTS IN VARIOUS UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THESE SAME RISKS. THESE RISKS ARE DESCRIBED IN THE FUND'S PROSPECTUS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total return would have been lower. The manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 5. Effective 12/1/05, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 12/1/05, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 11/30/05, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 12/1/05 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +11.03% and +10.15%. 6. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. See page 6 for descriptions of the S&P 500, the MSCI EAFE Index, the LB U.S. Aggregate Index and the P&R 90 Day U.S. T-Bill Index. 12 | Annual Report Your Fund's Expenses FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 13 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
------------------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 ------------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,065.10 $2.65 ------------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.63 $2.60 ------------------------------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,060.50 $6.49 ------------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 ------------------------------------------------------------------------------------------------------------------------------- CLASS C ------------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,060.50 $6.54 ------------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.41 ------------------------------------------------------------------------------------------------------------------------------- CLASS R ------------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,063.70 $3.95 ------------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.37 $3.87 ------------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS ------------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,066.60 $1.35 ------------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,023.89 $1.33 -------------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.51%; B: 1.25%; C: 1.26%; R: 0.76%; and Advisor: 0.26%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 14 | Annual Report Franklin Templeton Moderate Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Moderate Target Fund seeks the highest level of long-term total return consistent with a moderate level of risk. 1 -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton Moderate Target Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ......................... 38.8% Domestic Fixed Income ................... 23.4% Foreign Equity .......................... 17.2% Foreign Fixed Income .................... 11.1% Short-Term Investments & Other Net Assets 9.5% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- This annual report for Franklin Templeton Moderate Target Fund covers the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton Moderate Target Fund - Class A posted a cumulative total return of +11.57% for the 12 months under review. The Fund underperformed its hybrid benchmark, which comprised a weighted combination of the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Lehman Brothers (LB) U.S. Aggregate Index for fixed income, and the P&R 90 Day U.S. T-Bill Index for short-term investments and other net assets. For the reporting 1. The risk/reward potential is based on the Fund's goal and level of risk. It is not indicative of the Fund's actual or implied performance or portfolio composition, which may change on a continuous basis. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI. THE SOI BEGINS ON PAGE 46. Annual Report | 15 TOP 10 FUND HOLDINGS Franklin Templeton Moderate Target Fund 12/31/06 ------------------------------------------------------------------------------ % OF TOTAL NET ASSETS ------------------------------------------------------------------------------ Templeton Global Bond Fund 11.1% - Advisor Class ----------------------------------------------------------------------------- Franklin Small Cap Growth Fund II 11.1% - Advisor Class ----------------------------------------------------------------------------- Franklin Flex Cap Growth Fund 10.5% - Advisor Class ----------------------------------------------------------------------------- Franklin U.S. Government Securities 9.3% Fund - Advisor Class ----------------------------------------------------------------------------- Mutual European Fund 8.7% - Class Z ----------------------------------------------------------------------------- Mutual Shares Fund 8.7% - Class Z ----------------------------------------------------------------------------- Franklin Total Return Fund 7.4% - Advisor Class ----------------------------------------------------------------------------- Franklin Strategic Mortgage Portfolio 6.7% ----------------------------------------------------------------------------- Templeton Foreign Fund 3.4% - Advisor Class ----------------------------------------------------------------------------- Franklin Aggressive Growth Fund 3.1% - Advisor Class ----------------------------------------------------------------------------- period, the hybrid benchmark returned +12.25%.2 You can find the Fund's long-term performance data in the Performance Summary beginning on page 18. INVESTMENT STRATEGY Whenever possible, we attempt to hold the same underlying Franklin Templeton funds in each Target Fund's portfolio. We generally diversify the Target Funds' broad equity allocations across investment styles, market capitalization sizes and countries of origin. Maintaining similarity of the underlying Franklin Templeton fund investments across the Allocator Series is intended to increase the consistency of the Target Funds' results relative to one another. For your reference, Franklin Templeton Moderate Target Fund seeks to maintain the following asset class allocations: 55% equity funds, 35% fixed income funds, and 10% short-term investments and other net assets. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to maintaining a static allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. At period-end, Franklin Templeton Moderate Target Fund's domestic equity exposure was 69.3% of its total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2006, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Small Cap Growth Fund II - Advisor Class, representing 11.1% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 67.8% of the Fund's total 2. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond markets, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The benchmark index's weightings are as follows: S&P 500 39%, MSCI EAFE 16%, LB U.S. Aggregate 35% and P&R 90 Day U.S. T-Bill 10%. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 16 | Annual Report income weighting, with the balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 11.1% of total net assets. Our largest domestic growth fund holding, Franklin Small Cap Growth Fund II - Advisor Class, underperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500. Our largest foreign equity fund holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class outperformed the LB U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton Moderate Target Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton Moderate Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. Annual Report | 17 Performance Summary as of 12/31/06 FRANKLIN TEMPLETON MODERATE TARGET FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: FMTIX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.89 $14.03 $13.14 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.3803 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0030 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2277 -------------------------------------------------------------------------------- TOTAL $0.6110 -------------------------------------------------------------------------------- CLASS B (SYMBOL: FBMTX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.89 $13.99 $13.10 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.2693 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0030 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2277 -------------------------------------------------------------------------------- TOTAL $0.5000 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FTMTX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.87 $13.81 $12.94 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.2730 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0030 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2277 -------------------------------------------------------------------------------- TOTAL $0.5037 -------------------------------------------------------------------------------- CLASS R (SYMBOL: FTMRX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.89 $14.00 $13.11 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.3407 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0030 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2277 -------------------------------------------------------------------------------- TOTAL $0.5714 -------------------------------------------------------------------------------- 18 | Annual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.88 $14.03 $13.15 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.4170 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0030 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.2277 -------------------------------------------------------------------------------- TOTAL $0.6477 -------------------------------------------------------------------------------- PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
------------------------------------------------------------------------------------------------------ CLASS A 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +11.57% +46.66% +102.43% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +5.16% +6.68% +6.67% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,516 $13,820 $19,079 ------------------------------------------------------------------------------------------------------ CLASS B 1-YEAR 3-YEAR INCEPTION (12/1/03) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +10.70% +26.82% +29.22% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +6.70% +7.38% +7.85% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,670 $12,382 $12,622 ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +10.72% +41.34% +86.61% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +9.72% +7.17% +6.44% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,972 $14,134 $18,661 ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +11.27% +28.59% +44.73% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +11.27% +8.74% +7.68% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $11,127 $12,859 $14,473 ------------------------------------------------------------------------------------------------------ ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +11.87% +47.14% +103.09% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +11.87% +8.03% +7.34% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $11,187 $14,714 $20,309 ------------------------------------------------------------------------------------------------------
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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 19 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN ------------------------------------------- CLASS A 12/31/06 ------------------------------------------- 1-Year +5.16% ------------------------------------------- 5-Year +6.68% ------------------------------------------- 10-Year +6.67% ------------------------------------------- CLASS A (1/1/97-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Moderate MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------------------------ 1/1/1997 $ 9,425 $10,000 $10,000 $10,000 $10,000 1/31/1997 $ 9,670 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $ 9,670 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $ 9,589 $10,269 $ 9,850 $ 9,944 $10,126 4/30/1997 $ 9,674 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,061 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,286 $12,060 $11,136 $10,309 $10,261 7/31/1997 $10,655 $13,019 $11,319 $10,587 $10,305 8/31/1997 $10,494 $12,290 $10,476 $10,497 $10,351 9/30/1997 $10,966 $12,963 $11,065 $10,652 $10,399 10/31/1997 $10,632 $12,531 $10,217 $10,806 $10,438 11/30/1997 $10,660 $13,110 $10,115 $10,856 $10,484 12/31/1997 $10,771 $13,335 $10,206 $10,965 $10,530 1/31/1998 $10,720 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,119 $14,454 $11,362 $11,098 $10,623 3/31/1998 $11,451 $15,194 $11,715 $11,136 $10,675 4/30/1998 $11,513 $15,347 $11,810 $11,194 $10,725 5/31/1998 $11,318 $15,083 $11,756 $11,300 $10,771 6/30/1998 $11,318 $15,695 $11,847 $11,396 $10,815 7/31/1998 $11,051 $15,529 $11,970 $11,420 $10,862 8/31/1998 $ 9,943 $13,286 $10,490 $11,606 $10,914 9/30/1998 $10,164 $14,137 $10,171 $11,878 $10,970 10/31/1998 $10,381 $15,286 $11,234 $11,815 $11,013 11/30/1998 $10,619 $16,212 $11,812 $11,882 $11,048 12/31/1998 $10,788 $17,146 $12,281 $11,918 $11,094 1/31/1999 $10,884 $17,862 $12,247 $12,003 $11,137 2/28/1999 $10,670 $17,307 $11,958 $11,794 $11,172 3/31/1999 $10,909 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,241 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,134 $18,256 $12,303 $11,792 $11,305 6/30/1999 $11,351 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,243 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,265 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,244 $18,066 $13,356 $11,834 $11,488 10/31/1999 $11,667 $19,209 $13,859 $11,878 $11,533 11/30/1999 $12,481 $19,600 $14,343 $11,877 $11,579 12/31/1999 $13,727 $20,753 $15,633 $11,820 $11,632 1/31/2000 $13,561 $19,711 $14,643 $11,781 $11,677 2/29/2000 $15,067 $19,338 $15,040 $11,924 $11,730 3/31/2000 $14,767 $21,228 $15,626 $12,081 $11,789 4/30/2000 $14,055 $20,590 $14,806 $12,046 $11,849 5/31/2000 $13,665 $20,169 $14,448 $12,041 $11,913 6/30/2000 $14,514 $20,666 $15,016 $12,291 $11,964 7/31/2000 $14,369 $20,343 $14,389 $12,403 $12,019 8/31/2000 $15,163 $21,606 $14,517 $12,583 $12,082 9/30/2000 $14,828 $20,466 $13,813 $12,662 $12,148 10/31/2000 $14,286 $20,379 $13,490 $12,746 $12,209 11/30/2000 $13,124 $18,773 $12,987 $12,954 $12,276 12/31/2000 $13,577 $18,865 $13,451 $13,194 $12,347 1/31/2001 $14,063 $19,534 $13,445 $13,410 $12,428 2/28/2001 $13,311 $17,754 $12,438 $13,527 $12,478 3/31/2001 $12,795 $16,630 $11,614 $13,595 $12,540 4/30/2001 $13,434 $17,922 $12,429 $13,538 $12,592 5/31/2001 $13,504 $18,042 $12,000 $13,620 $12,641 6/30/2001 $13,375 $17,603 $11,514 $13,671 $12,678 7/31/2001 $13,212 $17,429 $11,305 $13,977 $12,720 8/31/2001 $12,908 $16,339 $11,021 $14,137 $12,762 9/30/2001 $11,956 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $12,380 $15,307 $10,161 $14,601 $12,851 11/30/2001 $12,803 $16,481 $10,536 $14,400 $12,878 12/31/2001 $13,009 $16,625 $10,599 $14,308 $12,899 1/31/2002 $12,961 $16,383 $10,037 $14,424 $12,917 2/28/2002 $12,876 $16,067 $10,107 $14,564 $12,934 3/31/2002 $13,260 $16,671 $10,659 $14,322 $12,953 4/30/2002 $13,224 $15,661 $10,736 $14,599 $12,973 5/31/2002 $13,139 $15,546 $10,882 $14,723 $12,993 6/30/2002 $12,649 $14,439 $10,453 $14,851 $13,012 7/31/2002 $11,932 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $12,017 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $11,453 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $11,795 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $12,210 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $12,030 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $11,943 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $11,869 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $11,831 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $12,387 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $12,993 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $13,095 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $13,181 $14,730 $10,059 $15,844 $13,217 8/31/2003 $13,578 $15,016 $10,304 $15,949 $13,227 9/30/2003 $13,621 $14,857 $10,623 $16,372 $13,239 10/31/2003 $14,093 $15,697 $11,286 $16,219 $13,249 11/30/2003 $14,379 $15,835 $11,539 $16,258 $13,260 12/31/2003 $14,722 $16,665 $12,441 $16,423 $13,270 1/31/2004 $14,860 $16,971 $12,617 $16,555 $13,281 2/29/2004 $15,023 $17,207 $12,911 $16,734 $13,290 3/31/2004 $15,059 $16,947 $12,989 $16,860 $13,301 4/30/2004 $14,595 $16,682 $12,706 $16,421 $13,311 5/31/2004 $14,745 $16,910 $12,761 $16,355 $13,320 6/30/2004 $14,958 $17,239 $13,046 $16,448 $13,326 7/31/2004 $14,656 $16,668 $12,624 $16,611 $13,338 8/31/2004 $14,769 $16,735 $12,683 $16,928 $13,352 9/30/2004 $15,088 $16,916 $13,016 $16,974 $13,367 10/31/2004 $15,328 $17,175 $13,461 $17,116 $13,382 11/30/2004 $15,821 $17,870 $14,384 $16,979 $13,395 12/31/2004 $16,142 $18,477 $15,016 $17,136 $13,421 1/31/2005 $15,849 $18,027 $14,741 $17,243 $13,440 2/28/2005 $16,180 $18,406 $15,381 $17,142 $13,461 3/31/2005 $15,911 $18,081 $15,001 $17,053 $13,492 4/30/2005 $15,656 $17,738 $14,665 $17,284 $13,521 5/31/2005 $15,962 $18,302 $14,688 $17,471 $13,552 6/30/2005 $16,163 $18,328 $14,888 $17,567 $13,582 7/31/2005 $16,521 $19,009 $15,346 $17,407 $13,612 8/31/2005 $16,585 $18,836 $15,738 $17,630 $13,649 9/30/2005 $16,752 $18,988 $16,442 $17,448 $13,688 10/31/2005 $16,431 $18,672 $15,963 $17,310 $13,720 11/30/2005 $16,867 $19,377 $16,358 $17,387 $13,765 12/31/2005 $17,101 $19,384 $17,120 $17,552 $13,809 1/31/2006 $17,765 $19,897 $18,172 $17,553 $13,848 2/28/2006 $17,752 $19,951 $18,135 $17,611 $13,892 3/31/2006 $18,024 $20,199 $18,742 $17,438 $13,946 4/30/2006 $18,220 $20,470 $19,651 $17,407 $13,996 5/31/2006 $17,724 $19,882 $18,911 $17,388 $14,051 6/30/2006 $17,756 $19,908 $18,918 $17,425 $14,104 7/31/2006 $17,690 $20,031 $19,108 $17,661 $14,162 8/31/2006 $17,980 $20,507 $19,638 $17,931 $14,224 9/30/2006 $18,049 $21,035 $19,672 $18,089 $14,287 10/31/2006 $18,513 $21,720 $20,439 $18,208 $14,342 11/30/2006 $18,976 $22,133 $21,056 $18,419 $14,403 12/31/2006 $19,079 $22,443 $21,718 $18,313 $14,465
AVERAGE ANNUAL TOTAL RETURN ------------------------------------------- CLASS B 12/31/06 ------------------------------------------- 1-Year +6.70% ------------------------------------------- 3-Year +7.38% ------------------------------------------- Since Inception (12/1/03) +7.85% ------------------------------------------- CLASS B (12/1/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Moderate MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------------------------ 12/1/2003 $10,000 $10,000 $10,000 $10,000 $10,000 12/31/2003 $10,189 $10,524 $10,782 $10,102 $10,008 1/31/2004 $10,284 $10,717 $10,935 $10,183 $10,016 2/29/2004 $10,389 $10,866 $11,189 $10,293 $10,023 3/31/2004 $10,410 $10,702 $11,257 $10,370 $10,031 4/30/2004 $10,088 $10,534 $11,012 $10,101 $10,038 5/31/2004 $10,184 $10,679 $11,059 $10,060 $10,045 6/30/2004 $10,327 $10,886 $11,306 $10,117 $10,050 7/31/2004 $10,110 $10,526 $10,941 $10,217 $10,059 8/31/2004 $10,188 $10,568 $10,991 $10,412 $10,069 9/30/2004 $10,393 $10,683 $11,280 $10,440 $10,080 10/31/2004 $10,550 $10,846 $11,666 $10,528 $10,092 11/30/2004 $10,890 $11,285 $12,466 $10,444 $10,102 12/31/2004 $11,098 $11,668 $13,013 $10,540 $10,122 1/31/2005 $10,896 $11,384 $12,775 $10,606 $10,136 2/28/2005 $11,115 $11,624 $13,330 $10,544 $10,151 3/31/2005 $10,917 $11,418 $13,001 $10,489 $10,175 4/30/2005 $10,742 $11,201 $12,710 $10,631 $10,196 5/31/2005 $10,944 $11,558 $12,729 $10,746 $10,220 6/30/2005 $11,079 $11,574 $12,903 $10,805 $10,243 7/31/2005 $11,317 $12,004 $13,299 $10,707 $10,265 8/31/2005 $11,352 $11,895 $13,639 $10,844 $10,293 9/30/2005 $11,454 $11,991 $14,250 $10,732 $10,323 10/31/2005 $11,225 $11,791 $13,834 $10,647 $10,347 11/30/2005 $11,516 $12,237 $14,177 $10,694 $10,381 12/31/2005 $11,672 $12,241 $14,837 $10,796 $10,414 1/31/2006 $12,118 $12,565 $15,749 $10,797 $10,443 2/28/2006 $12,100 $12,599 $15,717 $10,833 $10,477 3/31/2006 $12,274 $12,756 $16,243 $10,726 $10,518 4/30/2006 $12,408 $12,927 $17,030 $10,707 $10,555 5/31/2006 $12,060 $12,555 $16,389 $10,695 $10,597 6/30/2006 $12,075 $12,572 $16,395 $10,718 $10,637 7/31/2006 $12,021 $12,650 $16,560 $10,863 $10,680 8/31/2006 $12,209 $12,950 $17,019 $11,029 $10,727 9/30/2006 $12,252 $13,284 $17,049 $11,126 $10,774 10/31/2006 $12,559 $13,716 $17,714 $11,200 $10,816 11/30/2006 $12,856 $13,977 $18,248 $11,330 $10,862 12/31/2006 $12,622 $14,173 $18,822 $11,264 $10,909
20 | Annual Report Performance Summary (CONTINUED) CLASS C (1/1/97-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Moderate MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 -------------------------------------------------------------------------------------------------------------- 1/1/1997 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1997 $10,260 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $10,250 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $10,101 $10,269 $ 9,850 $9,944 $10,126 4/30/1997 $10,181 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,581 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,814 $12,060 $11,136 $10,309 $10,261 7/31/1997 $11,184 $13,019 $11,319 $10,587 $10,305 8/31/1997 $11,014 $12,290 $10,476 $10,497 $10,351 9/30/1997 $11,492 $12,963 $11,065 $10,652 $10,399 10/31/1997 $11,139 $12,531 $10,217 $10,806 $10,438 11/30/1997 $11,169 $13,110 $10,115 $10,856 $10,484 12/31/1997 $11,289 $13,335 $10,206 $10,965 $10,530 1/31/1998 $11,213 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,634 $14,454 $11,362 $11,098 $10,623 3/31/1998 $11,969 $15,194 $11,715 $11,136 $10,675 4/30/1998 $12,012 $15,347 $11,810 $11,194 $10,725 5/31/1998 $11,818 $15,083 $11,756 $11,300 $10,771 6/30/1998 $11,799 $15,695 $11,847 $11,396 $10,815 7/31/1998 $11,518 $15,529 $11,970 $11,420 $10,862 8/31/1998 $10,350 $13,286 $10,490 $11,606 $10,914 9/30/1998 $10,580 $14,137 $10,171 $11,878 $10,970 10/31/1998 $10,797 $15,286 $11,234 $11,815 $11,013 11/30/1998 $11,025 $16,212 $11,812 $11,882 $11,048 12/31/1998 $11,202 $17,146 $12,281 $11,918 $11,094 1/31/1999 $11,292 $17,862 $12,247 $12,003 $11,137 2/28/1999 $11,067 $17,307 $11,958 $11,794 $11,172 3/31/1999 $11,303 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,640 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,517 $18,256 $12,303 $11,792 $11,305 6/30/1999 $11,733 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,620 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,631 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,609 $18,066 $13,356 $11,834 $11,488 10/31/1999 $12,040 $19,209 $13,859 $11,878 $11,533 11/30/1999 $12,867 $19,600 $14,343 $11,877 $11,579 12/31/1999 $14,148 $20,753 $15,633 $11,820 $11,632 1/31/2000 $13,963 $19,711 $14,643 $11,781 $11,677 2/29/2000 $15,499 $19,338 $15,040 $11,924 $11,730 3/31/2000 $15,192 $21,228 $15,626 $12,081 $11,789 4/30/2000 $14,451 $20,590 $14,806 $12,046 $11,849 5/31/2000 $14,033 $20,169 $14,448 $12,041 $11,913 6/30/2000 $14,913 $20,666 $15,016 $12,291 $11,964 7/31/2000 $14,738 $20,343 $14,389 $12,403 $12,019 8/31/2000 $15,553 $21,606 $14,517 $12,583 $12,082 9/30/2000 $15,199 $20,466 $13,813 $12,662 $12,148 10/31/2000 $14,626 $20,379 $13,490 $12,746 $12,209 11/30/2000 $13,431 $18,773 $12,987 $12,954 $12,276 12/31/2000 $13,889 $18,865 $13,451 $13,194 $12,347 1/31/2001 $14,380 $19,534 $13,445 $13,410 $12,428 2/28/2001 $13,601 $17,754 $12,438 $13,527 $12,478 3/31/2001 $13,064 $16,630 $11,614 $13,595 $12,540 4/30/2001 $13,713 $17,922 $12,429 $13,538 $12,592 5/31/2001 $13,773 $18,042 $12,000 $13,620 $12,641 6/30/2001 $13,627 $17,603 $11,514 $13,671 $12,678 7/31/2001 $13,458 $17,429 $11,305 $13,977 $12,720 8/31/2001 $13,145 $16,339 $11,021 $14,137 $12,762 9/30/2001 $12,162 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $12,586 $15,307 $10,161 $14,601 $12,851 11/30/2001 $12,999 $16,481 $10,536 $14,400 $12,878 12/31/2001 $13,203 $16,625 $10,599 $14,308 $12,899 1/31/2002 $13,140 $16,383 $10,037 $14,424 $12,917 2/28/2002 $13,054 $16,067 $10,107 $14,564 $12,934 3/31/2002 $13,446 $16,671 $10,659 $14,322 $12,953 4/30/2002 $13,396 $15,661 $10,736 $14,599 $12,973 5/31/2002 $13,297 $15,546 $10,882 $14,723 $12,993 6/30/2002 $12,793 $14,439 $10,453 $14,851 $13,012 7/31/2002 $12,071 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $12,133 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $11,569 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $11,894 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $12,319 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $12,120 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $12,019 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $11,943 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $11,900 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $12,442 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $13,047 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $13,142 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $13,217 $14,730 $10,059 $15,844 $13,217 8/31/2003 $13,608 $15,016 $10,304 $15,949 $13,227 9/30/2003 $13,654 $14,857 $10,623 $16,372 $13,239 10/31/2003 $14,109 $15,697 $11,286 $16,219 $13,249 11/30/2003 $14,387 $15,835 $11,539 $16,258 $13,260 12/31/2003 $14,728 $16,665 $12,441 $16,423 $13,270 1/31/2004 $14,855 $16,971 $12,617 $16,555 $13,281 2/29/2004 $15,007 $17,207 $12,911 $16,734 $13,290 3/31/2004 $15,026 $16,947 $12,989 $16,860 $13,301 4/30/2004 $14,568 $16,682 $12,706 $16,421 $13,311 5/31/2004 $14,695 $16,910 $12,761 $16,355 $13,320 6/30/2004 $14,909 $17,239 $13,046 $16,448 $13,326 7/31/2004 $14,591 $16,668 $12,624 $16,611 $13,338 8/31/2004 $14,693 $16,735 $12,683 $16,928 $13,352 9/30/2004 $15,001 $16,916 $13,016 $16,974 $13,367 10/31/2004 $15,230 $17,175 $13,461 $17,116 $13,382 11/30/2004 $15,715 $17,870 $14,384 $16,979 $13,395 12/31/2004 $16,014 $18,477 $15,016 $17,136 $13,421 1/31/2005 $15,719 $18,027 $14,741 $17,243 $13,440 2/28/2005 $16,039 $18,406 $15,381 $17,142 $13,461 3/31/2005 $15,762 $18,081 $15,001 $17,053 $13,492 4/30/2005 $15,505 $17,738 $14,665 $17,284 $13,521 5/31/2005 $15,801 $18,302 $14,688 $17,471 $13,552 6/30/2005 $15,986 $18,328 $14,888 $17,567 $13,582 7/31/2005 $16,333 $19,009 $15,346 $17,407 $13,612 8/31/2005 $16,385 $18,836 $15,738 $17,630 $13,649 9/30/2005 $16,534 $18,988 $16,442 $17,448 $13,688 10/31/2005 $16,199 $18,672 $15,963 $17,310 $13,720 11/30/2005 $16,624 $19,377 $16,358 $17,387 $13,765 12/31/2005 $16,854 $19,384 $17,120 $17,552 $13,809 1/31/2006 $17,493 $19,897 $18,172 $17,553 $13,848 2/28/2006 $17,467 $19,951 $18,135 $17,611 $13,892 3/31/2006 $17,722 $20,199 $18,742 $17,438 $13,946 4/30/2006 $17,917 $20,470 $19,651 $17,407 $13,996 5/31/2006 $17,409 $19,882 $18,911 $17,388 $14,051 6/30/2006 $17,433 $19,908 $18,918 $17,425 $14,104 7/31/2006 $17,354 $20,031 $19,108 $17,661 $14,162 8/31/2006 $17,630 $20,507 $19,638 $17,931 $14,224 9/30/2006 $17,680 $21,035 $19,672 $18,089 $14,287 10/31/2006 $18,129 $21,720 $20,439 $18,208 $14,342 11/30/2006 $18,564 $22,133 $21,056 $18,419 $14,403 12/31/2006 $18,661 $22,443 $21,718 $18,313 $14,465
AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS C 12/31/06 ---------------------------------------------- 1-Year +9.72% ---------------------------------------------- 5-Year +7.17% ---------------------------------------------- 10-Year +6.44% ---------------------------------------------- CLASS R (1/1/02-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Moderate MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------------------------ 1/1/2002 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/2002 $ 9,954 $ 9,854 $ 9,469 $10,081 $10,014 2/28/2002 $ 9,889 $ 9,664 $ 9,536 $10,179 $10,027 3/31/2002 $10,182 $10,028 $10,057 $10,009 $10,042 4/30/2002 $10,154 $ 9,420 $10,130 $10,203 $10,057 5/31/2002 $10,089 $ 9,351 $10,267 $10,290 $10,073 6/30/2002 $ 9,703 $ 8,685 $ 9,862 $10,379 $10,088 7/31/2002 $ 9,162 $ 8,008 $ 8,889 $10,504 $10,102 8/31/2002 $ 9,218 $ 8,061 $ 8,871 $10,682 $10,117 9/30/2002 $ 8,787 $ 7,185 $ 7,921 $10,855 $10,133 10/31/2002 $ 9,040 $ 7,817 $ 8,347 $10,805 $10,149 11/30/2002 $ 9,360 $ 8,277 $ 8,727 $10,802 $10,165 12/31/2002 $ 9,212 $ 7,791 $ 8,434 $11,025 $10,175 1/31/2003 $ 9,146 $ 7,587 $ 8,083 $11,035 $10,186 2/28/2003 $ 9,089 $ 7,473 $ 7,898 $11,188 $10,195 3/31/2003 $ 9,066 $ 7,545 $ 7,749 $11,179 $10,207 4/30/2003 $ 9,483 $ 8,167 $ 8,517 $11,271 $10,217 5/31/2003 $ 9,948 $ 8,596 $ 9,041 $11,481 $10,227 6/30/2003 $10,021 $ 8,706 $ 9,265 $11,459 $10,240 7/31/2003 $10,088 $ 8,860 $ 9,491 $11,073 $10,247 8/31/2003 $10,383 $ 9,032 $ 9,721 $11,147 $10,255 9/30/2003 $10,420 $ 8,937 $10,023 $11,442 $10,263 10/31/2003 $10,772 $ 9,442 $10,648 $11,335 $10,272 11/30/2003 $10,991 $ 9,525 $10,887 $11,362 $10,280 12/31/2003 $11,256 $10,024 $11,738 $11,478 $10,288 1/31/2004 $11,361 $10,208 $11,904 $11,570 $10,297 2/29/2004 $11,477 $10,350 $12,181 $11,696 $10,303 3/31/2004 $11,500 $10,194 $12,255 $11,783 $10,312 4/30/2004 $11,153 $10,034 $11,988 $11,477 $10,319 5/31/2004 $11,259 $10,171 $12,040 $11,431 $10,326 6/30/2004 $11,424 $10,369 $12,308 $11,495 $10,331 7/31/2004 $11,193 $10,026 $11,911 $11,609 $10,341 8/31/2004 $11,270 $10,066 $11,966 $11,831 $10,351 9/30/2004 $11,507 $10,175 $12,280 $11,863 $10,363 10/31/2004 $11,690 $10,331 $12,700 $11,962 $10,375 11/30/2004 $12,067 $10,749 $13,571 $11,867 $10,385 12/31/2004 $12,303 $11,114 $14,167 $11,976 $10,405 1/31/2005 $12,079 $10,843 $13,908 $12,051 $10,420 2/28/2005 $12,332 $11,071 $14,512 $11,980 $10,436 3/31/2005 $12,122 $10,876 $14,153 $11,919 $10,460 4/30/2005 $11,927 $10,669 $13,837 $12,080 $10,482 5/31/2005 $12,161 $11,009 $13,858 $12,211 $10,506 6/30/2005 $12,317 $11,024 $14,047 $12,277 $10,530 7/31/2005 $12,581 $11,434 $14,479 $12,165 $10,553 8/31/2005 $12,630 $11,330 $14,849 $12,321 $10,582 9/30/2005 $12,748 $11,422 $15,513 $12,194 $10,612 10/31/2005 $12,504 $11,231 $15,061 $12,098 $10,636 11/30/2005 $12,836 $11,655 $15,433 $12,151 $10,672 12/31/2005 $13,007 $11,660 $16,153 $12,267 $10,705 1/31/2006 $13,513 $11,968 $17,145 $12,268 $10,736 2/28/2006 $13,503 $12,001 $17,110 $12,308 $10,770 3/31/2006 $13,700 $12,150 $17,683 $12,188 $10,812 4/30/2006 $13,849 $12,313 $18,540 $12,165 $10,851 5/31/2006 $13,472 $11,959 $17,843 $12,152 $10,893 6/30/2006 $13,496 $11,975 $17,849 $12,178 $10,934 7/31/2006 $13,436 $12,049 $18,028 $12,343 $10,979 8/31/2006 $13,657 $12,335 $18,528 $12,532 $11,028 9/30/2006 $13,702 $12,653 $18,561 $12,642 $11,076 10/31/2006 $14,053 $13,065 $19,284 $12,726 $11,119 11/30/2006 $14,396 $13,313 $19,866 $12,873 $11,166 12/31/2006 $14,473 $13,500 $20,491 $12,798 $11,215
AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS R 12/31/06 ---------------------------------------------- 1-Year +11.27% ---------------------------------------------- 3-Year +8.74% ---------------------------------------------- Since Inception (1/1/02) +7.68% ---------------------------------------------- Annual Report | 21 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- ADVISOR CLASS 5 12/31/06 ---------------------------------------------- 1-Year +11.87% ---------------------------------------------- 5-Year +8.03% ---------------------------------------------- 10-Year +7.34% ---------------------------------------------- ADVISOR CLASS (1/1/97-12/31/06) 5 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Moderate MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------------------------ 1/1/1997 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1997 $10,260 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $10,260 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $10,174 $10,269 $ 9,850 $ 9,944 $10,126 4/30/1997 $10,264 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,675 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,914 $12,060 $11,136 $10,309 $10,261 7/31/1997 $11,305 $13,019 $11,319 $10,587 $10,305 8/31/1997 $11,134 $12,290 $10,476 $10,497 $10,351 9/30/1997 $11,634 $12,963 $11,065 $10,652 $10,399 10/31/1997 $11,280 $12,531 $10,217 $10,806 $10,438 11/30/1997 $11,311 $13,110 $10,115 $10,856 $10,484 12/31/1997 $11,428 $13,335 $10,206 $10,965 $10,530 1/31/1998 $11,374 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,797 $14,454 $11,362 $11,098 $10,623 3/31/1998 $12,150 $15,194 $11,715 $11,136 $10,675 4/30/1998 $12,215 $15,347 $11,810 $11,194 $10,725 5/31/1998 $12,009 $15,083 $11,756 $11,300 $10,771 6/30/1998 $12,008 $15,695 $11,847 $11,396 $10,815 7/31/1998 $11,725 $15,529 $11,970 $11,420 $10,862 8/31/1998 $10,549 $13,286 $10,490 $11,606 $10,914 9/30/1998 $10,784 $14,137 $10,171 $11,878 $10,970 10/31/1998 $11,014 $15,286 $11,234 $11,815 $11,013 11/30/1998 $11,266 $16,212 $11,812 $11,882 $11,048 12/31/1998 $11,446 $17,146 $12,281 $11,918 $11,094 1/31/1999 $11,548 $17,862 $12,247 $12,003 $11,137 2/28/1999 $11,321 $17,307 $11,958 $11,794 $11,172 3/31/1999 $11,574 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,927 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,813 $18,256 $12,303 $11,792 $11,305 6/30/1999 $12,044 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,929 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,952 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,930 $18,066 $13,356 $11,834 $11,488 10/31/1999 $12,379 $19,209 $13,859 $11,878 $11,533 11/30/1999 $13,243 $19,600 $14,343 $11,877 $11,579 12/31/1999 $14,564 $20,753 $15,633 $11,820 $11,632 1/31/2000 $14,388 $19,711 $14,643 $11,781 $11,677 2/29/2000 $15,987 $19,338 $15,040 $11,924 $11,730 3/31/2000 $15,668 $21,228 $15,626 $12,081 $11,789 4/30/2000 $14,912 $20,590 $14,806 $12,046 $11,849 5/31/2000 $14,499 $20,169 $14,448 $12,041 $11,913 6/30/2000 $15,399 $20,666 $15,016 $12,291 $11,964 7/31/2000 $15,245 $20,343 $14,389 $12,403 $12,019 8/31/2000 $16,088 $21,606 $14,517 $12,583 $12,082 9/30/2000 $15,733 $20,466 $13,813 $12,662 $12,148 10/31/2000 $15,158 $20,379 $13,490 $12,746 $12,209 11/30/2000 $13,925 $18,773 $12,987 $12,954 $12,276 12/31/2000 $14,405 $18,865 $13,451 $13,194 $12,347 1/31/2001 $14,921 $19,534 $13,445 $13,410 $12,428 2/28/2001 $14,123 $17,754 $12,438 $13,527 $12,478 3/31/2001 $13,576 $16,630 $11,614 $13,595 $12,540 4/30/2001 $14,254 $17,922 $12,429 $13,538 $12,592 5/31/2001 $14,328 $18,042 $12,000 $13,620 $12,641 6/30/2001 $14,191 $17,603 $11,514 $13,671 $12,678 7/31/2001 $14,018 $17,429 $11,305 $13,977 $12,720 8/31/2001 $13,695 $16,339 $11,021 $14,137 $12,762 9/30/2001 $12,685 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $13,135 $15,307 $10,161 $14,601 $12,851 11/30/2001 $13,584 $16,481 $10,536 $14,400 $12,878 12/31/2001 $13,802 $16,625 $10,599 $14,308 $12,899 1/31/2002 $13,751 $16,383 $10,037 $14,424 $12,917 2/28/2002 $13,661 $16,067 $10,107 $14,564 $12,934 3/31/2002 $14,069 $16,671 $10,659 $14,322 $12,953 4/30/2002 $14,031 $15,661 $10,736 $14,599 $12,973 5/31/2002 $13,941 $15,546 $10,882 $14,723 $12,993 6/30/2002 $13,420 $14,439 $10,453 $14,851 $13,012 7/31/2002 $12,659 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $12,750 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $12,151 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $12,514 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $12,954 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $12,763 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $12,672 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $12,593 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $12,553 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $13,143 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $13,786 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $13,894 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $13,986 $14,730 $10,059 $15,844 $13,217 8/31/2003 $14,406 $15,016 $10,304 $15,949 $13,227 9/30/2003 $14,452 $14,857 $10,623 $16,372 $13,239 10/31/2003 $14,953 $15,697 $11,286 $16,219 $13,249 11/30/2003 $15,256 $15,835 $11,539 $16,258 $13,260 12/31/2003 $15,620 $16,665 $12,441 $16,423 $13,270 1/31/2004 $15,767 $16,971 $12,617 $16,555 $13,281 2/29/2004 $15,940 $17,207 $12,911 $16,734 $13,290 3/31/2004 $15,978 $16,947 $12,989 $16,860 $13,301 4/30/2004 $15,485 $16,682 $12,706 $16,421 $13,311 5/31/2004 $15,645 $16,910 $12,761 $16,355 $13,320 6/30/2004 $15,870 $17,239 $13,046 $16,448 $13,326 7/31/2004 $15,550 $16,668 $12,624 $16,611 $13,338 8/31/2004 $15,670 $16,735 $12,683 $16,928 $13,352 9/30/2004 $16,008 $16,916 $13,016 $16,974 $13,367 10/31/2004 $16,263 $17,175 $13,461 $17,116 $13,382 11/30/2004 $16,786 $17,870 $14,384 $16,979 $13,395 12/31/2004 $17,126 $18,477 $15,016 $17,136 $13,421 1/31/2005 $16,816 $18,027 $14,741 $17,243 $13,440 2/28/2005 $17,167 $18,406 $15,381 $17,142 $13,461 3/31/2005 $16,882 $18,081 $15,001 $17,053 $13,492 4/30/2005 $16,611 $17,738 $14,665 $17,284 $13,521 5/31/2005 $16,936 $18,302 $14,688 $17,471 $13,552 6/30/2005 $17,149 $18,328 $14,888 $17,567 $13,582 7/31/2005 $17,529 $19,009 $15,346 $17,407 $13,612 8/31/2005 $17,597 $18,836 $15,738 $17,630 $13,649 9/30/2005 $17,774 $18,988 $16,442 $17,448 $13,688 10/31/2005 $17,433 $18,672 $15,963 $17,310 $13,720 11/30/2005 $17,896 $19,377 $16,358 $17,387 $13,765 12/31/2005 $18,155 $19,384 $17,120 $17,552 $13,809 1/31/2006 $18,873 $19,897 $18,172 $17,553 $13,848 2/28/2006 $18,860 $19,951 $18,135 $17,611 $13,892 3/31/2006 $19,147 $20,199 $18,742 $17,438 $13,946 4/30/2006 $19,369 $20,470 $19,651 $17,407 $13,996 5/31/2006 $18,842 $19,882 $18,911 $17,388 $14,051 6/30/2006 $18,888 $19,908 $18,918 $17,425 $14,104 7/31/2006 $18,818 $20,031 $19,108 $17,661 $14,162 8/31/2006 $19,126 $20,507 $19,638 $17,931 $14,224 9/30/2006 $19,197 $21,035 $19,672 $18,089 $14,287 10/31/2006 $19,704 $21,720 $20,439 $18,208 $14,342 11/30/2006 $20,197 $22,133 $21,056 $18,419 $14,403 12/31/2006 $20,309 $22,443 $21,718 $18,313 $14,465
ENDNOTES THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT INVESTS IN A LIMITED NUMBER OF MUTUAL FUNDS. BECAUSE THE FUND INVESTS IN VARIOUS UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THESE SAME RISKS. THESE RISKS ARE DESCRIBED IN THE FUND'S PROSPECTUS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total return would have been lower. The manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 5. Effective 12/1/05, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 12/1/05, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 11/30/05, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 12/1/05 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +12.63% and +11.61%. 6. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. See page 16 for descriptions of the S&P 500, the MSCI EAFE Index, the LB U.S. Aggregate Index and the P&R 90 Day U.S. T-Bill Index. 22 | Annual Report Your Fund's Expenses FRANKLIN TEMPLETON MODERATE TARGET FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 23 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
--------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,074.50 $2.61 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 --------------------------------------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,070.20 $6.52 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 --------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,070.40 $6.52 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 --------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,072.40 $3.92 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.82 --------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,075.30 $1.31 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,023.95 $1.28 ---------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; B: 1.25%; C: 1.25%; R: 0.75%; and Advisor: 0.25%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 24 | Annual Report Franklin Templeton Growth Target Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Growth Target Fund seeks the highest level of long-term total return consistent with a higher level of risk. 1 -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton Growth Target Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ......................... 55.0% Foreign Equity .......................... 25.0% Domestic Fixed Income ................... 10.1% Foreign Fixed Income .................... 4.6% Short-Term Investments & Other Net Assets 5.3% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- This annual report for Franklin Templeton Growth Target Fund covers the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton Growth Target Fund - Class A posted a +13.90% cumulative total return for the 12 months under review. The Fund underperformed its hybrid benchmark, which comprised a weighted combination of the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Lehman Brothers (LB) U.S. Aggregate Index for fixed income, and the P&R 90 Day U.S. T-Bill Index for short-term investments and other net assets. For the reporting 1. The risk/reward potential is based on the Fund's goal and level of risk. It is not indicative of the Fund's actual or implied performance or portfolio composition, which may change on a continuous basis. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI. THE SOI BEGINS ON PAGE 52. Annual Report | 25 TOP 10 FUND HOLDINGS Franklin Templeton Growth Target Fund 12/31/06 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II 15.8% - Advisor Class -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund 14.9% - Advisor Class -------------------------------------------------------------------------------- Mutual Shares Fund 12.7% - Class Z -------------------------------------------------------------------------------- Mutual European Fund 12.4% - Class Z -------------------------------------------------------------------------------- Templeton Foreign Fund 4.9% - Advisor Class -------------------------------------------------------------------------------- Templeton Global Bond Fund 4.6% - Advisor Class -------------------------------------------------------------------------------- Franklin Aggressive Growth Fund 4.3% - Advisor Class -------------------------------------------------------------------------------- Franklin Gold and Precious Metals Fund 4.1% - Advisor Class -------------------------------------------------------------------------------- Franklin U.S. Government Securities 4.0% Fund - Advisor Class -------------------------------------------------------------------------------- Franklin Real Estate Securities Fund 3.9% - Advisor Class -------------------------------------------------------------------------------- period, the hybrid benchmark returned +16.02%. 2 You can find the Fund's long-term performance data in the Performance Summary beginning on page 28. INVESTMENT STRATEGY Whenever possible, we attempt to hold the same underlying Franklin Templeton funds in each Target Fund's portfolio. We generally diversify the Target Funds' broad equity allocations across investment styles, market capitalization sizes and countries of origin. Maintaining similarity of the underlying Franklin Templeton fund investments across the Allocator Series is intended to increase the consistency of the Target Funds' results relative to one another. For your reference, Franklin Templeton Growth Target Fund seeks to maintain the following asset class allocations: 80% equity funds, 15% fixed income funds, and 5% short-term investments and other net assets. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to maintaining a static allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. At period-end, Franklin Templeton Growth Target Fund's domestic equity exposure was 68.7% of its total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2006, we held shares in large-, mid-and small-capitalization equity funds, representing both growth and value styles. Franklin Small Cap Growth Fund II - Advisor Class, representing 15.8% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 68.5% of the Fund's total 2. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond markets, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The benchmark index's weightings are as follows: S&P 500 56%, MSCI EAFE 24%, LB U.S. Aggregate 15% and P&R 90 Day U.S. T-Bill 5%. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 26 | Annual Report income weighting, with the balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 4.6% of total net assets. Our largest domestic growth fund holding, Franklin Small Cap Growth Fund II - Advisor Class, underperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, outperformed the S&P 500. Our largest foreign equity fund holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index. Among other holdings, Franklin Flex Cap Growth Fund - Advisor Class under-performed the S&P 500, and Templeton Foreign Fund - Advisor Class lagged the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class outperformed the LB U.S. Aggregate Index. Thank you for your continued participation in Franklin Templeton Growth Target Fund. We look forward to serving your future investment needs. [PHOTO] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton Growth Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. Annual Report | 27 Performance Summary as of 12/31/06 FRANKLIN TEMPLETON GROWTH TARGET FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: FGTIX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.53 $15.63 $14.10 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.3185 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.1152 -------------------------------------------------------------------------------- TOTAL $0.4337 -------------------------------------------------------------------------------- CLASS B (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.48 $15.45 $13.97 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.2357 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.1152 -------------------------------------------------------------------------------- TOTAL $0.3509 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FTGTX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.47 $15.44 $13.97 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.2385 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.1152 -------------------------------------------------------------------------------- TOTAL $0.3537 -------------------------------------------------------------------------------- CLASS R (SYMBOL: FGTRX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.50 $15.52 $14.02 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.2919 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.1152 -------------------------------------------------------------------------------- TOTAL $0.4071 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.54 $15.64 $14.10 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.3460 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.1152 -------------------------------------------------------------------------------- TOTAL $0.4612 -------------------------------------------------------------------------------- 28 | Annual Report Performance Summary (CONTINUED) PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. -------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return 2 +13.90% +52.68% +104.74% -------------------------------------------------------------------------------- Average Annual Total Return 3 +7.36% +7.54% +6.79% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,736 $14,386 $19,297 -------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (12/1/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +13.06% +34.40% +36.76% -------------------------------------------------------------------------------- Average Annual Total Return 3 +9.06% +9.53% +9.90% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,906 $13,140 $13,376 -------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return 2 +13.08% +47.07% +90.38% -------------------------------------------------------------------------------- Average Annual Total Return 3 +12.08% +8.02% +6.65% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,208 $14,707 $19,038 -------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) -------------------------------------------------------------------------------- Cumulative Total Return 2 +13.65% +36.43% +50.57% -------------------------------------------------------------------------------- Average Annual Total Return 3 +13.65% +10.91% +8.54% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,365 $13,643 $15,057 -------------------------------------------------------------------------------- ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------- Cumulative Total Return 2 +14.26% +53.17% +105.40% -------------------------------------------------------------------------------- Average Annual Total Return 3 +14.26% +8.90% +7.46% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,426 $15,317 $20,540 -------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 29 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN --------------------------------------------- CLASS A 12/31/06 --------------------------------------------- 1-Year +7.36% --------------------------------------------- 5-Year +7.54% --------------------------------------------- 10-Year +6.79% --------------------------------------------- CLASS A (1/1/97-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 -------------------------------------------------------------------------------------------------------------- 1/1/1997 $ 9,425 $10,000 $10,000 $10,000 $10,000 1/31/1997 $ 9,774 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $ 9,708 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $ 9,510 $10,269 $ 9,850 $ 9,944 $10,126 4/30/1997 $ 9,585 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,047 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,311 $12,060 $11,136 $10,309 $10,261 7/31/1997 $10,679 $13,019 $11,319 $10,587 $10,305 8/31/1997 $10,490 $12,290 $10,476 $10,497 $10,351 9/30/1997 $11,037 $12,963 $11,065 $10,652 $10,399 10/31/1997 $10,564 $12,531 $10,217 $10,806 $10,438 11/30/1997 $10,573 $13,110 $10,115 $10,856 $10,484 12/31/1997 $10,655 $13,335 $10,206 $10,965 $10,530 1/31/1998 $10,616 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,107 $14,454 $11,362 $11,098 $10,623 3/31/1998 $11,490 $15,194 $11,715 $11,136 $10,675 4/30/1998 $11,559 $15,347 $11,810 $11,194 $10,725 5/31/1998 $11,294 $15,083 $11,756 $11,300 $10,771 6/30/1998 $11,264 $15,695 $11,847 $11,396 $10,815 7/31/1998 $10,960 $15,529 $11,970 $11,420 $10,862 8/31/1998 $ 9,614 $13,286 $10,490 $11,606 $10,914 9/30/1998 $ 9,848 $14,137 $10,171 $11,878 $10,970 10/31/1998 $10,134 $15,286 $11,234 $11,815 $11,013 11/30/1998 $10,420 $16,212 $11,812 $11,882 $11,048 12/31/1998 $10,643 $17,146 $12,281 $11,918 $11,094 1/31/1999 $10,809 $17,862 $12,247 $12,003 $11,137 2/28/1999 $10,581 $17,307 $11,958 $11,794 $11,172 3/31/1999 $10,892 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,326 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,192 $18,256 $12,303 $11,792 $11,305 6/30/1999 $11,523 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,388 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,450 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,444 $18,066 $13,356 $11,834 $11,488 10/31/1999 $12,049 $19,209 $13,859 $11,878 $11,533 11/30/1999 $13,133 $19,600 $14,343 $11,877 $11,579 12/31/1999 $15,025 $20,753 $15,633 $11,820 $11,632 1/31/2000 $14,776 $19,711 $14,643 $11,781 $11,677 2/29/2000 $17,097 $19,338 $15,040 $11,924 $11,730 3/31/2000 $16,606 $21,228 $15,626 $12,081 $11,789 4/30/2000 $15,488 $20,590 $14,806 $12,046 $11,849 5/31/2000 $14,869 $20,169 $14,448 $12,041 $11,913 6/30/2000 $16,093 $20,666 $15,016 $12,291 $11,964 7/31/2000 $15,778 $20,343 $14,389 $12,403 $12,019 8/31/2000 $17,018 $21,606 $14,517 $12,583 $12,082 9/30/2000 $16,472 $20,466 $13,813 $12,662 $12,148 10/31/2000 $15,607 $20,379 $13,490 $12,746 $12,209 11/30/2000 $13,725 $18,773 $12,987 $12,954 $12,276 12/31/2000 $14,254 $18,865 $13,451 $13,194 $12,347 1/31/2001 $14,905 $19,534 $13,445 $13,410 $12,428 2/28/2001 $13,558 $17,754 $12,438 $13,527 $12,478 3/31/2001 $12,750 $16,630 $11,614 $13,595 $12,540 4/30/2001 $13,637 $17,922 $12,429 $13,538 $12,592 5/31/2001 $13,681 $18,042 $12,000 $13,620 $12,641 6/30/2001 $13,432 $17,603 $11,514 $13,671 $12,678 7/31/2001 $13,105 $17,429 $11,305 $13,977 $12,720 8/31/2001 $12,576 $16,339 $11,021 $14,137 $12,762 9/30/2001 $11,214 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $11,756 $15,307 $10,161 $14,601 $12,851 11/30/2001 $12,343 $16,481 $10,536 $14,400 $12,878 12/31/2001 $12,639 $16,625 $10,599 $14,308 $12,899 1/31/2002 $12,523 $16,383 $10,037 $14,424 $12,917 2/28/2002 $12,350 $16,067 $10,107 $14,564 $12,934 3/31/2002 $12,928 $16,671 $10,659 $14,322 $12,953 4/30/2002 $12,743 $15,661 $10,736 $14,599 $12,973 5/31/2002 $12,604 $15,546 $10,882 $14,723 $12,993 6/30/2002 $11,933 $14,439 $10,453 $14,851 $13,012 7/31/2002 $10,951 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $10,985 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $10,199 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $10,627 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $11,147 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $10,787 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $10,635 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $10,495 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $10,460 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $11,126 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $11,839 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $11,968 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $12,225 $14,730 $10,059 $15,844 $13,217 8/31/2003 $12,727 $15,016 $10,304 $15,949 $13,227 9/30/2003 $12,657 $14,857 $10,623 $16,372 $13,239 10/31/2003 $13,323 $15,697 $11,286 $16,219 $13,249 11/30/2003 $13,686 $15,835 $11,539 $16,258 $13,260 12/31/2003 $14,036 $16,665 $12,441 $16,423 $13,270 1/31/2004 $14,212 $16,971 $12,617 $16,555 $13,281 2/29/2004 $14,389 $17,207 $12,911 $16,734 $13,290 3/31/2004 $14,413 $16,947 $12,989 $16,860 $13,301 4/30/2004 $13,906 $16,682 $12,706 $16,421 $13,311 5/31/2004 $14,095 $16,910 $12,761 $16,355 $13,320 6/30/2004 $14,389 $17,239 $13,046 $16,448 $13,326 7/31/2004 $13,941 $16,668 $12,624 $16,611 $13,338 8/31/2004 $13,988 $16,735 $12,683 $16,928 $13,352 9/30/2004 $14,366 $16,916 $13,016 $16,974 $13,367 10/31/2004 $14,625 $17,175 $13,461 $17,116 $13,382 11/30/2004 $15,249 $17,870 $14,384 $16,979 $13,395 12/31/2004 $15,619 $18,477 $15,016 $17,136 $13,421 1/31/2005 $15,228 $18,027 $14,741 $17,243 $13,440 2/28/2005 $15,667 $18,406 $15,381 $17,142 $13,461 3/31/2005 $15,335 $18,081 $15,001 $17,053 $13,492 4/30/2005 $14,967 $17,738 $14,665 $17,284 $13,521 5/31/2005 $15,383 $18,302 $14,688 $17,471 $13,552 6/30/2005 $15,656 $18,328 $14,888 $17,567 $13,582 7/31/2005 $16,167 $19,009 $15,346 $17,407 $13,612 8/31/2005 $16,202 $18,836 $15,738 $17,630 $13,649 9/30/2005 $16,496 $18,988 $16,442 $17,448 $13,688 10/31/2005 $16,068 $18,672 $15,963 $17,310 $13,720 11/30/2005 $16,662 $19,377 $16,358 $17,387 $13,765 12/31/2005 $16,942 $19,384 $17,120 $17,552 $13,809 1/31/2006 $17,806 $19,897 $18,172 $17,553 $13,848 2/28/2006 $17,770 $19,951 $18,135 $17,611 $13,892 3/31/2006 $18,203 $20,199 $18,742 $17,438 $13,946 4/30/2006 $18,419 $20,470 $19,651 $17,407 $13,996 5/31/2006 $17,697 $19,882 $18,911 $17,388 $14,051 6/30/2006 $17,769 $19,908 $18,918 $17,425 $14,104 7/31/2006 $17,576 $20,031 $19,108 $17,661 $14,162 8/31/2006 $17,926 $20,507 $19,638 $17,931 $14,224 9/30/2006 $17,984 $21,035 $19,672 $18,089 $14,287 10/31/2006 $18,588 $21,720 $20,439 $18,208 $14,342 11/30/2006 $19,144 $22,133 $21,056 $18,419 $14,403 12/31/2006 $19,297 $22,443 $21,718 $18,313 $14,465
AVERAGE ANNUAL TOTAL RETURN --------------------------------------------- CLASS B 12/31/06 --------------------------------------------- 1-Year +9.06% --------------------------------------------- 3-Year +9.53% --------------------------------------------- Since Inception (12/1/03) +9.90% --------------------------------------------- CLASS B (12/1/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 --------------------------------------------------------------------------------------------------------------- 12/1/2003 $10,000 $10,000 $10,000 $10,000 $10,000 12/31/2003 $10,175 $10,524 $10,782 $10,102 $10,008 1/31/2004 $10,295 $10,717 $10,935 $10,183 $10,016 2/29/2004 $10,415 $10,866 $11,189 $10,293 $10,023 3/31/2004 $10,424 $10,702 $11,257 $10,370 $10,031 4/30/2004 $10,047 $10,534 $11,012 $10,101 $10,038 5/31/2004 $10,184 $10,679 $11,059 $10,060 $10,045 6/30/2004 $10,389 $10,886 $11,306 $10,117 $10,050 7/31/2004 $10,056 $10,526 $10,941 $10,217 $10,059 8/31/2004 $10,090 $10,568 $10,991 $10,412 $10,069 9/30/2004 $10,355 $10,683 $11,280 $10,440 $10,080 10/31/2004 $10,535 $10,846 $11,666 $10,528 $10,092 11/30/2004 $10,971 $11,285 $12,466 $10,444 $10,102 12/31/2004 $11,238 $11,668 $13,013 $10,540 $10,122 1/31/2005 $10,946 $11,384 $12,775 $10,606 $10,136 2/28/2005 $11,255 $11,624 $13,330 $10,544 $10,151 3/31/2005 $11,012 $11,418 $13,001 $10,489 $10,175 4/30/2005 $10,737 $11,201 $12,710 $10,631 $10,196 5/31/2005 $11,029 $11,558 $12,729 $10,746 $10,220 6/30/2005 $11,218 $11,574 $12,903 $10,805 $10,243 7/31/2005 $11,578 $12,004 $13,299 $10,707 $10,265 8/31/2005 $11,596 $11,895 $13,639 $10,844 $10,293 9/30/2005 $11,793 $11,991 $14,250 $10,732 $10,323 10/31/2005 $11,484 $11,791 $13,834 $10,647 $10,347 11/30/2005 $11,913 $12,237 $14,177 $10,694 $10,381 12/31/2005 $12,096 $12,241 $14,837 $10,796 $10,414 1/31/2006 $12,711 $12,565 $15,749 $10,797 $10,443 2/28/2006 $12,676 $12,599 $15,717 $10,833 $10,477 3/31/2006 $12,973 $12,756 $16,243 $10,726 $10,518 4/30/2006 $13,129 $12,927 $17,030 $10,707 $10,555 5/31/2006 $12,608 $12,555 $16,389 $10,695 $10,597 6/30/2006 $12,643 $12,572 $16,395 $10,718 $10,637 7/31/2006 $12,495 $12,650 $16,560 $10,863 $10,680 8/31/2006 $12,738 $12,950 $17,019 $11,029 $10,727 9/30/2006 $12,765 $13,284 $17,049 $11,126 $10,774 10/31/2006 $13,191 $13,716 $17,714 $11,200 $10,816 11/30/2006 $13,574 $13,977 $18,248 $11,330 $10,862 12/31/2006 $13,376 $14,173 $18,822 $11,264 $10,909
30 | Annual Report Performance Summary (CONTINUED) CLASS C (1/1/97-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ----------------------------------------------------------------------------------------------------------------- 1/1/1997 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1997 $10,360 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $10,290 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $10,090 $10,269 $ 9,850 $ 9,944 $10,126 4/30/1997 $10,170 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,650 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,910 $12,060 $11,136 $10,309 $10,261 7/31/1997 $11,300 $13,019 $11,319 $10,587 $10,305 8/31/1997 $11,090 $12,290 $10,476 $10,497 $10,351 9/30/1997 $11,664 $12,963 $11,065 $10,652 $10,399 10/31/1997 $11,163 $12,531 $10,217 $10,806 $10,438 11/30/1997 $11,173 $13,110 $10,115 $10,856 $10,484 12/31/1997 $11,237 $13,335 $10,206 $10,965 $10,530 1/31/1998 $11,196 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,705 $14,454 $11,362 $11,098 $10,623 3/31/1998 $12,099 $15,194 $11,715 $11,136 $10,675 4/30/1998 $12,162 $15,347 $11,810 $11,194 $10,725 5/31/1998 $11,871 $15,083 $11,756 $11,300 $10,771 6/30/1998 $11,840 $15,695 $11,847 $11,396 $10,815 7/31/1998 $11,507 $15,529 $11,970 $11,420 $10,862 8/31/1998 $10,085 $13,286 $10,490 $11,606 $10,914 9/30/1998 $10,338 $14,137 $10,171 $11,878 $10,970 10/31/1998 $10,629 $15,286 $11,234 $11,815 $11,013 11/30/1998 $10,920 $16,212 $11,812 $11,882 $11,048 12/31/1998 $11,149 $17,146 $12,281 $11,918 $11,094 1/31/1999 $11,312 $17,862 $12,247 $12,003 $11,137 2/28/1999 $11,073 $17,307 $11,958 $11,794 $11,172 3/31/1999 $11,378 $18,000 $12,460 $11,859 $11,220 4/30/1999 $11,834 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,682 $18,256 $12,303 $11,792 $11,305 6/30/1999 $12,019 $19,268 $12,786 $11,755 $11,347 7/31/1999 $11,867 $18,667 $13,169 $11,705 $11,394 8/31/1999 $11,932 $18,575 $13,220 $11,699 $11,438 9/30/1999 $11,917 $18,066 $13,356 $11,834 $11,488 10/31/1999 $12,538 $19,209 $13,859 $11,878 $11,533 11/30/1999 $13,660 $19,600 $14,343 $11,877 $11,579 12/31/1999 $15,616 $20,753 $15,633 $11,820 $11,632 1/31/2000 $15,356 $19,711 $14,643 $11,781 $11,677 2/29/2000 $17,755 $19,338 $15,040 $11,924 $11,730 3/31/2000 $17,225 $21,228 $15,626 $12,081 $11,789 4/30/2000 $16,060 $20,590 $14,806 $12,046 $11,849 5/31/2000 $15,403 $20,169 $14,448 $12,041 $11,913 6/30/2000 $16,672 $20,666 $15,016 $12,291 $11,964 7/31/2000 $16,333 $20,343 $14,389 $12,403 $12,019 8/31/2000 $17,612 $21,606 $14,517 $12,583 $12,082 9/30/2000 $17,037 $20,466 $13,813 $12,662 $12,148 10/31/2000 $16,128 $20,379 $13,490 $12,746 $12,209 11/30/2000 $14,173 $18,773 $12,987 $12,954 $12,276 12/31/2000 $14,706 $18,865 $13,451 $13,194 $12,347 1/31/2001 $15,380 $19,534 $13,445 $13,410 $12,428 2/28/2001 $13,974 $17,754 $12,438 $13,527 $12,478 3/31/2001 $13,125 $16,630 $11,614 $13,595 $12,540 4/30/2001 $14,044 $17,922 $12,429 $13,538 $12,592 5/31/2001 $14,078 $18,042 $12,000 $13,620 $12,641 6/30/2001 $13,812 $17,603 $11,514 $13,671 $12,678 7/31/2001 $13,463 $17,429 $11,305 $13,977 $12,720 8/31/2001 $12,917 $16,339 $11,021 $14,137 $12,762 9/30/2001 $11,519 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $12,055 $15,307 $10,161 $14,601 $12,851 11/30/2001 $12,648 $16,481 $10,536 $14,400 $12,878 12/31/2001 $12,945 $16,625 $10,599 $14,308 $12,899 1/31/2002 $12,815 $16,383 $10,037 $14,424 $12,917 2/28/2002 $12,636 $16,067 $10,107 $14,564 $12,934 3/31/2002 $13,219 $16,671 $10,659 $14,322 $12,953 4/30/2002 $13,029 $15,661 $10,736 $14,599 $12,973 5/31/2002 $12,874 $15,546 $10,882 $14,723 $12,993 6/30/2002 $12,185 $14,439 $10,453 $14,851 $13,012 7/31/2002 $11,174 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $11,198 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $10,390 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $10,817 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $11,341 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $10,980 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $10,813 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $10,670 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $10,610 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $11,278 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $11,993 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $12,124 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $12,375 $14,730 $10,059 $15,844 $13,217 8/31/2003 $12,875 $15,016 $10,304 $15,949 $13,227 9/30/2003 $12,804 $14,857 $10,623 $16,372 $13,239 10/31/2003 $13,459 $15,697 $11,286 $16,219 $13,249 11/30/2003 $13,817 $15,835 $11,539 $16,258 $13,260 12/31/2003 $14,161 $16,665 $12,441 $16,423 $13,270 1/31/2004 $14,329 $16,971 $12,617 $16,555 $13,281 2/29/2004 $14,508 $17,207 $12,911 $16,734 $13,290 3/31/2004 $14,508 $16,947 $12,989 $16,860 $13,301 4/30/2004 $13,994 $16,682 $12,706 $16,421 $13,311 5/31/2004 $14,185 $16,910 $12,761 $16,355 $13,320 6/30/2004 $14,460 $17,239 $13,046 $16,448 $13,326 7/31/2004 $14,006 $16,668 $12,624 $16,611 $13,338 8/31/2004 $14,054 $16,735 $12,683 $16,928 $13,352 9/30/2004 $14,412 $16,916 $13,016 $16,974 $13,367 10/31/2004 $14,663 $17,175 $13,461 $17,116 $13,382 11/30/2004 $15,273 $17,870 $14,384 $16,979 $13,395 12/31/2004 $15,643 $18,477 $15,016 $17,136 $13,421 1/31/2005 $15,237 $18,027 $14,741 $17,243 $13,440 2/28/2005 $15,667 $18,406 $15,381 $17,142 $13,461 3/31/2005 $15,327 $18,081 $15,001 $17,053 $13,492 4/30/2005 $14,945 $17,738 $14,665 $17,284 $13,521 5/31/2005 $15,351 $18,302 $14,688 $17,471 $13,552 6/30/2005 $15,614 $18,328 $14,888 $17,567 $13,582 7/31/2005 $16,116 $19,009 $15,346 $17,407 $13,612 8/31/2005 $16,152 $18,836 $15,738 $17,630 $13,649 9/30/2005 $16,415 $18,988 $16,442 $17,448 $13,688 10/31/2005 $15,985 $18,672 $15,963 $17,310 $13,720 11/30/2005 $16,571 $19,377 $16,358 $17,387 $13,765 12/31/2005 $16,836 $19,384 $17,120 $17,552 $13,809 1/31/2006 $17,680 $19,897 $18,172 $17,553 $13,848 2/28/2006 $17,644 $19,951 $18,135 $17,611 $13,892 3/31/2006 $18,056 $20,199 $18,742 $17,438 $13,946 4/30/2006 $18,262 $20,470 $19,651 $17,407 $13,996 5/31/2006 $17,537 $19,882 $18,911 $17,388 $14,051 6/30/2006 $17,597 $19,908 $18,918 $17,425 $14,104 7/31/2006 $17,392 $20,031 $19,108 $17,661 $14,162 8/31/2006 $17,730 $20,507 $19,638 $17,931 $14,224 9/30/2006 $17,768 $21,035 $19,672 $18,089 $14,287 10/31/2006 $18,361 $21,720 $20,439 $18,208 $14,342 11/30/2006 $18,893 $22,133 $21,056 $18,419 $14,403 12/31/2006 $19,038 $22,443 $21,718 $18,313 $14,465
AVERAGE ANNUAL TOTAL RETURN ----------------------------------------------- CLASS C 12/31/06 ----------------------------------------------- 1-Year +12.08% ----------------------------------------------- 5-Year +8.02% ----------------------------------------------- 10-Year +6.65% ----------------------------------------------- CLASS R (1/1/02-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 ---------------------------------------------------------------------------------------------------------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/2002 $ 9,890 $ 9,854 $ 9,469 $10,081 $10,014 2/28/2002 $ 9,753 $ 9,664 $ 9,536 $10,179 $10,027 3/31/2002 $10,200 $10,028 $10,057 $10,009 $10,042 4/30/2002 $10,064 $ 9,420 $10,130 $10,203 $10,057 5/31/2002 $ 9,945 $ 9,351 $10,267 $10,290 $10,073 6/30/2002 $ 9,425 $ 8,685 $ 9,862 $10,379 $10,088 7/31/2002 $ 8,648 $ 8,008 $ 8,889 $10,504 $10,102 8/31/2002 $ 8,666 $ 8,061 $ 8,871 $10,682 $10,117 9/30/2002 $ 8,036 $ 7,185 $ 7,921 $10,855 $10,133 10/31/2002 $ 8,375 $ 7,817 $ 8,347 $10,805 $10,149 11/30/2002 $ 8,776 $ 8,277 $ 8,727 $10,802 $10,165 12/31/2002 $ 8,501 $ 7,791 $ 8,434 $11,025 $10,175 1/31/2003 $ 8,380 $ 7,587 $ 8,083 $11,035 $10,186 2/28/2003 $ 8,269 $ 7,473 $ 7,898 $11,188 $10,195 3/31/2003 $ 8,232 $ 7,545 $ 7,749 $11,179 $10,207 4/30/2003 $ 8,759 $ 8,167 $ 8,517 $11,271 $10,217 5/31/2003 $ 9,313 $ 8,596 $ 9,041 $11,481 $10,227 6/30/2003 $ 9,415 $ 8,706 $ 9,265 $11,459 $10,240 7/31/2003 $ 9,609 $ 8,860 $ 9,491 $11,073 $10,247 8/31/2003 $10,016 $ 9,032 $ 9,721 $11,147 $10,255 9/30/2003 $ 9,951 $ 8,937 $10,023 $11,442 $10,263 10/31/2003 $10,468 $ 9,442 $10,648 $11,335 $10,272 11/30/2003 $10,754 $ 9,525 $10,887 $11,362 $10,280 12/31/2003 $11,037 $10,024 $11,738 $11,478 $10,288 1/31/2004 $11,167 $10,208 $11,904 $11,570 $10,297 2/29/2004 $11,306 $10,350 $12,181 $11,696 $10,303 3/31/2004 $11,315 $10,194 $12,255 $11,783 $10,312 4/30/2004 $10,915 $10,034 $11,988 $11,477 $10,319 5/31/2004 $11,074 $10,171 $12,040 $11,431 $10,326 6/30/2004 $11,297 $10,369 $12,308 $11,495 $10,331 7/31/2004 $10,943 $10,026 $11,911 $11,609 $10,341 8/31/2004 $10,981 $10,066 $11,966 $11,831 $10,351 9/30/2004 $11,278 $10,175 $12,280 $11,863 $10,363 10/31/2004 $11,474 $10,331 $12,700 $11,962 $10,375 11/30/2004 $11,957 $10,749 $13,571 $11,867 $10,385 12/31/2004 $12,256 $11,114 $14,167 $11,976 $10,405 1/31/2005 $11,938 $10,843 $13,908 $12,051 $10,420 2/28/2005 $12,275 $11,071 $14,512 $11,980 $10,436 3/31/2005 $12,018 $10,876 $14,153 $11,919 $10,460 4/30/2005 $11,719 $10,669 $13,837 $12,080 $10,482 5/31/2005 $12,046 $11,009 $13,858 $12,211 $10,506 6/30/2005 $12,262 $11,024 $14,047 $12,277 $10,530 7/31/2005 $12,655 $11,434 $14,479 $12,165 $10,553 8/31/2005 $12,683 $11,330 $14,849 $12,321 $10,582 9/30/2005 $12,908 $11,422 $15,513 $12,194 $10,612 10/31/2005 $12,571 $11,231 $15,061 $12,098 $10,636 11/30/2005 $13,038 $11,655 $15,433 $12,151 $10,672 12/31/2005 $13,249 $11,660 $16,153 $12,267 $10,705 1/31/2006 $13,920 $11,968 $17,145 $12,268 $10,736 2/28/2006 $13,891 $12,001 $17,110 $12,308 $10,770 3/31/2006 $14,226 $12,150 $17,683 $12,188 $10,812 4/30/2006 $14,396 $12,313 $18,540 $12,165 $10,851 5/31/2006 $13,837 $11,959 $17,843 $12,152 $10,893 6/30/2006 $13,885 $11,975 $17,849 $12,178 $10,934 7/31/2006 $13,723 $12,049 $18,028 $12,343 $10,979 8/31/2006 $13,999 $12,335 $18,528 $12,532 $11,028 9/30/2006 $14,035 $12,653 $18,561 $12,642 $11,076 10/31/2006 $14,511 $13,065 $19,284 $12,726 $11,119 11/30/2006 $14,939 $13,313 $19,866 $12,873 $11,166 12/31/2006 $15,057 $13,500 $20,491 $12,798 $11,215
AVERAGE ANNUAL TOTAL RETURN ----------------------------------------------- CLASS R 12/31/06 ----------------------------------------------- 1-Year +13.65% ----------------------------------------------- 3-Year +10.91% ----------------------------------------------- Since Inception (1/1/02) +8.54% ----------------------------------------------- Annual Report | 31 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------ ADVISOR CLASS 5 12/31/06 ------------------------------------------------ 1-Year +14.26% ------------------------------------------------ 5-Year +8.90% ------------------------------------------------ 10-Year +7.46% ------------------------------------------------ ADVISOR CLASS (1/1/97-12/31/06) 5 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. Date Target Fund S&P 500 6 Index 6 Aggregate Index 6 T-Bill Index 6 -------------------------------------------------------------------------------------------------------- 1/1/1997 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1997 $10,370 $10,624 $ 9,652 $10,031 $10,045 2/28/1997 $10,300 $10,708 $ 9,813 $10,056 $10,083 3/31/1997 $10,090 $10,269 $ 9,850 $ 9,944 $10,126 4/30/1997 $10,170 $10,881 $ 9,905 $10,093 $10,172 5/31/1997 $10,660 $11,543 $10,552 $10,188 $10,223 6/30/1997 $10,940 $12,060 $11,136 $10,309 $10,261 7/31/1997 $11,330 $13,019 $11,319 $10,587 $10,305 8/31/1997 $11,130 $12,290 $10,476 $10,497 $10,351 9/30/1997 $11,710 $12,963 $11,065 $10,652 $10,399 10/31/1997 $11,208 $12,531 $10,217 $10,806 $10,438 11/30/1997 $11,218 $13,110 $10,115 $10,856 $10,484 12/31/1997 $11,305 $13,335 $10,206 $10,965 $10,530 1/31/1998 $11,264 $13,482 $10,675 $11,106 $10,582 2/28/1998 $11,785 $14,454 $11,362 $11,098 $10,623 3/31/1998 $12,191 $15,194 $11,715 $11,136 $10,675 4/30/1998 $12,264 $15,347 $11,810 $11,194 $10,725 5/31/1998 $11,983 $15,083 $11,756 $11,300 $10,771 6/30/1998 $11,951 $15,695 $11,847 $11,396 $10,815 7/31/1998 $11,628 $15,529 $11,970 $11,420 $10,862 8/31/1998 $10,201 $13,286 $10,490 $11,606 $10,914 9/30/1998 $10,449 $14,137 $10,171 $11,878 $10,970 10/31/1998 $10,752 $15,286 $11,234 $11,815 $11,013 11/30/1998 $11,056 $16,212 $11,812 $11,882 $11,048 12/31/1998 $11,293 $17,146 $12,281 $11,918 $11,094 1/31/1999 $11,468 $17,862 $12,247 $12,003 $11,137 2/28/1999 $11,227 $17,307 $11,958 $11,794 $11,172 3/31/1999 $11,556 $18,000 $12,460 $11,859 $11,220 4/30/1999 $12,017 $18,697 $12,968 $11,896 $11,262 5/31/1999 $11,874 $18,256 $12,303 $11,792 $11,305 6/30/1999 $12,226 $19,268 $12,786 $11,755 $11,347 7/31/1999 $12,083 $18,667 $13,169 $11,705 $11,394 8/31/1999 $12,149 $18,575 $13,220 $11,699 $11,438 9/30/1999 $12,142 $18,066 $13,356 $11,834 $11,488 10/31/1999 $12,784 $19,209 $13,859 $11,878 $11,533 11/30/1999 $13,934 $19,600 $14,343 $11,877 $11,579 12/31/1999 $15,942 $20,753 $15,633 $11,820 $11,632 1/31/2000 $15,677 $19,711 $14,643 $11,781 $11,677 2/29/2000 $18,140 $19,338 $15,040 $11,924 $11,730 3/31/2000 $17,619 $21,228 $15,626 $12,081 $11,789 4/30/2000 $16,432 $20,590 $14,806 $12,046 $11,849 5/31/2000 $15,776 $20,169 $14,448 $12,041 $11,913 6/30/2000 $17,075 $20,666 $15,016 $12,291 $11,964 7/31/2000 $16,740 $20,343 $14,389 $12,403 $12,019 8/31/2000 $18,056 $21,606 $14,517 $12,583 $12,082 9/30/2000 $17,477 $20,466 $13,813 $12,662 $12,148 10/31/2000 $16,559 $20,379 $13,490 $12,746 $12,209 11/30/2000 $14,562 $18,773 $12,987 $12,954 $12,276 12/31/2000 $15,123 $18,865 $13,451 $13,194 $12,347 1/31/2001 $15,814 $19,534 $13,445 $13,410 $12,428 2/28/2001 $14,385 $17,754 $12,438 $13,527 $12,478 3/31/2001 $13,528 $16,630 $11,614 $13,595 $12,540 4/30/2001 $14,468 $17,922 $12,429 $13,538 $12,592 5/31/2001 $14,516 $18,042 $12,000 $13,620 $12,641 6/30/2001 $14,251 $17,603 $11,514 $13,671 $12,678 7/31/2001 $13,905 $17,429 $11,305 $13,977 $12,720 8/31/2001 $13,343 $16,339 $11,021 $14,137 $12,762 9/30/2001 $11,898 $15,020 $ 9,908 $14,302 $12,818 10/31/2001 $12,473 $15,307 $10,161 $14,601 $12,851 11/30/2001 $13,096 $16,481 $10,536 $14,400 $12,878 12/31/2001 $13,410 $16,625 $10,599 $14,308 $12,899 1/31/2002 $13,287 $16,383 $10,037 $14,424 $12,917 2/28/2002 $13,103 $16,067 $10,107 $14,564 $12,934 3/31/2002 $13,716 $16,671 $10,659 $14,322 $12,953 4/30/2002 $13,520 $15,661 $10,736 $14,599 $12,973 5/31/2002 $13,373 $15,546 $10,882 $14,723 $12,993 6/30/2002 $12,661 $14,439 $10,453 $14,851 $13,012 7/31/2002 $11,619 $13,313 $ 9,422 $15,030 $13,031 8/31/2002 $11,655 $13,401 $ 9,403 $15,284 $13,050 9/30/2002 $10,821 $11,946 $ 8,395 $15,531 $13,071 10/31/2002 $11,275 $12,996 $ 8,847 $15,461 $13,091 11/30/2002 $11,827 $13,760 $ 9,250 $15,456 $13,111 12/31/2002 $11,445 $12,952 $ 8,939 $15,776 $13,125 1/31/2003 $11,284 $12,613 $ 8,567 $15,789 $13,139 2/28/2003 $11,135 $12,424 $ 8,371 $16,008 $13,151 3/31/2003 $11,098 $12,543 $ 8,213 $15,995 $13,165 4/30/2003 $11,805 $13,577 $ 9,027 $16,127 $13,178 5/31/2003 $12,561 $14,292 $ 9,583 $16,428 $13,192 6/30/2003 $12,698 $14,474 $ 9,820 $16,395 $13,208 7/31/2003 $12,970 $14,730 $10,059 $15,844 $13,217 8/31/2003 $13,504 $15,016 $10,304 $15,949 $13,227 9/30/2003 $13,429 $14,857 $10,623 $16,372 $13,239 10/31/2003 $14,136 $15,697 $11,286 $16,219 $13,249 11/30/2003 $14,520 $15,835 $11,539 $16,258 $13,260 12/31/2003 $14,892 $16,665 $12,441 $16,423 $13,270 1/31/2004 $15,079 $16,971 $12,617 $16,555 $13,281 2/29/2004 $15,267 $17,207 $12,911 $16,734 $13,290 3/31/2004 $15,292 $16,947 $12,989 $16,860 $13,301 4/30/2004 $14,754 $16,682 $12,706 $16,421 $13,311 5/31/2004 $14,954 $16,910 $12,761 $16,355 $13,320 6/30/2004 $15,267 $17,239 $13,046 $16,448 $13,326 7/31/2004 $14,792 $16,668 $12,624 $16,611 $13,338 8/31/2004 $14,842 $16,735 $12,683 $16,928 $13,352 9/30/2004 $15,242 $16,916 $13,016 $16,974 $13,367 10/31/2004 $15,517 $17,175 $13,461 $17,116 $13,382 11/30/2004 $16,180 $17,870 $14,384 $16,979 $13,395 12/31/2004 $16,572 $18,477 $15,016 $17,136 $13,421 1/31/2005 $16,157 $18,027 $14,741 $17,243 $13,440 2/28/2005 $16,623 $18,406 $15,381 $17,142 $13,461 3/31/2005 $16,271 $18,081 $15,001 $17,053 $13,492 4/30/2005 $15,880 $17,738 $14,665 $17,284 $13,521 5/31/2005 $16,321 $18,302 $14,688 $17,471 $13,552 6/30/2005 $16,611 $18,328 $14,888 $17,567 $13,582 7/31/2005 $17,153 $19,009 $15,346 $17,407 $13,612 8/31/2005 $17,191 $18,836 $15,738 $17,630 $13,649 9/30/2005 $17,502 $18,988 $16,442 $17,448 $13,688 10/31/2005 $17,048 $18,672 $15,963 $17,310 $13,720 11/30/2005 $17,678 $19,377 $16,358 $17,387 $13,765 12/31/2005 $17,977 $19,384 $17,120 $17,552 $13,809 1/31/2006 $18,895 $19,897 $18,172 $17,553 $13,848 2/28/2006 $18,870 $19,951 $18,135 $17,611 $13,892 3/31/2006 $19,323 $20,199 $18,742 $17,438 $13,946 4/30/2006 $19,566 $20,470 $19,651 $17,407 $13,996 5/31/2006 $18,811 $19,882 $18,911 $17,388 $14,051 6/30/2006 $18,888 $19,908 $18,918 $17,425 $14,104 7/31/2006 $18,671 $20,031 $19,108 $17,661 $14,162 8/31/2006 $19,055 $20,507 $19,638 $17,931 $14,224 9/30/2006 $19,115 $21,035 $19,672 $18,089 $14,287 10/31/2006 $19,770 $21,720 $20,439 $18,208 $14,342 11/30/2006 $20,361 $22,133 $21,056 $18,419 $14,403 12/31/2006 $20,540 $22,443 $21,718 $18,313 $14,465
ENDNOTES THE FUND IS CLASSIFIED AS A NONDIVERSIFIED FUND BECAUSE IT INVESTS IN A LIMITED NUMBER OF MUTUAL FUNDS. BECAUSE THE FUND INVESTS IN VARIOUS UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THESE SAME RISKS. THESE RISKS ARE DESCRIBED IN THE FUND'S PROSPECTUS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total return would have been lower. The manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 5. Effective 12/1/05, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 12/1/05, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 11/30/05, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 12/1/05 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +14.88% and +13.67%. 6. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. See page 26 for descriptions of the S&P 500, the MSCI EAFE Index, the LB U.S. Aggregate Index and the P&R 90 Day U.S. T-Bill Index. 32 | Annual Report Your Fund's Expenses FRANKLIN TEMPLETON GROWTH TARGET FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 33 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
------------------------------------------------------------------------------------------------------------------ BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,086.00 $2.63 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 ------------------------------------------------------------------------------------------------------------------ CLASS B ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,081.70 $6.56 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 ------------------------------------------------------------------------------------------------------------------ CLASS C ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,081.90 $6.56 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 ------------------------------------------------------------------------------------------------------------------ CLASS R ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,084.40 $3.94 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.82 ------------------------------------------------------------------------------------------------------------------ ADVISOR CLASS ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,087.50 $1.32 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,023.95 $1.28 ------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; B: 1.25%; C: 1.25%; R: 0.75%; and Advisor: 0.25%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 34 | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
-------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS A 2006 2005 2004 g 2004 2003 2002 -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.74 $ 12.48 $ 11.66 $ 10.91 $ 10.23 $ 11.30 -------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.41 0.29 0.12 0.23 0.23 0.31 Net realized and unrealized gains (losses) ........ 0.84 0.29 0.84 0.74 0.69 (0.95) -------------------------------------------------------------------------- Total from investment operations ................... 1.25 0.58 0.96 0.97 0.92 (0.64) -------------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.42) (0.32) (0.14) (0.22) (0.24) (0.34) Net realized gains ................................ (0.24) -- -- -- -- (0.09) -------------------------------------------------------------------------- Total distributions ................................ (0.66) (0.32) (0.14) (0.22) (0.24) (0.43) -------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- -------------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.33 $ 12.74 $ 12.48 $ 11.66 $ 10.91 $ 10.23 ========================================================================== Total return d ..................................... 9.92% 4.70% 8.30% 8.89% 8.99% (5.74)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $194,477 $162,079 $139,153 $117,013 $ 64,409 $ 35,991 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.69% 0.73% 0.82% h 0.85% 0.91% 0.96% Expenses net of waiver and payments by affiliates e 0.50% 0.69% 0.82% h 0.85% 0.91% 0.96% Net investment income c ........................... 3.09% 2.31% 2.40% h 2.00% 2.21% 2.86% Portfolio turnover rate ............................ 11.08% 8.16% 2.63% 3.71% 18.03% 5.75%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.68% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 35 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
---------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS B 2006 2005 2004 g 2004 i ---------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $12.71 $12.46 $11.63 $11.67 ---------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.30 0.19 0.09 0.07 Net realized and unrealized gains (losses) ........ 0.84 0.29 0.84 0.04 ---------------------------------------------- Total from investment operations ................... 1.14 0.48 0.93 0.11 ---------------------------------------------- Less distributions from: Net investment income ............................. (0.32) (0.23) (0.10) (0.15) Net realized gains ................................ (0.24) -- -- -- ---------------------------------------------- Total distributions ................................ (0.56) (0.23) (0.10) (0.15) ---------------------------------------------- Redemption fees .................................... -- f -- f -- f --f ---------------------------------------------- Net asset value, end of year ....................... $13.29 $12.71 $12.46 $11.63 ============================================== Total return d ..................................... 9.05% 3.87% 8.02% 0.98% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $6,422 $6,202 $5,223 $3,567 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.44% 1.48% 1.57% h 1.60% h Expenses net of waiver and payments by affiliates e 1.25% 1.44% 1.57% h 1.60% h Net investment income c ........................... 2.34% 1.56% 1.65% h 1.25% h Portfolio turnover rate ............................ 11.08% 8.16% 2.63% 3.71%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.68% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period December 1, 2003 (effective date) to July 31, 2004. 36 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
--------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS C 2006 2005 2004 g 2004 2003 2002 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 12.60 $ 12.36 $ 11.53 $ 10.80 $ 10.14 $ 11.20 --------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c .......................... 0.30 0.19 0.08 0.14 0.15 0.23 Net realized and unrealized gains (losses) ......... 0.85 0.28 0.84 0.73 0.67 (0.94) --------------------------------------------------------------------------- Total from investment operations .................... 1.15 0.47 0.92 0.87 0.82 (0.71) --------------------------------------------------------------------------- Less distributions from: Net investment income .............................. (0.33) (0.23) (0.09) (0.14) (0.16) (0.26) Net realized gains ................................. (0.24) -- -- -- -- (0.09) --------------------------------------------------------------------------- Total distributions ................................. (0.57) (0.23) (0.09) (0.14) (0.16) (0.35) --------------------------------------------------------------------------- Redemption fees ..................................... -- f -- f -- f -- f -- -- --------------------------------------------------------------------------- Net asset value, end of year ........................ $ 13.18 $ 12.60 $ 12.36 $ 11.53 $ 10.80 $ 10.14 =========================================================================== Total return d ...................................... 9.16% 3.83% 8.03% 8.04% 8.20% (6.48)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $ 76,018 $ 63,298 $ 59,803 $ 52,881 $ 32,344 $ 22,436 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.43% 1.47% 1.57% h 1.60% 1.66% 1.70% Expenses net of waiver and payments by affiliates e 1.24% 1.43% 1.57% h 1.60% 1.66% 1.70% Net investment income c ............................ 2.35% 1.57% 1.65% h 1.25% 1.46% 2.15% Portfolio turnover rate ............................. 11.08% 8.16% 2.63% 3.71% 18.03% 5.75%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.68% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 37 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS R 2006 2005 2004 g 2004 2003 2002 i ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.71 $ 12.46 $ 11.63 $ 10.89 $ 10.23 $ 10.89 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.37 0.26 0.11 0.21 0.19 0.12 Net realized and unrealized gains (losses) ........ 0.85 0.28 0.85 0.72 0.69 (0.70) ---------------------------------------------------------------------------- Total from investment operations ................... 1.22 0.54 0.96 0.93 0.88 (0.58) ---------------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.39) (0.29) (0.13) (0.19) (0.22) (0.08) Net realized gains ................................ (0.24) -- -- -- -- -- ---------------------------------------------------------------------------- Total distributions ................................ (0.63) (0.29) (0.13) (0.19) (0.22) (0.08) ---------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- ---------------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.30 $ 12.71 $ 12.46 $ 11.63 $ 10.89 $ 10.23 ============================================================================ Total return d ..................................... 9.73% 4.37% 8.27% 8.56% 8.79% (5.38)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 14,490 $ 14,112 $ 12,199 $ 8,370 $ 5,718 $ 543 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.94% 0.98% 1.07% h 1.10% 1.16% 1.21% h Expenses net of waiver and payments by affiliates e 0.75% 0.94% 1.07% h 1.10% 1.16% 1.21% h Net investment income c ........................... 2.84% 2.06% 2.15% h 1.75% 1.96% 1.93% h Portfolio turnover rate ............................ 11.08% 8.16% 2.63% 3.71% 18.03% 5.75%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.68% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period January 1, 2002 (effective date) to July 31, 2002. 38 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
------------------------------ YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, ADVISOR CLASS 2006 2005 g ------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.72 $ 12.81 ------------------------------ Income from investment operations a: Net investment income b,c ......................... 0.45 0.07 Net realized and unrealized gains (losses) ........ 0.83 0.02 ------------------------------ Total from investment operations ................... 1.28 0.09 ------------------------------ Less distributions from: Net investment income ............................. (0.45) (0.18) Net realized gains ................................ (0.24) -- ------------------------------ Total distributions ................................ (0.69) (0.18) ------------------------------ Redemption fees .................................... -- f -- f ------------------------------ Net asset value, end of year ....................... $ 13.31 $ 12.72 ============================== Total return d ..................................... 10.28% 0.68% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 1,726 $ 753 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.44% 0.48% h Expenses net of waiver and payments by affiliates e 0.25% 0.44% h Net investment income c ........................... 3.34% 2.56% h Portfolio turnover rate ............................ 11.08% 8.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.68% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period December 1, 2005 (effective date) to December 31, 2005. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 39 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
--------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND SHARES VALUE --------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDSa LONG TERM INVESTMENTS 80.7% DOMESTIC EQUITY 28.6% b Franklin Aggressive Growth Fund, Advisor Class ...................... 347,061 $ 6,278,342 Franklin Flex Cap Growth Fund, Advisor Class ........................ 527,558 22,500,368 Franklin Natural Resources Fund, Advisor Class ...................... 143,550 5,009,909 Franklin Real Estate Securities Fund, Advisor Class ................. 238,559 6,333,752 b Franklin Small Cap Growth Fund II, Advisor Class .................... 1,960,965 24,492,448 Mutual Shares Fund, Class Z ......................................... 735,022 19,176,730 ------------- 83,791,549 ------------- DOMESTIC FIXED INCOME 26.8% Franklin Strategic Mortgage Portfolio ............................... 2,304,237 22,120,671 Franklin Total Return Fund, Advisor Class ........................... 2,602,641 25,870,248 Franklin U.S. Government Securities Fund, Advisor Class ............. 4,773,130 30,786,688 ------------- 78,777,607 ------------- FOREIGN EQUITY 12.7% Franklin Gold and Precious Metals Fund, Advisor Class ............... 198,161 6,515,530 Mutual European Fund, Class Z ....................................... 766,534 18,849,071 Templeton China World Fund, Advisor Class ........................... 158,249 5,076,630 Templeton Foreign Fund, Advisor Class ............................... 501,454 6,814,760 ------------- 37,255,991 ------------- FOREIGN FIXED INCOME 12.6% Templeton Global Bond Fund, Advisor Class ........................... 3,348,418 36,899,562 ------------- TOTAL LONG TERM INVESTMENTS (COST $203,358,170) ..................... 236,724,709 ------------- SHORT TERM INVESTMENT (COST $57,083,974) 19.5% MONEY MARKET FUND 19.5% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 57,083,974 57,083,974 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $260,442,144) 100.2% .... 293,808,683 OTHER ASSETS, LESS LIABILITIES (0.2)% ............................... (675,352) ------------- NET ASSETS 100.0% ................................................... $293,133,331 =============
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2006. c The rate shown is the annualized seven-day yield at period end. 40 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON MODERATE TARGET FUND
--------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS A 2006 2005 2004 g 2004 2003 2002 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 13.14 $ 12.69 $ 11.65 $ 10.64 $ 9.83 $ 11.31 --------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.35 0.25 0.12 0.20 0.19 0.26 --------------------------------------------------------------------------- Net realized and unrealized gains (losses) ........ 1.15 0.50 1.05 1.00 0.81 (1.31) --------------------------------------------------------------------------- Total from investment operations ................... 1.50 0.75 1.17 1.20 1.00 (1.05) --------------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.38) (0.30) (0.13) (0.19) (0.19) (0.29) Net realized gains ................................ (0.23) -- -- -- -- (0.14) --------------------------------------------------------------------------- Total distributions ................................ (0.61) (0.30) (0.13) (0.19) (0.19) (0.43) --------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- --------------------------------------------------------------------------- Net asset value, end of year ....................... $ 14.03 $ 13.14 $ 12.69 $ 11.65 $ 10.64 $ 9.83 =========================================================================== Total return d ..................................... 11.57% 5.94% 10.14% 11.18% 10.47% (9.69)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $401,392 $316,754 $281,033 $219,273 $121,617 $ 85,035 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.70% 0.74% 0.81% h 0.89% 0.98% 0.96% Expenses net of waiver and payments by affiliates e 0.50% 0.69% 0.81% h 0.89% 0.98% 0.96% Net investment income c ........................... 2.56% 1.93% 2.32% h 1.75% 1.89% 2.46% Portfolio turnover rate ............................ 9.40% 10.59% 2.78% 4.13% 15.90% 8.88%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 41 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
----------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS B 2006 2005 2004 g 2004 i ----------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $13.10 $12.66 $11.62 $11.62 ----------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.24 0.15 0.09 0.05 Net realized and unrealized gains (losses) ........ 1.15 0.50 1.03 0.09 ----------------------------------------------- Total from investment operations ................... 1.39 0.65 1.12 0.14 ----------------------------------------------- Less distributions from: Net investment income ............................. (0.27) (0.21) (0.08) (0.14) Net realized gains ................................ (0.23) -- -- -- ----------------------------------------------- Total distributions ................................ (0.50) (0.21) (0.08) (0.14) ----------------------------------------------- Redemption fees .................................... -- f -- f -- f --f ----------------------------------------------- Net asset value, end of year ....................... $13.99 $13.10 $12.66 $11.62 =============================================== Total return d ..................................... 10.70% 5.18% 9.77% 1.18% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $11,533 $10,170 $8,700 $5,417 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.45% 1.49% 1.56% h 1.64% h Expenses net of waiver and payments by affiliates e 1.25% 1.44% 1.56% h 1.64% h Net investment income c ........................... 1.81% 1.18% 1.57% h 1.00% h Portfolio turnover rate ............................ 9.40% 10.59% 2.78% 4.13%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period December 1, 2003 (effective date) to July 31, 2004. 42 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS C 2006 2005 2004 g 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.94 $ 12.50 $ 11.47 $ 10.48 $ 9.69 $ 11.16 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.24 0.15 0.08 0.12 0.11 0.19 Net realized and unrealized gains (losses) ........ 1.13 0.50 1.03 0.98 0.80 (1.31) ---------------------------------------------------------------------------- Total from investment operations ................... 1.37 0.65 1.11 1.10 0.91 (1.12) ---------------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.27) (0.21) (0.08) (0.11) (0.12) (0.21) Net realized gains ................................ (0.23) -- -- -- -- (0.14) ---------------------------------------------------------------------------- Total distributions ................................ (0.50) (0.21) (0.08) (0.11) (0.12) (0.35) ---------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- ---------------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.81 $ 12.94 $ 12.50 $ 11.47 $ 10.48 $ 9.69 ============================================================================ Total return d ..................................... 10.72% 5.25% 9.75% 10.39% 9.50% (10.31)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $134,465 $112,294 $105,966 $ 90,988 $ 56,341 $ 39,835 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.45% 1.48% 1.56% h 1.64% 1.73% 1.71% Expenses net of waiver and payments by affiliates e 1.25% 1.43% 1.56% h 1.64% 1.73% 1.71% Net investment income c ........................... 1.81% 1.19% 1.57% h 1.00% 1.14% 1.77% Portfolio turnover rate ............................ 9.40% 10.59% 2.78% 4.13% 15.90% 8.88%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 43 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS R 2006 2005 2004 g 2004 2003 2002 i ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 13.11 $ 12.66 $ 11.62 $ 10.62 $ 9.82 $ 10.79 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.31 0.21 0.11 0.18 0.13 0.09 Net realized and unrealized gains (losses) ........ 1.15 0.51 1.04 0.98 0.85 (0.99) ---------------------------------------------------------------------------- Total from investment operations ................... 1.46 0.72 1.15 1.16 0.98 (0.90) ---------------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.34) (0.27) (0.11) (0.16) (0.18) (0.07) Net realized gains ................................ (0.23) -- -- -- -- -- ---------------------------------------------------------------------------- Total distributions ................................ (0.57) (0.27) (0.11) (0.16) (0.18) (0.07) ---------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- ---------------------------------------------------------------------------- Net asset value, end of year ....................... $ 14.00 $ 13.11 $ 12.66 $ 11.62 $ 10.62 $ 9.82 ============================================================================ Total return d ..................................... 11.27% 5.73% 9.92% 10.95% 10.10% (8.38)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 31,719 $ 30,403 $ 25,162 $ 17,161 $ 10,989 $ 94 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.95% 0.99% 1.06% h 1.14% 1.23% 1.21% h Expenses net of waiver and payments byaffiliates e 0.75% 0.94% 1.06% h 1.14% 1.23% 1.21% h Net investment income c ........................... 2.31% 1.68% 2.07% h 1.50% 1.64% 1.53% h Portfolio turnover rate ............................ 9.40% 10.59% 2.78% 4.13% 15.90% 8.88%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period January 1, 2002 (effective date) to July 31, 2002. 44 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON MODERATE TARGET FUND
------------------------------- YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, ADVISOR CLASS 2006 2005 g ------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 13.15 $ 13.23 ------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.40 0.08 Net realized and unrealized gains (losses) ........ 1.13 0.02 ------------------------------- Total from investment operations ................... 1.53 0.10 ------------------------------- Less distributions from: Net investment income ............................. (0.42) (0.18) Net realized gains ................................ (0.23) -- ------------------------------- Total distributions ................................ (0.65) (0.18) ------------------------------- Redemption fees .................................... -- f --f ------------------------------- Net asset value, end of year ....................... $ 14.03 $ 13.15 =============================== Total return d ..................................... 11.87% 0.68% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 7,071 $ 3,890 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.45% 0.49% h Expenses net of waiver and payments by affiliates e 0.25% 0.44% h Net investment income c ........................... 2.81% 2.18% h Portfolio turnover rate ............................ 9.40% 10.59%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period December 1, 2005 (effective date) to December 31, 2005. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 45 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
------------------------------------------------------------------------------------------------------ FRANKLIN TEMPLETON MODERATE TARGET FUND SHARES VALUE ------------------------------------------------------------------------------------------------------ INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 90.5% DOMESTIC EQUITY 38.8% b Franklin Aggressive Growth Fund, Advisor Class ...................... 1,017,222 $ 18,401,552 Franklin Flex Cap Growth Fund, Advisor Class ........................ 1,438,997 61,373,222 Franklin Natural Resources Fund, Advisor Class ...................... 443,155 15,466,098 Franklin Real Estate Securities Fund, Advisor Class ................. 630,362 16,736,105 b Franklin Small Cap Growth Fund II, Advisor Class .................... 5,199,671 64,943,894 Mutual Shares Fund, Class Z ......................................... 1,947,168 50,801,624 ------------- 227,722,495 ------------- DOMESTIC FIXED INCOME 23.4% Franklin Strategic Mortgage Portfolio ............................... 4,071,631 39,087,653 Franklin Total Return Fund, Advisor Class ........................... 4,354,819 43,286,896 Franklin U.S. Government Securities Fund, Advisor Class ............. 8,442,357 54,453,201 ------------- 136,827,750 ------------- FOREIGN EQUITY 17.2% Franklin Gold and Precious Metals Fund, Advisor Class ............... 478,023 15,717,415 Mutual European Fund, Class Z ....................................... 2,068,989 50,876,442 Templeton China World Fund, Advisor Class ........................... 458,105 14,696,023 Templeton Foreign Fund, Advisor Class ............................... 1,455,131 19,775,228 ------------- 101,065,108 ------------- FOREIGN FIXED INCOME 11.1% Templeton Global Bond Fund, Advisor Class ........................... 5,905,099 65,074,189 ------------- TOTAL LONG TERM INVESTMENTS (COST $448,116,616) ..................... 530,689,542 ------------- SHORT TERM INVESTMENT (COST $56,635,105) 9.7% MONEY MARKET FUND 9.7% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 56,635,105 56,635,105 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $504,751,721) 100.2% .... 587,324,647 OTHER ASSETS, LESS LIABILITIES (0.2)% ............................... (1,144,798) ------------- NET ASSETS 100.0% ................................................... $ 586,179,849 =============
46 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON GROWTH TARGET FUND
--------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS A 2006 2005 2004 g 2004 2003 2002 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 14.10 $ 13.17 $ 11.83 $ 10.46 $ 9.47 $ 11.64 --------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.24 0.14 0.09 0.11 0.08 0.13 Net realized and unrealized gains (losses) ........ 1.73 0.96 1.33 1.36 1.01 (2.01) --------------------------------------------------------------------------- Total from investment operations ................... 1.97 1.10 1.42 1.47 1.09 (1.88) --------------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.32) (0.17) (0.08) (0.10) (0.10) (0.13) Net realized gains ................................ (0.12) -- -- -- -- (0.16) --------------------------------------------------------------------------- Total distributions ................................ (0.44) (0.17) (0.08) (0.10) (0.10) (0.29) --------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- --------------------------------------------------------------------------- Net asset value, end of year ....................... $ 15.63 $ 14.10 $ 13.17 $ 11.83 $ 10.46 $ 9.47 =========================================================================== Total return d ..................................... 13.90% 8.47% 12.04% 14.04% 11.64% (16.44)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $319,521 $230,686 $202,560 $165,500 $ 99,432 $ 69,663 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.75% 0.79% 0.85% h 0.83% 0.92% 0.93% Expenses net of waiver and payments by affiliates e 0.50% 0.72% 0.85% h 0.83% 0.92% 0.93% Net investment income c ........................... 1.59% 1.07% 1.72% h 0.91% 0.84% 1.20% Portfolio turnover rate ............................ 9.31% 10.50% 3.98% 3.46% 21.87% 14.24%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 47 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
--------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS B 2006 2005 2004 g 2004 i --------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $13.97 $13.09 $11.75 $11.80 --------------------------------------------- Income from investment operations a: Net investment income (loss) b,c ....................... 0.12 0.04 0.06 (0.02) Net realized and unrealized gains (losses) ............. 1.72 0.96 1.32 0.09 --------------------------------------------- Total from investment operations ........................ 1.84 1.00 1.38 0.07 --------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ...................................... (0.24) (0.12) (0.04) (0.12) Net realized gains ..................................... (0.12) -- -- -- --------------------------------------------- Total distributions ..................................... (0.36) (0.12) (0.04) (0.12) --------------------------------------------- Redemption fees ......................................... -- f -- f -- f -- f --------------------------------------------- Net asset value, end of year ............................ $15.45 $13.97 $13.09 $11.75 ============================================= Total return d .......................................... 13.06% 7.63% 11.76% 0.56% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $8,195 $6,468 $5,343 $3,178 Ratios to average net assets: Expenses before waiver and payments by affiliates e .... 1.50% 1.54% 1.60% h 1.58% h Expenses net of waiver and payments by affiliates e .... 1.25% 1.47% 1.60% h 1.58% h Net investment income c ................................ 0.84% 0.32% 0.97% h 0.16% h Portfolio turnover rate ................................. 9.31% 10.50% 3.98% 3.46%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. cRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period December 1, 2003 (effective date) to July 31, 2004. 48 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS C 2006 2005 2004G 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 13.97 $ 13.09 $ 11.72 $ 10.38 $ 9.40 $ 11.58 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.13 0.04 0.05 0.02 0.01 0.05 Net realized and unrealized gains (losses) ........ 1.70 0.96 1.32 1.35 1.00 (1.99) ---------------------------------------------------------------------------- Total from investment operations ................... 1.83 1.00 1.37 1.37 1.01 (1.94) ---------------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.24) (0.12) -- (0.03) (0.03) (0.08) Net realized gains ................................ (0.12) -- -- -- -- (0.16) ---------------------------------------------------------------------------- Total distributions ................................ (0.36) (0.12) -- (0.03) (0.03) (0.24) ---------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- ---------------------------------------------------------------------------- Net asset value, end of year ....................... $ 15.44 $ 13.97 $ 13.09 $ 11.72 $ 10.38 $ 9.40 ============================================================================ Total return d ..................................... 13.08% 7.63% 11.69% 13.18% 10.74% (17.00)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $122,156 $ 88,986 $ 73,816 $ 61,179 $ 40,829 $ 31,255 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.50% 1.54% 1.60% h 1.58% 1.67% 1.68% Expenses net of waiver and payments by affiliates e 1.25% 1.47% 1.60% h 1.58% 1.67% 1.68% Net investment income c ........................... 0.84% 0.32% 0.97% h 0.16% 0.09% 0.50% Portfolio turnover rate ............................ 9.31% 10.50% 3.98% 3.46% 21.87% 14.24%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 49 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED JULY 31, CLASS R 2006 2005 2004 g 2004 2003 2002 i ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 14.02 $ 13.11 $ 11.76 $ 10.40 $ 9.46 $ 10.95 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.20 0.11 0.08 0.08 0.05 0.01 Net realized and unrealized gains (losses) ........ 1.71 0.95 1.33 1.36 1.00 (1.50) ---------------------------------------------------------------------------- Total from investment operations ................... 1.91 1.06 1.41 1.44 1.05 (1.49) ---------------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.29) (0.15) (0.06) (0.08) (0.11) -- Net realized gains ................................ (0.12) -- -- -- -- -- ---------------------------------------------------------------------------- Total distributions ................................ (0.41) (0.15) (0.06) (0.08) (0.11) -- ---------------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f -- -- ---------------------------------------------------------------------------- Net asset value, end of year ....................... $ 15.52 $ 14.02 $ 13.11 $ 11.76 $ 10.40 $ 9.46 ============================================================================ Total return d ..................................... 13.65% 8.10% 12.00% 13.89% 11.11% (13.52)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 26,215 $ 19,461 $ 15,206 $ 11,714 $ 5,567 $ 141 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.00% 1.04% 1.10% h 1.08% 1.17% 1.18% h Expenses net of waiver and payments by affiliates e 0.75% 0.97% 1.10% h 1.08% 1.17% 1.18% h Net investment income c ........................... 1.34% 0.82% 1.47% h 0.66% 0.59% 0.18% h Portfolio turnover rate ............................ 9.31% 10.50% 3.98% 3.46% 21.87% 14.24%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period January 1, 2002 (effective date) to July 31, 2002. 50 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON GROWTH TARGET FUND
------------------------------------ YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, ADVISOR CLASS 2006 2005 g ------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................................... $ 14.10 $ 14.18 ------------------------------------ Income from investment operations a: Net investment income b,c ............................................... 0.29 0.11 Net realized and unrealized gains (losses) .............................. 1.72 (0.03) ------------------------------------ Total from investment operations ......................................... 2.01 0.08 ------------------------------------ Less distributions from: Net investment income and short term gains received from Underlying Funds (0.35) (0.16) Net realized gains ...................................................... (0.12) -- ------------------------------------ Total distributions ...................................................... (0.47) (0.16) ------------------------------------ Redemption fees .......................................................... -- f -- f ------------------------------------ Net asset value, end of year ............................................. $ 15.64 $ 14.10 ==================================== Total return d ........................................................... 14.26% 0.54% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .......................................... $ 5,593 $ 3,320 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 0.50% 0.54% h Expenses net of waiver and payments by affiliates e ..................... 0.25% 0.47% h Net investment income c ................................................. 1.84% 1.32% h Portfolio turnover rate .................................................. 9.31% 10.50%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period December 1, 2005 (effective date) to December 31, 2005. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 51 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
----------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND SHARES VALUE ----------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 94.7% DOMESTIC EQUITY 55.0% b Franklin Aggressive Growth Fund, Advisor Class ...................... 1,156,971 $ 20,929,599 Franklin Flex Cap Growth Fund, Advisor Class ........................ 1,679,236 71,619,395 Franklin Natural Resources Fund, Advisor Class ...................... 464,955 16,226,917 Franklin Real Estate Securities Fund, Advisor Class ................. 700,870 18,608,100 b Franklin Small Cap Growth Fund II, Advisor Class .................... 6,090,045 76,064,662 Mutual Shares Fund, Class Z ......................................... 2,350,164 61,315,789 -------------- 264,764,462 -------------- DOMESTIC FIXED INCOME 10.1% Franklin Strategic Mortgage Portfolio ............................... 1,392,107 13,364,227 Franklin Total Return Fund, Advisor Class ........................... 1,600,208 15,906,069 Franklin U.S. Government Securities Fund, Advisor Class ............. 2,983,571 19,244,036 -------------- 48,514,332 -------------- FOREIGN EQUITY 25.0% Franklin Gold and Precious Metals Fund, Advisor Class ............... 603,366 19,838,673 Mutual European Fund, Class Z ....................................... 2,435,572 59,890,725 Templeton China World Fund, Advisor Class ........................... 541,310 17,365,213 Templeton Foreign Fund, Advisor Class ............................... 1,723,886 23,427,615 -------------- 120,522,226 -------------- FOREIGN FIXED INCOME 4.6% Templeton Global Bond Fund, Advisor Class ........................... 2,028,361 22,352,536 -------------- TOTAL LONG TERM INVESTMENTS (COST $371,894,910) ..................... 456,153,556 -------------- SHORT TERM INVESTMENT (COST $26,679,076) 5.5% MONEY MARKET FUND 5.5% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 26,679,076 26,679,076 -------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $398,573,986) 100.2% .... 482,832,632 OTHER ASSETS, LESS LIABILITIES (0.2)% ............................... (1,152,350) -------------- NET ASSETS 100.0% ................................................... $ 481,680,282 ==============
52 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES December 31, 2006
--------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND --------------------------------------------- Assets: Investments in Underlying Funds (Note 6): Cost .................................... $ 260,442,144 $ 504,751,721 $ 398,573,986 ============================================= Value ................................... $ 293,808,683 $ 587,324,647 $ 482,832,632 Receivables on capital shares sold ....... 740,409 1,394,556 1,097,515 --------------------------------------------- Total assets ...................... 294,549,092 588,719,203 483,930,147 --------------------------------------------- Liabilities: Payables: Capital shares redeemed ................. 1,088,080 1,930,574 1,785,649 Affiliates .............................. 252,466 476,947 407,849 Accrued expenses and other liabilities ... 75,215 131,833 56,367 --------------------------------------------- Total liabilities ................. 1,415,761 2,539,354 2,249,865 --------------------------------------------- Net assets, at value ............ $ 293,133,331 $ 586,179,849 $ 481,680,282 ============================================= Net assets consist of: Paid-in capital .......................... $ 254,415,375 $ 489,134,464 $ 380,640,787 Undistributed net investment income ...... 116,913 247,487 124,616 Net unrealized appreciation (depreciation) 33,366,539 82,572,926 84,258,646 Accumulated net realized gain (loss) ..... 5,234,504 14,224,972 16,656,233 --------------------------------------------- Net assets, at value ............ $ 293,133,331 $ 586,179,849 $ 481,680,282 =============================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 53 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) December 31, 2006
---------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ---------------------------------------------- CLASS A: Net assets, at value ................................................ $ 194,477,036 $ 401,391,577 $ 319,520,574 ============================================== Shares outstanding .................................................. 14,594,645 28,605,523 20,436,276 ============================================== Net asset value per share a ......................................... $ 13.33 $ 14.03 $ 15.63 ============================================== Maximum offering price per share (net asset value per share / 94.25%) $ 14.14 $ 14.89 $ 16.58 CLASS B: Net assets, at value ................................................ $ 6,421,942 $ 11,533,255 $ 8,195,098 ============================================== Shares outstanding .................................................. 483,355 824,266 530,539 ============================================== Net asset value and maximum offering price per share a .............. $ 13.29 $ 13.99 $ 15.45 CLASS C: Net assets, at value ................................................ $ 76,018,339 $ 134,465,223 $ 122,156,148 ============================================== Shares outstanding .................................................. 5,769,688 9,737,375 7,910,013 ============================================== Net asset value and maximum offering price per share a .............. $ 13.18 $ 13.81 $ 15.44 CLASS R: Net assets, at value ................................................ $ 14,489,694 $ 31,719,156 $ 26,215,162 ============================================== Shares outstanding .................................................. 1,089,512 2,264,928 1,688,613 ============================================== Net asset value and maximum offering price per share a .............. $ 13.30 $ 14.00 $ 15.52 ADVISOR CLASS: Net assets, at value ................................................ $ 1,726,320 $ 7,070,638 $ 5,593,300 ============================================== Shares outstanding .................................................. 129,696 503,906 357,672 ============================================== Net asset value and maximum offering price per share ................ $ 13.31 $ 14.03 $ 15.64 ==============================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 54 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended December 31, 2006
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------ Investment income: Dividends from Underlying Funds (Note 6) ............................. $ 9,633,559 $ 16,185,991 $ 8,771,785 ------------------------------------------------ Expenses: Asset allocation fees (Note 3a) ...................................... 539,702 1,193,554 995,273 Distribution fees: (Note 3c) Class A ............................................................. 444,639 898,556 701,824 Class B ............................................................. 64,085 108,699 75,651 Class C ............................................................. 689,374 1,246,414 1,046,997 Class R ............................................................. 66,723 145,474 114,099 Transfer agent fees (Note 3e) ........................................ 497,137 965,162 920,735 Custodian fees ....................................................... 20 37 24 Reports to shareholders .............................................. 21,518 55,404 48,255 Registration and filing fees ......................................... 92,625 131,877 101,223 Professional fees .................................................... 22,456 23,443 24,019 Trustees' fees and expenses .......................................... 627 1,192 918 Other ................................................................ 7,758 15,072 11,383 ------------------------------------------------ Total expenses ................................................ 2,446,664 4,784,884 4,040,401 Expenses waived/paid by affiliates (Note 3f) .................. (500,099) (1,062,112) (1,052,826) ------------------------------------------------ Net expenses ................................................ 1,946,565 3,722,772 2,987,575 ------------------------------------------------ Net investment income ...................................... 7,686,994 12,463,219 5,784,210 ------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Sale of investments in Underlying Funds ............................. 2,432,230 5,108,731 5,596,925 Realized gain distributions by Underlying Funds ..................... 6,690,420 17,983,663 20,804,259 ------------------------------------------------ Net realized gain (loss) from Underlying Funds ............ 9,122,650 23,092,394 26,401,184 ------------------------------------------------ Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .................................................... 8,514,289 21,975,614 21,414,539 ------------------------------------------------ Net realized and unrealized gain (loss) ............................... 17,636,939 45,068,008 47,815,723 ------------------------------------------------ Net increase (decrease) in net assets resulting from operations ....... $ 25,323,933 $ 57,531,227 $ 53,599,933 ================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 55 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND MODERATE TARGET FUND ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 2006 2005 2006 2005 ------------------------------------------------------------------ Increase (decrease) in net assets: Operations: Net investment income .............................. $ 7,686,994 $ 4,807,782 $ 12,463,219 $ 7,576,652 Net realized gain (loss) from Underlying Funds ..... 9,122,650 3,823,027 23,092,394 8,836,460 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ............... 8,514,289 1,901,662 21,975,614 9,191,060 ------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations .............................. 25,323,933 10,532,471 57,531,227 25,604,172 ------------------------------------------------------------------ Distributions to shareholders from: Net investment income: Class A ............................................ (5,841,842) (4,035,513) (10,307,386) (7,181,993) Class B ............................................ (157,308) (111,536) (214,821) (162,211) Class C ............................................ (1,799,408) (1,140,064) (2,582,448) (1,825,865) Class R ............................................ (392,941) (331,572) (728,940) (630,744) Advisor Class ...................................... (50,554) (10,329) (186,986) (52,636) Net realized gains: Class A ............................................ (3,318,674) -- (6,318,031) -- Class B ............................................ (117,917) -- (183,094) -- Class C ............................................ (1,314,610) -- (2,177,152) -- Class R ............................................ (239,128) -- (494,272) -- Advisor Class ...................................... (27,311) -- (106,561) -- ------------------------------------------------------------------ Total distributions to shareholders .................... (13,259,693) (5,629,014) (23,299,691) (9,853,449) ------------------------------------------------------------------ Capital share transactions: (Note 2) Class A ............................................ 24,368,768 19,673,591 61,461,304 25,091,859 Class B ............................................ (57,283) 850,070 655,366 1,129,090 Class C ............................................ 9,679,370 2,290,697 14,184,310 2,608,138 Class R ............................................ (299,909) 1,584,439 (742,059) 4,134,667 Advisor Class ...................................... 932,606 760,697 2,870,008 3,930,604 ------------------------------------------------------------------ Total capital share transactions ....................... 34,623,552 25,159,494 78,428,929 36,894,358 ------------------------------------------------------------------ Redemption fees ........................................ 1,280 2,446 9,418 2,839 ------------------------------------------------------------------ Net increase (decrease) in net assets .......... 46,689,072 30,065,397 112,669,883 52,647,920 Net assets: Beginning of year .................................... 246,444,259 216,378,862 473,509,966 420,862,046 ------------------------------------------------------------------ End of year .......................................... $ 293,133,331 $ 246,444,259 $ 586,179,849 $ 473,509,966 ================================================================== Undistributed net investment income included in net assets: End of year ........................................ $ 116,913 $ 17,582 $ 247,487 $ 23,790 ==================================================================
56 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
------------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND ------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ------------------------------- Increase (decrease) in net assets: Operations: Net investment income ................................................................. $ 5,784,210 $ 2,783,708 Net realized gain (loss) from Underlying Funds ........................................ 26,401,184 8,045,166 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds 21,414,539 15,755,314 ------------------------------- Net increase (decrease) in net assets resulting from operations ................... 53,599,933 26,584,188 ------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ............................................................................... (6,239,874) (2,957,561) Class B ............................................................................... (121,718) (54,650) Class C ............................................................................... (1,804,826) (744,924) Class R ............................................................................... (471,530) (213,905) Advisor Class ......................................................................... (111,697) (36,584) Net realized gains: Class A ............................................................................... (2,313,310) -- Class B ............................................................................... (59,985) -- Class C ............................................................................... (893,913) -- Class R ............................................................................... (190,290) -- Advisor Class ......................................................................... (40,304) -- ------------------------------- Total distributions to shareholders ....................................................... (12,247,447) (4,007,624) ------------------------------- Capital share transactions: (Note 2) Class A ............................................................................... 61,095,501 12,665,336 Class B ............................................................................... 1,006,265 739,433 Class C ............................................................................... 22,990,099 9,702,929 Class R ............................................................................... 4,438,592 2,953,654 Advisor Class ......................................................................... 1,874,057 3,350,378 ------------------------------- Total capital share transactions .......................................................... 91,404,514 29,411,730 ------------------------------- Redemption fees ........................................................................... 2,778 6,807 ------------------------------- Net increase (decrease) in net assets ............................................. 132,759,778 51,995,101 Net assets: Beginning of year ....................................................................... 348,920,504 296,925,403 ------------------------------- End of year ............................................................................. $ 481,680,282 $ 348,920,504 =============================== Undistributed net investment income included in net assets: End of year ............................................................................. $ 124,616 $ 1,027,161 ===============================
Annual Report | The accompanying notes are an integral part of these financial statements. | 57 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Fund Allocator Series (the Trust) is registered under the Investment Company Act of 1940, as amended (the 1940 Act) as an open-end investment company, consisting of ten separate funds. All funds included in this report (the Funds) are non-diversified. The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (the Underlying Funds). The Funds offer five classes of shares: Class A, Class B, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. B. INCOME TAXES No provision has been made for U.S. income taxes because each fund intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. C. 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. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. 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. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 58 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) The Funds indirectly bear their proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Funds will vary. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in class-level expenses may result in payment of different per share distributions by class. D. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. E. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the Funds and accounted for as an addition to paid-in capital. F. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. Annual Report | 59 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At December 31, 2006, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Funds' shares were as follows:
------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND MODERATE TARGET FUND ------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------ CLASS A SHARES: Year ended December 31, 2006 Shares sold ................. 5,267,663 $ 69,031,910 10,849,703 $ 148,283,203 Shares issued in reinvestment of distributions ........... 640,735 8,396,683 1,172,063 16,165,554 Shares redeemed ............. (4,038,464) (53,059,825) (7,517,285) (102,987,453) ------------------------------------------------------------ Net increase (decrease) ..... 1,869,934 $ 24,368,768 4,504,481 $ 61,461,304 ============================================================ Year ended December 31, 2005 Shares sold ................. 4,700,208 $ 58,731,887 8,741,947 $ 111,231,407 Shares issued in reinvestment of distributions ........... 295,015 3,730,391 538,713 7,009,845 Shares redeemed ............. (3,418,586) (42,788,687) (7,329,765) (93,149,393) ------------------------------------------------------------ Net increase (decrease) ..... 1,576,637 $ 19,673,591 1,950,895 $ 25,091,859 ============================================================ CLASS B SHARES: Year ended December 31, 2006 Shares sold ................. 110,692 $ 1,452,387 142,818 $ 1,944,744 Shares issued in reinvestment of distributions ........... 16,886 220,406 26,264 361,939 Shares redeemed ............. (132,378) (1,730,076) (121,066) (1,651,317) ------------------------------------------------------------ Net increase (decrease) ..... (4,800) $ (57,283) 48,016 $ 655,366 ============================================================ Year ended December 31, 2005 Shares sold ................. 126,621 $ 1,569,848 177,044 $ 2,231,881 Shares issued in reinvestment of distributions ........... 7,008 88,480 11,226 146,083 Shares redeemed ............. (64,844) (808,258) (99,155) (1,248,874) ------------------------------------------------------------ Net increase (decrease) ..... 68,785 $ 850,070 89,115 $ 1,129,090 ============================================================ CLASS C SHARES: Year ended December 31, 2006 Shares sold ................. 1,635,650 $ 21,224,273 2,668,477 $ 35,908,726 Shares issued in reinvestment of distributions ........... 211,590 2,743,017 316,236 4,298,696 Shares redeemed ............. (1,099,416) (14,287,920) (1,926,312) (26,023,112) ------------------------------------------------------------ Net increase (decrease) ..... 747,824 $ 9,679,370 1,058,401 $ 14,184,310 ============================================================ Year ended December 31, 2005 Shares sold ................. 1,402,940 $ 17,329,727 2,264,680 $ 28,333,362 Shares issued in reinvestment of distributions ........... 80,743 1,011,875 127,401 1,638,002 Shares redeemed ............. (1,301,614) (16,050,905) (2,187,065) (27,363,226) ------------------------------------------------------------ Net increase (decrease) ..... 182,069 $ 2,290,697 205,016 $ 2,608,138 ============================================================
60 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND MODERATE TARGET FUND ---------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------- CLASS R SHARES: Year ended December 31, 2006 Shares sold .................................. 498,965 $ 6,521,243 822,740 $ 11,190,373 Shares issued in reinvestment of distributions ............................ 45,028 589,121 88,241 1,215,875 Shares redeemed .............................. (564,684) (7,410,273) (964,370) (13,148,307) ---------------------------------------------------------- Net increase (decrease) ...................... (20,691) $ (299,909) (53,389) $ (742,059) ========================================================== Year ended December 31, 2005 Shares sold .................................. 574,711 $ 7,126,545 871,013 $ 11,010,434 Shares issued in reinvestment of distributions ............................ 26,232 331,034 48,317 627,950 Shares redeemed .............................. (470,003) (5,873,140) (587,826) (7,503,717) ---------------------------------------------------------- Net increase (decrease) ...................... 130,940 $ 1,584,439 331,504 $ 4,134,667 ========================================================== ADVISOR CLASS SHARES: Year ended December 31, 2006 Shares sold .................................. 78,009 $ 1,031,418 223,105 $ 3,073,509 Shares issued in reinvestment of distributions ............................ 5,913 77,539 21,252 293,287 Shares redeemed .............................. (13,415) (176,351) (36,372) (496,788) ---------------------------------------------------------- Net increase (decrease) ...................... 70,507 $ 932,606 207,985 $ 2,870,008 ========================================================== Period ended December 31, 2005 a Shares sold .................................. 58,390 $ 750,506 298,490 $ 3,965,456 Shares issued in reinvestment of distributions ............................ 799 10,191 3,983 52,500 Shares redeemed .............................. -- -- (6,552) (87,352) ---------------------------------------------------------- Net increase (decrease) ...................... 59,189 $ 760,697 295,921 $ 3,930,604 ========================================================== ----------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND ----------------------------- SHARES AMOUNT ----------------------------- CLASS A SHARES: Year ended December 31, 2006 Shares sold ............................................................... 7,423,548 $ 111,016,449 Shares issued in reinvestment of distributions ............................ 531,377 8,217,362 Shares redeemed ........................................................... (3,875,660) (58,138,310) ----------------------------- Net increase (decrease) ................................................... 4,079,265 $ 61,095,501 ============================= Year ended December 31, 2005 Shares sold ............................................................... 5,719,599 $ 76,098,416 Shares issued in reinvestment of distributions ............................ 205,782 2,886,413 Shares redeemed ........................................................... (4,944,438) (66,319,493) ----------------------------- Net increase (decrease) ................................................... 980,943 $ 12,665,336 =============================
Annual Report | 61 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED) --------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND --------------------------- SHARES AMOUNT --------------------------- CLASS B SHARES: Year ended December 31, 2006 Shares sold .................................. 128,664 $ 1,912,637 Shares issued in reinvestment of distributions 11,481 176,117 Shares redeemed .............................. (72,608) (1,082,489) --------------------------- Net increase (decrease) ...................... 67,537 $ 1,006,265 =========================== Year ended December 31, 2005 Shares sold .................................. 106,430 $ 1,419,587 Shares issued in reinvestment of distributions 3,679 51,404 Shares redeemed .............................. (55,290) (731,558) --------------------------- Net increase (decrease) ...................... 54,819 $ 739,433 =========================== CLASS C SHARES: Year ended December 31, 2006 Shares sold .................................. 2,499,951 $ 37,039,870 Shares issued in reinvestment of distributions 159,704 2,451,217 Shares redeemed .............................. (1,121,259) (16,500,988) --------------------------- Net increase (decrease) ...................... 1,538,396 $ 22,990,099 =========================== Year ended December 31, 2005 Shares sold .................................. 1,819,222 $ 23,985,733 Shares issued in reinvestment of distributions 47,927 669,884 Shares redeemed .............................. (1,133,935) (14,952,688) --------------------------- Net increase (decrease) ...................... 733,214 $ 9,702,929 =========================== CLASS R SHARES: Year ended December 31, 2006 Shares sold .................................. 688,762 $ 10,208,521 Shares issued in reinvestment of distributions 42,611 655,061 Shares redeemed .............................. (431,068) (6,424,990) --------------------------- Net increase (decrease) ...................... 300,305 $ 4,438,592 =========================== Year ended December 31, 2005 Shares sold .................................. 621,409 $ 8,193,434 Shares issued in reinvestment of distributions 15,240 212,944 Shares redeemed .............................. (408,629) (5,452,724) --------------------------- Net increase (decrease) ...................... 228,020 $ 2,953,654 =========================== ADVISOR CLASS SHARES: Year ended December 31, 2006 Shares sold .................................. 142,844 $ 2,178,781 Shares issued in reinvestment of distributions 9,811 151,859 Shares redeemed .............................. (30,528) (456,583) --------------------------- Net increase (decrease) ...................... 122,127 $ 1,874,057 =========================== Period ended December 31, 2005 a Shares sold .................................. 233,824 $ 3,326,187 Shares issued in reinvestment of distributions 2,578 36,473 Shares redeemed .............................. (857) (12,282) --------------------------- Net increase (decrease) ...................... 235,545 $ 3,350,378 =========================== a For the period December 1, 2005 (effective date) to December 31, 2005. 62 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of some of the Underlying Funds and of the following subsidiaries:
SUBSIDIARY AFFILIATION ----------------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. ASSET ALLOCATION FEES The Funds pay an asset allocation fee to Advisers of 0.25% per year of the average daily net assets of each of the Funds for investment advisory services, consisting principally of determining the allocation of assets of the Funds among the designated Underlying Funds. B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: Class A ........................... 0.25% Class B ........................... 1.00% Class C ........................... 1.00% Class R ........................... 0.50% Annual Report | 63 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
---------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ---------------------------------------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers .............................................. $ 136,928 $ 361,618 $ 253,683 Contingent deferred sales charges retained ................... $ 34,535 $ 47,257 $ 25,386
E. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
--------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND --------------------------------------------- Transfer agent fees ......................... $ 227,042 $ 542,155 $ 565,267
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS Advisers agreed in advance to voluntarily waive all or a portion of asset allocation fees and assume payment of other expenses. Total expenses waived/paid by Advisers are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. Advisers may discontinue this waiver at any time. 4. INCOME TAXES During the year ended December 31, 2006, the Franklin Templeton Growth Target Fund utilized $2,591,751 of capital loss carryforwards. The tax character of distributions paid during the years ended December 31, 2006 and 2005, was as follows: ------------------------- FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND ------------------------- 2006 2005 ------------------------- Distributions paid from: Ordinary income ................ $ 8,475,271 $ 5,629,014 Long-term capital gain ......... 4,784,422 -- ------------------------- $13,259,693 $ 5,629,014 ========================= 64 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) ------------------------- FRANKLIN TEMPLETON MODERATE TARGET FUND ------------------------- 2006 2005 ------------------------- Distributions paid from: Ordinary income ................ $14,143,400 $9,853,449 Long-term capital gain ......... 9,156,291 -- ------------------------- $23,299,691 $9,853,449 ========================= ------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND ------------------------- 2006 2005 ------------------------- Distributions paid from: Ordinary income ................ $ 8,749,645 $4,007,624 Long-term capital gain ......... 3,497,802 -- ------------------------- $12,247,447 $4,007,624 ========================= At December 31, 2006, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------ Cost of investments ...................... $ 260,652,931 $ 505,076,773 $ 398,838,308 ================================================ Unrealized appreciation .................. $ 34,788,304 $ 84,954,549 $ 84,851,317 Unrealized depreciation .................. (1,632,552) (2,706,675) (856,993) ------------------------------------------------ Net unrealized appreciation (depreciation) $ 33,155,752 $ 82,247,874 $ 83,994,324 ================================================ Undistributed ordinary income ............ $ 116,913 $ 247,487 $ 124,617 Undistributed long term capital gains .... 5,445,291 14,550,022 16,920,555 ------------------------------------------------ Distributable earnings ................... $ 5,562,204 $ 14,797,509 $ 17,045,172 ================================================
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of short term capital gain distributions from Underlying Funds. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of short term capital gain distributions from Underlying Funds and wash sales. Annual Report | 65 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENT TRANSACTIONS Purchases and sales of Underlying Funds (excluding short term securities) for the year ended December 31, 2006, were as follows: ----------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ----------------------------------------------- Purchases ................... $ 46,649,320 $ 112,274,173 $ 121,904,779 Sales ....................... $ 23,997,768 $ 45,095,941 $ 37,322,994 6. INVESTMENTS IN UNDERLYING FUNDS The Funds invest primarily in the Underlying Funds which are managed by Advisers or an affiliate of Advisers. The Funds do not invest in the Underlying Funds for the purpose of exercising management or control. At December 31, 2006, the Funds held the following positions which exceed 5% of the Underlying Funds' shares outstanding: -------------------------------------------------------------------------------- NAME OF ISSUER % OF SHARES HELD -------------------------------------------------------------------------------- FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND Franklin Strategic Mortgage Portfolio ..................... 7.78% FRANKLIN TEMPLETON MODERATE TARGET FUND Franklin Strategic Mortgage Portfolio ..................... 13.75% Franklin Aggressive Growth Fund ........................... 7.56% Franklin Small Cap Growth Fund II ......................... 5.82% Franklin Total Return Fund ................................ 5.74% FRANKLIN TEMPLETON GROWTH TARGET FUND Franklin Aggressive Growth Fund ........................... 8.60% Franklin Small Cap Growth Fund II ......................... 6.82% The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Pursuant to a SEC exemptive order specific to the Funds' investment in the Sweep Money Fund, asset allocation fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 7. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares ("marketing support"), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. 66 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. REGULATORY MATTERS (CONTINUED) On June 23, 2006, the SEC approved the proposed plan of distribution for the marketing support settlement, and disbursement of the settlement monies to the designated funds, in accordance with the terms and conditions of that settlement and plan, was completed in September 2006. The Trust did not participate in that Settlement. The plan of distribution for the market timing settlement is currently under review by the SEC staff. After publication of notice of the plan and a 30-day comment period, the proposed plan of distribution will be submitted to the SEC for approval. Following the SEC's approval of the plan of distribution, with modifications as appropriate, distribution of the settlement monies will begin in accordance with the terms and conditions of the settlement and plan. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above, as well as to allegedly excessive commissions and advisory and distribution fees. The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Trust, it is committed to making the Trust or its shareholders whole, as appropriate. 8. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. On December 22, 2006, the Securities and Exchange Commission extended the implementation date to no later than the last net asset value calculation in the first semi-annual reporting period in 2007. The Fund is currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will have no material impact on its financial statements. Annual Report | 67 Franklin Templeton Fund Allocator Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN TEMPLETON FUND ALLOCATOR SERIES In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Templeton Conservative Target Fund, Franklin Templeton Moderate Target Fund and Franklin Templeton Growth Target Fund (separate portfolios of Franklin Templeton Fund Allocator Series, hereafter referred to as the "Funds") at December 31, 2006, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments in the Underlying Funds at December 31, 2006 by correspondence with the transfer agent of the Underlying Funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 22, 2007 68 | Annual Report Franklin Templeton Fund Allocator Series TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds designate the maximum amount allowable but no less than the following amounts as long term capital gain dividends for the fiscal year ended December 31, 2006: --------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND --------------------------------------------- $ 8,235,913 $ 21,143,640 $ 20,418,357 Under Section 871(k)(2)(C) of the Code, the funds designate the maximum amount allowable but no less than the following amounts as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006: ----------------------------- FRANKLIN FRANKLIN TEMPLETON TEMPLETON CONSERVATIVE MODERATE TARGET FUND TARGET FUND ----------------------------- $ 231,553 $ 122,317 Under Section 854(b)(2) of the Code, the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2006: --------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND --------------------------------------------- 3.82% 6.02% 11.61% Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2006: --------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND --------------------------------------------- $ 1,190,614 $ 3,238,046 $ 3,768,598 In January 2007, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2006. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Annual Report | 69 Franklin Templeton Fund Allocator Series TAX DESIGNATION (UNAUDITED) (CONTINUED) Under Section 871(k)(1)(C) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006: --------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND --------------------------------------------- $ 1,660,198 $ 2,112,532 $ 180,251 70 | Annual Report FRANKLIN TEMPLETON FUND ALLOCATOR SERIES BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
-------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD -------------------------------------------------------------------------------------------------------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1995 142 Director, Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). -------------------------------------------------------------------------------------------------------------------------------- ROBERT F. CARLSON (1928) Trustee Since 2005 57 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, senior member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS); and FORMERLY, member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. -------------------------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Director, Hess Corporation (formerly One Franklin Parkway Amerada Hess Corporation) San Mateo, CA 94403-1906 (exploration and refining of oil and gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). -------------------------------------------------------------------------------------------------------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1995 116 Director, Center for Creative Land One Franklin Parkway Recycling (redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). --------------------------------------------------------------------------------------------------------------------------------
Annual Report | 71
---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ---------------------------------------------------------------------------------------------------------------------------------- JOHN B. WILSON (1959) Trustee Since February 46 None One Franklin Parkway 2006 San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (1986-1990). ----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ---------------------------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON (1933) Trustee and Since 1995 142 None One Franklin Parkway Chairman of San Mateo, CA 94403-1906 the Board PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments. ---------------------------------------------------------------------------------------------------------------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 126 None One Franklin Parkway President and 1995 and San Mateo, CA 94403-1906 Chief President and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. ---------------------------------------------------------------------------------------------------------------------------------- JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since 2004 San Mateo, CA 94403-1906 Officer and and Vice Vice President President - AML - AML Compliance since Compliance February 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). ----------------------------------------------------------------------------------------------------------------------------------
72 | Annual Report
---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ---------------------------------------------------------------------------------------------------------------------------------- LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 30 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). ---------------------------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. ---------------------------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. ---------------------------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). ---------------------------------------------------------------------------------------------------------------------------------- KAREN L. SKIDMORE (1952) Vice President Vice President Not Applicable Not Applicable One Franklin Parkway and Secretary since February San Mateo, CA 94403-1906 2006 and Secretary since April 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company; and officer of 30 of the investment companies in Franklin Templeton Investments. ----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 73
---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ---------------------------------------------------------------------------------------------------------------------------------- CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). ---------------------------------------------------------------------------------------------------------------------------------- GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Officer and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). ----------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust and under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Prior to December 31, 2006, S. Joseph Fortunato and Gordon S. Macklin ceased to be a trustee of the Trust. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. 74 | Annual Report FRANKLIN TEMPLETON FUND ALLOCATOR SERIES SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 75 This page intentionally left blank. Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund 1 GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Blue Chip Fund 1 Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund RETIREMENT TARGET FUNDS Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 4 Franklin Floating Rate Daily Access Fund Franklin High Income Fund 5 Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 4 Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 4 Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME 6 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 7 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Michigan 7 Arizona Minnesota 7 California 8 Missouri Colorado New Jersey Connecticut New York 8 Florida 8 North Carolina Georgia Ohio 7 Kentucky Oregon Louisiana Pennsylvania Maryland Tennessee Massachusetts 7 Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 9 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to Franklin High Income Fund. The fund's investment goal and strategy remained the same. 6. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 7. Portfolio of insured municipal securities. 8. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 9. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 01/07 Not part of the annual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN TEMPLETON FUND ALLOCATOR SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FAS A2006 02/07 [GRAPHIC OMITTED] -------------------------------------------------------------------------------- DECEMBER 31, 2006 -------------------------------------------------------------------------------- Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund -------------------------------------------------------------------------------- ANNUAL REPORT AND SHAREHOLDER LETTER ASSET ALLOCATION -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN TEMPLETON FUND ALLOCATOR SERIES Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. -------------------------------------------------------------------------------- [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN o TEMPLETON o MUTUAL SERIES Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) 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 aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Annual Report Economic and Market Overview During the 12 months ended December 31, 2006, the U.S. economy advanced at a moderate but slowing pace. Although first quarter 2006 gross domestic product (GDP) grew an annualized 5.6%, fourth quarter GDP growth was an estimated annualized 3.5%. The housing market weakened during the year, while corporate profits and consumer and government spending generally remained robust. Exports picked up some momentum, but the trade deficit stayed in record territory. Labor costs rose and hiring generally increased as the unemployment rate fell from 4.9% to 4.5%. 1 Although energy and other commodity prices fell in the second half of the year, they remained historically high and were a primary economic concern for much of the period. Oil prices reached a record high of $77 per barrel in July before declining to $61 at year-end. Oil price volatility appeared to raise the anxiety level among consumers and businesses alike. Consumers curbed spending on large purchases, such as homes and cars. Home prices fell in many parts of the country, mortgage rates crept up, and borrowing against home equity flattened. Overall, the core Consumer Price Index (CPI) rose 2.6% for the 12 months ended December 31, 2006, which was higher than the 2.2% 10-year average. 2 The Federal Reserve Board (Fed) raised the federal funds target rate incrementally from 4.25% at the beginning of the year to 5.25% on June 30. Since June, however, the Fed left the rate unchanged, citing a slowing economy, widespread cooling in the housing market and the lagging effect of prior tightening. The Fed stated that even with lower oil prices toward period-end, inflation risks remained. Outside the U.S., the economy continued to grow. The economic drivers remained consistent over the past four years: strong corporate and consumer demand, reasonably low inflation, a tight or improving labor market, and a relatively moderate interest rate environment, despite recent interest rate hikes by many of the world's central banks. However, the global economy also faced headwinds from elevated energy prices, higher global interest rates and a weaker U.S. housing market. These factors dampened investor confidence mid-year, when many equity markets declined before rebounding later in the year. 1. Source: Bureau of Labor Statistics. 2. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. Annual Report | 3 Despite such challenges, global economic activity was healthy. Strong global liquidity -- whether petrodollars, corporate cash, private equity, household savings or central banks' reserves -- continued to search for a home. Record global merger and acquisition activity in 2006 also reflected the abundance of cash in the capital markets. Bond yield spreads over U.S. Treasuries narrowed, and global equity and commodity markets rose in the latter part of the year. U.S. equity markets performed well for the year in this environment. The blue chip stocks of the Dow Jones Industrial Average posted a 12-month total return of +19.05%, and the broader Standard & Poor's 500 Index (S&P 500) returned +15.78%, while the technology-heavy NASDAQ Composite Index had a total return of +11.27%. 3 Non-U.S. equity markets ended 2006 on a stronger note, and all major non-U.S. regions delivered double-digit total returns for the year. Stock market indexes in the U.S. and most European countries reached six-year highs in the fourth quarter, and many emerging market indexes in Asia, Europe and Latin America neared or reached all-time highs. Fixed income markets, on the other hand, were somewhat constrained by higher interest rates and robust equity markets. 3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2006. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 4 | Annual Report Franklin Templeton Corefolio Allocation Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Corefolio Allocation Fund seeks capital appreciation through investments in an equally weighted combination of Franklin Capital Growth Fund, Franklin Growth Fund, Mutual Shares Fund and Templeton Growth Fund. -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- This annual report for Franklin Templeton Corefolio Allocation Fund covers the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton Corefolio Allocation Fund - Class A posted a +15.25% cumulative total return for the year under review. The Fund underperformed its hybrid benchmark, which comprised a weighted combination of the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) World Index. For the reporting period, the hybrid benchmark returned +16.99%. 1 You can find other performance data in the Performance Summary beginning on page 7. INVESTMENT STRATEGY The Fund invests its assets in an equally weighted combination of Franklin Capital Growth Fund, Franklin Growth Fund, Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund's allocations to maintain the predetermined equal weightings of approximately 25% of total net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages. 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. The benchmark index's weightings are as follows: S&P 500 75% and MSCI World Index 25%. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 37. Annual Report | 5 ASSET ALLOCATION* Franklin Templeton Corefolio Allocation Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] Domestic Equity 74.7% Foreign Equity 25.2% Short-Term Investments & Other Net Assets 0.1% * The asset allocation is based on the SOI, which classifies each underlying fund into a broad asset class. PORTFOLIO REVIEW The Fund's performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. During the year under review, the Fund's performance benefited most from Mutual Shares Fund - Class Z. However, Franklin Capital Growth Fund - Advisor Class and Franklin Growth Fund - Advisor Class hindered the Fund's overall return relative to its hybrid benchmark. Thank you for your continued participation in Franklin Templeton Corefolio Allocation Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Vice President of Advisers Franklin Templeton Corefolio Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. 6 | Annual Report Performance Summary as of 12/31/06 FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: FTCOX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.38 $ 14.09 $ 12.71 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.1642 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0011 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.3750 -------------------------------------------------------------------------------- TOTAL $ 0.5403 -------------------------------------------------------------------------------- CLASS B (SYMBOL: FBCOX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.37 $ 13.99 $ 12.62 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.0728 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0011 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.3750 -------------------------------------------------------------------------------- TOTAL $ 0.4489 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FTCLX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.35 $ 13.96 $ 12.61 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.0826 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0011 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.3750 -------------------------------------------------------------------------------- TOTAL $ 0.4587 -------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.38 $ 14.07 $ 12.69 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.1429 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0011 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.3750 -------------------------------------------------------------------------------- TOTAL $ 0.5190 -------------------------------------------------------------------------------- Annual Report | 7 Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.39 $ 14.12 $ 12.73 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.2086 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0011 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.3750 -------------------------------------------------------------------------------- TOTAL $ 0.5847 -------------------------------------------------------------------------------- PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. -------------------------------------------------------------------------------- CLASS A 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +15.25% +37.23% +52.26% -------------------------------------------------------------------------------- Average Annual Total Return 3 +8.58% +8.96% +11.28% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 10,858 $ 12,937 $ 14,350 -------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +14.55% +34.50% +48.79% -------------------------------------------------------------------------------- Average Annual Total Return 3 +10.55% +9.56% +11.81% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,055 $ 13,150 $ 14,579 -------------------------------------------------------------------------------- CLASS C 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +14.48% +34.57% +48.75% -------------------------------------------------------------------------------- Average Annual Total Return 3 +13.48% +10.40% +12.47% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,348 $ 13,457 $ 14,875 -------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +15.10% +36.49% +51.45% -------------------------------------------------------------------------------- Average Annual Total Return 3 +15.10% +10.93% +13.07% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,510 $ 13,649 $ 15,145 -------------------------------------------------------------------------------- ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +15.65% +38.49% +53.76% -------------------------------------------------------------------------------- Average Annual Total Return 3 +15.65% +11.47% +13.58% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,565 $ 13,849 $ 15,376 -------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 8 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT COREFOLIO ALLOCATION FUND DATE CLASS A S&P 500 5 MSCI WORLD INDEX 5 ---------- --------------- --------- ------------------ 8/15/2003 $9,425 $10,000 $10,000 8/31/2003 $9,491 $10,100 $10,113 9/30/2003 $9,369 $9,994 $10,177 10/31/2003 $9,783 $10,559 $10,783 11/30/2003 $9,962 $10,651 $10,950 12/31/2003 $10,457 $11,210 $11,639 1/31/2004 $10,600 $11,415 $11,829 2/29/2004 $10,770 $11,574 $12,031 3/31/2004 $10,637 $11,399 $11,956 4/30/2004 $10,533 $11,221 $11,718 5/31/2004 $10,618 $11,374 $11,832 6/30/2004 $10,884 $11,595 $12,080 7/31/2004 $10,448 $11,212 $11,689 8/31/2004 $10,429 $11,257 $11,745 9/30/2004 $10,600 $11,379 $11,971 10/31/2004 $10,770 $11,552 $12,267 11/30/2004 $11,292 $12,020 $12,917 12/31/2004 $11,677 $12,428 $13,414 1/31/2005 $11,333 $12,126 $13,114 2/28/2005 $11,591 $12,381 $13,536 3/31/2005 $11,439 $12,162 $13,280 4/30/2005 $11,237 $11,931 $12,999 5/31/2005 $11,526 $12,310 $13,239 6/30/2005 $11,546 $12,328 $13,360 7/31/2005 $11,951 $12,786 $13,830 8/31/2005 $11,951 $12,670 $13,940 9/30/2005 $12,067 $12,772 $14,306 10/31/2005 $11,845 $12,559 $13,962 11/30/2005 $12,260 $13,034 $14,435 12/31/2005 $12,452 $13,038 $14,758 1/31/2006 $12,756 $13,384 $15,420 2/28/2006 $12,824 $13,420 $15,404 3/31/2006 $13,089 $13,587 $15,749 4/30/2006 $13,268 $13,769 $16,236 5/31/2006 $12,920 $13,373 $15,696 6/30/2006 $12,901 $13,391 $15,698 7/31/2006 $12,851 $13,474 $15,799 8/31/2006 $13,169 $13,794 $16,217 9/30/2006 $13,427 $14,149 $16,415 10/31/2006 $13,875 $14,610 $17,021 11/30/2006 $14,183 $14,887 $17,447 12/31/2006 $14,350 $15,096 $17,806 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS A 12/31/06 ------------------------------------------ 1-Year +8.58% ------------------------------------------ 3-Year +8.96% ------------------------------------------ Since Inception (8/15/03) +11.28% ------------------------------------------ CLASS B (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT COREFOLIO ALLOCATION FUND - DATE CLASS B S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,070 $10,100 $10,113 9/30/2003 $9,930 $9,994 $10,177 10/31/2003 $10,360 $10,559 $10,783 11/30/2003 $10,550 $10,651 $10,950 12/31/2003 $11,062 $11,210 $11,639 1/31/2004 $11,203 $11,415 $11,829 2/29/2004 $11,374 $11,574 $12,031 3/31/2004 $11,223 $11,399 $11,956 4/30/2004 $11,113 $11,221 $11,718 5/31/2004 $11,193 $11,374 $11,832 6/30/2004 $11,474 $11,595 $12,080 7/31/2004 $11,002 $11,212 $11,689 8/31/2004 $10,982 $11,257 $11,745 9/30/2004 $11,143 $11,379 $11,971 10/31/2004 $11,324 $11,552 $12,267 11/30/2004 $11,866 $12,020 $12,917 12/31/2004 $12,268 $12,428 $13,414 1/31/2005 $11,893 $12,126 $13,114 2/28/2005 $12,156 $12,381 $13,536 3/31/2005 $11,996 $12,162 $13,280 4/30/2005 $11,781 $11,931 $12,999 5/31/2005 $12,077 $12,310 $13,239 6/30/2005 $12,087 $12,328 $13,360 7/31/2005 $12,506 $12,786 $13,830 8/31/2005 $12,496 $12,670 $13,940 9/30/2005 $12,608 $12,772 $14,306 10/31/2005 $12,373 $12,559 $13,962 11/30/2005 $12,802 $13,034 $14,435 12/31/2005 $12,990 $13,038 $14,758 1/31/2006 $13,309 $13,384 $15,420 2/28/2006 $13,360 $13,420 $15,404 3/31/2006 $13,639 $13,587 $15,749 4/30/2006 $13,817 $13,769 $16,236 5/31/2006 $13,441 $13,373 $15,696 6/30/2006 $13,420 $13,391 $15,698 7/31/2006 $13,357 $13,474 $15,799 8/31/2006 $13,681 $13,794 $16,217 9/30/2006 $13,942 $14,149 $16,415 10/31/2006 $14,401 $14,610 $17,021 11/30/2006 $14,715 $14,887 $17,447 12/31/2006 $14,579 $15,096 $17,806 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS B 12/31/06 ------------------------------------------ 1-Year +10.55% ------------------------------------------ 3-Year +9.56% ------------------------------------------ Since Inception (8/15/03) +11.81% ------------------------------------------ Annual Report | 9 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS C 12/31/06 ------------------------------------------ 1-Year +13.48% ------------------------------------------ 3-Year +10.40% ------------------------------------------ Since Inception (8/15/03) +12.47% ------------------------------------------ CLASS C (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT COREFOLIO ALLOCATION FUND - DATE CLASS C S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,070 $10,100 $10,113 9/30/2003 $ 9,930 $ 9,994 $10,177 10/31/2003 $10,360 $10,559 $10,783 11/30/2003 $10,540 $10,651 $10,950 12/31/2003 $11,054 $11,210 $11,639 1/31/2004 $11,194 $11,415 $11,829 2/29/2004 $11,365 $11,574 $12,031 3/31/2004 $11,215 $11,399 $11,956 4/30/2004 $11,104 $11,221 $11,718 5/31/2004 $11,194 $11,374 $11,832 6/30/2004 $11,466 $11,595 $12,080 7/31/2004 $10,993 $11,212 $11,689 8/31/2004 $10,973 $11,257 $11,745 9/30/2004 $11,144 $11,379 $11,971 10/31/2004 $11,315 $11,552 $12,267 11/30/2004 $11,858 $12,020 $12,917 12/31/2004 $12,256 $12,428 $13,414 1/31/2005 $11,892 $12,126 $13,114 2/28/2005 $12,155 $12,381 $13,536 3/31/2005 $11,995 $12,162 $13,280 4/30/2005 $11,770 $11,931 $12,999 5/31/2005 $12,066 $12,310 $13,239 6/30/2005 $12,087 $12,328 $13,360 7/31/2005 $12,495 $12,786 $13,830 8/31/2005 $12,495 $12,670 $13,940 9/30/2005 $12,597 $12,772 $14,306 10/31/2005 $12,362 $12,559 $13,962 11/30/2005 $12,801 $13,034 $14,435 12/31/2005 $12,994 $13,038 $14,758 1/31/2006 $13,303 $13,384 $15,420 2/28/2006 $13,365 $13,420 $15,404 3/31/2006 $13,634 $13,587 $15,749 4/30/2006 $13,811 $13,769 $16,236 5/31/2006 $13,435 $13,373 $15,696 6/30/2006 $13,414 $13,391 $15,698 7/31/2006 $13,351 $13,474 $15,799 8/31/2006 $13,675 $13,794 $16,217 9/30/2006 $13,937 $14,149 $16,415 10/31/2006 $14,397 $14,610 $17,021 11/30/2006 $14,710 $14,887 $17,447 12/31/2006 $14,875 $15,096 $17,806 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS R 12/31/06 ------------------------------------------ 1-Year +15.10% ------------------------------------------ 3-Year +10.93% ------------------------------------------ Since Inception (8/15/03) +13.07% ------------------------------------------ CLASS R (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT COREFOLIO ALLOCATION FUND - DATE CLASS R S&P 500 5 MSCI WORLD INDEX 5 --------- ----------------- --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,070 $10,100 $10,113 9/30/2003 $ 9,940 $ 9,994 $10,177 10/31/2003 $10,380 $10,559 $10,783 11/30/2003 $10,570 $10,651 $10,950 12/31/2003 $11,096 $11,210 $11,639 1/31/2004 $11,236 $11,415 $11,829 2/29/2004 $11,417 $11,574 $12,031 3/31/2004 $11,267 $11,399 $11,956 4/30/2004 $11,156 $11,221 $11,718 5/31/2004 $11,246 $11,374 $11,832 6/30/2004 $11,528 $11,595 $12,080 7/31/2004 $11,065 $11,212 $11,689 8/31/2004 $11,045 $11,257 $11,745 9/30/2004 $11,216 $11,379 $11,971 10/31/2004 $11,397 $11,552 $12,267 11/30/2004 $11,951 $12,020 $12,917 12/31/2004 $12,363 $12,428 $13,414 1/31/2005 $11,998 $12,126 $13,114 2/28/2005 $12,262 $12,381 $13,536 3/31/2005 $12,111 $12,162 $13,280 4/30/2005 $11,886 $11,931 $12,999 5/31/2005 $12,193 $12,310 $13,239 6/30/2005 $12,213 $12,328 $13,360 7/31/2005 $12,633 $12,786 $13,830 8/31/2005 $12,633 $12,670 $13,940 9/30/2005 $12,756 $12,772 $14,306 10/31/2005 $12,520 $12,559 $13,962 11/30/2005 $12,971 $13,034 $14,435 12/31/2005 $13,158 $13,038 $14,758 1/31/2006 $13,479 $13,384 $15,420 2/28/2006 $13,552 $13,420 $15,404 3/31/2006 $13,832 $13,587 $15,749 4/30/2006 $14,022 $13,769 $16,236 5/31/2006 $13,643 $13,373 $15,696 6/30/2006 $13,622 $13,391 $15,698 7/31/2006 $13,569 $13,474 $15,799 8/31/2006 $13,906 $13,794 $16,217 9/30/2006 $14,169 $14,149 $16,415 10/31/2006 $14,642 $14,610 $17,021 11/30/2006 $14,969 $14,887 $17,447 12/31/2006 $15,145 $15,096 $17,806 10 | Annual Report Performance Summary (CONTINUED) ADVISOR CLASS (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT COREFOLIO ALLOCATION FUND - DATE ADVISOR CLASS S&P 500 5 MSCI WORLD INDEX 5 --------- ----------------- --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,070 $10,100 $10,113 9/30/2003 $ 9,940 $ 9,994 $10,177 10/31/2003 $10,380 $10,559 $10,783 11/30/2003 $10,580 $10,651 $10,950 12/31/2003 $11,102 $11,210 $11,639 1/31/2004 $11,253 $11,415 $11,829 2/29/2004 $11,434 $11,574 $12,031 3/31/2004 $11,293 $11,399 $11,956 4/30/2004 $11,193 $11,221 $11,718 5/31/2004 $11,273 $11,374 $11,832 6/30/2004 $11,565 $11,595 $12,080 7/31/2004 $11,092 $11,212 $11,689 8/31/2004 $11,082 $11,257 $11,745 9/30/2004 $11,263 $11,379 $11,971 10/31/2004 $11,444 $11,552 $12,267 11/30/2004 $12,008 $12,020 $12,917 12/31/2004 $12,432 $12,428 $13,414 1/31/2005 $12,066 $12,126 $13,114 2/28/2005 $12,341 $12,381 $13,536 3/31/2005 $12,190 $12,162 $13,280 4/30/2005 $11,974 $11,931 $12,999 5/31/2005 $12,282 $12,310 $13,239 6/30/2005 $12,313 $12,328 $13,360 7/31/2005 $12,734 $12,786 $13,830 8/31/2005 $12,744 $12,670 $13,940 9/30/2005 $12,867 $12,772 $14,306 10/31/2005 $12,631 $12,559 $13,962 11/30/2005 $13,083 $13,034 $14,435 12/31/2005 $13,294 $13,038 $14,758 1/31/2006 $13,618 $13,384 $15,420 2/28/2006 $13,691 $13,420 $15,404 3/31/2006 $13,995 $13,587 $15,749 4/30/2006 $14,186 $13,769 $16,236 5/31/2006 $13,804 $13,373 $15,696 6/30/2006 $13,794 $13,391 $15,698 7/31/2006 $13,741 $13,474 $15,799 8/31/2006 $14,090 $13,794 $16,217 9/30/2006 $14,366 $14,149 $16,415 10/31/2006 $14,853 $14,610 $17,021 11/30/2006 $15,192 $14,887 $17,447 12/31/2006 $15,376 $15,096 $17,806 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ ADVISOR CLASS 12/31/06 ------------------------------------------ 1-Year +15.65% ------------------------------------------ 3-Year +11.47% ------------------------------------------ Since Inception (8/15/03) +13.58% ------------------------------------------ ENDNOTES BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS THAT MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THIS FUND OF FUNDS IS SUBJECT TO THESE SAME RISKS. STOCKS HISTORICALLY HAVE OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. FOREIGN INVESTING HAS ADDITIONAL RISKS SUCH AS CURRENCY AND MARKET VOLATILITY AND POLITICAL AND SOCIAL INSTABILITY. INVESTING IN SPECIALIZED INDUSTRY SECTORS, SUCH AS THE TECHNOLOGY SECTOR, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS, INVOLVES SPECIAL CONSIDERATIONS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. The manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. Annual Report | 11 Your Fund's Expenses FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 12 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,112.40 $2.66 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 ------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,108.80 $6.11 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.41 $5.85 ------------------------------------------------------------------------------------------------------- CLASS C ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,108.90 $6.11 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.41 $5.85 ------------------------------------------------------------------------------------------------------- CLASS R ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,111.80 $3.46 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.93 $3.31 ------------------------------------------------------------------------------------------------------- ADVISOR CLASS ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,114.70 $0.80 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.45 $0.77 -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; B: 1.15%; C: 1.15%; R: 0.65%; and Advisor: 0.15%) multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Annual Report | 13 Franklin Templeton Founding Funds Allocation Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Templeton Founding Funds Allocation Fund's principal investment goal is capital appreciation, with a secondary goal of income. The Fund invests in an equally weighted combination of Franklin Income Fund, Mutual Shares Fund and Templeton Growth Fund. -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- We are pleased to bring you Franklin Templeton Founding Funds Allocation Fund's annual report for the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton Founding Funds Allocation Fund - Class A posted a +19.34% cumulative total return for the year under review. The Fund outperformed its hybrid benchmark, which comprised a weighted combination of the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) World Index. For the reporting period, the hybrid benchmark's total return was +17.38%. 1 You can find other performance data in the Performance Summary beginning on page 16. INVESTMENT STRATEGY The Fund invests its assets in an equally weighted combination of Franklin Income Fund, Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund's allocations to maintain the predetermined equal weightings of approximately 33 1/3% of total 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. The benchmark index's weightings are as follows: S&P 500 67% and MSCI World Index 33%. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 43. 14 | Annual Report net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages. PORTFOLIO REVIEW The Fund's performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. During the year under review, the Fund's performance benefited most from Templeton Growth Fund - Advisor Class. Second in terms of performance was Franklin Income Fund - Advisor Class and last was Mutual Shares Fund - Class Z. Thank you for your continued participation in Franklin Templeton Founding Funds Allocation Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Vice President of Advisers Franklin Templeton Founding Funds Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. ASSET ALLOCATION* Franklin Templeton Founding Funds Allocation Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] Domestic Equity 33.2% Domestic Hybrid 33.1% Foreign Equity 33.1% Short-Term Investments & Other Net Assets 0.6% * The asset allocation is based on the SOI, which classifies each underlying fund into a broad asset class. Annual Report | 15 Performance Summary as of 12/31/06 FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: FFALX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.48 $ 13.98 $ 12.50 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.4379 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0002 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4697 -------------------------------------------------------------------------------- TOTAL $ 0.9078 -------------------------------------------------------------------------------- CLASS B (SYMBOL: FFABX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.47 $ 13.93 $ 12.46 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.3407 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0002 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4697 -------------------------------------------------------------------------------- TOTAL $ 0.8106 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FFACX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.42 $ 13.78 $ 12.36 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.3687 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0002 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4697 -------------------------------------------------------------------------------- TOTAL $ 0.8386 -------------------------------------------------------------------------------- CLASS R (SYMBOL: FFARX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.48 $ 13.98 $ 12.50 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.4142 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0002 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4697 -------------------------------------------------------------------------------- TOTAL $ 0.8841 -------------------------------------------------------------------------------- 16 | Annual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FFAAX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.50 $ 14.05 $ 12.55 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.4762 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0002 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4697 -------------------------------------------------------------------------------- TOTAL $ 0.9461 -------------------------------------------------------------------------------- PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. -------------------------------------------------------------------------------- CLASS A 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +19.34% +44.10% +60.80% -------------------------------------------------------------------------------- Average Annual Total Return 3 +12.50% +10.73% +13.10% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,250 $ 13,576 $ 15,156 -------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +18.53% +41.42% +57.37% -------------------------------------------------------------------------------- Average Annual Total Return 3 +14.53% +11.45% +13.72% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,453 $ 13,842 $ 15,437 -------------------------------------------------------------------------------- CLASS C 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +18.50% +41.32% +57.28% -------------------------------------------------------------------------------- Average Annual Total Return 3 +17.50% +12.22% +14.35% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,750 $ 14,132 $ 15,728 -------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +19.15% +43.42% +60.18% -------------------------------------------------------------------------------- Average Annual Total Return 3 +19.15% +12.77% +14.97% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,915 $ 14,342 $ 16,018 -------------------------------------------------------------------------------- ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------- Cumulative Total Return 2 +19.73% +45.60% +62.70% -------------------------------------------------------------------------------- Average Annual Total Return 3 +19.73% +13.34% +15.50% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,973 $ 14,560 $ 16,270 -------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 17 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS A 12/31/06 ------------------------------------------ 1-Year +12.50% ------------------------------------------ 3-Year +10.73% ------------------------------------------ Since Inception (8/15/03) +13.10% ------------------------------------------ CLASS A (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT FOUNDING FUNDS ALLOCATION FUND - DATE CLASS A S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/15/2003 $ 9,425 $10,000 $10,000 8/31/2003 $ 9,463 $10,100 $10,113 9/30/2003 $ 9,519 $ 9,994 $10,177 10/31/2003 $ 9,811 $10,559 $10,783 11/30/2003 $10,019 $10,651 $10,950 12/31/2003 $10,517 $11,210 $11,639 1/31/2004 $10,650 $11,415 $11,829 2/29/2004 $10,850 $11,574 $12,031 3/31/2004 $10,774 $11,399 $11,956 4/30/2004 $10,631 $11,221 $11,718 5/31/2004 $10,641 $11,374 $11,832 6/30/2004 $10,802 $11,595 $12,080 7/31/2004 $10,650 $11,212 $11,689 8/31/2004 $10,783 $11,257 $11,745 9/30/2004 $10,954 $11,379 $11,971 10/31/2004 $11,135 $11,552 $12,267 11/30/2004 $11,610 $12,020 $12,917 12/31/2004 $11,945 $12,428 $13,414 1/31/2005 $11,693 $12,126 $13,114 2/28/2005 $12,082 $12,381 $13,536 3/31/2005 $11,903 $12,162 $13,280 4/30/2005 $11,727 $11,931 $12,999 5/31/2005 $11,903 $12,310 $13,239 6/30/2005 $12,119 $12,328 $13,360 7/31/2005 $12,404 $12,786 $13,830 8/31/2005 $12,473 $12,670 $13,940 9/30/2005 $12,601 $12,772 $14,306 10/31/2005 $12,237 $12,559 $13,962 11/30/2005 $12,404 $13,034 $14,435 12/31/2005 $12,700 $13,038 $14,758 1/31/2006 $13,086 $13,384 $15,420 2/28/2006 $13,157 $13,420 $15,404 3/31/2006 $13,379 $13,587 $15,749 4/30/2006 $13,627 $13,769 $16,236 5/31/2006 $13,400 $13,373 $15,696 6/30/2006 $13,431 $13,391 $15,698 7/31/2006 $13,627 $13,474 $15,799 8/31/2006 $13,937 $13,794 $16,217 9/30/2006 $14,103 $14,149 $16,415 10/31/2006 $14,526 $14,610 $17,021 11/30/2006 $14,857 $14,887 $17,447 12/31/2006 $15,156 $15,096 $17,806 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS B 12/31/06 ------------------------------------------ 1-Year +14.53% ------------------------------------------ 3-Year +11.45% ------------------------------------------ Since Inception (8/15/03) +13.72% ------------------------------------------ CLASS B (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT FOUNDING FUNDS ALLOCATION FUND - DATE CLASS B S&P 500 5 MSCI WORLD INDEX 5 ---------- ------------------ --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,100 $10,113 9/30/2003 $10,090 $ 9,994 $10,177 10/31/2003 $10,400 $10,559 $10,783 11/30/2003 $10,610 $10,651 $10,950 12/31/2003 $11,128 $11,210 $11,639 1/31/2004 $11,279 $11,415 $11,829 2/29/2004 $11,470 $11,574 $12,031 3/31/2004 $11,390 $11,399 $11,956 4/30/2004 $11,229 $11,221 $11,718 5/31/2004 $11,229 $11,374 $11,832 6/30/2004 $11,400 $11,595 $12,080 7/31/2004 $11,239 $11,212 $11,689 8/31/2004 $11,360 $11,257 $11,745 9/30/2004 $11,541 $11,379 $11,971 10/31/2004 $11,722 $11,552 $12,267 11/30/2004 $12,216 $12,020 $12,917 12/31/2004 $12,576 $12,428 $13,414 1/31/2005 $12,298 $12,126 $13,114 2/28/2005 $12,689 $12,381 $13,536 3/31/2005 $12,501 $12,162 $13,280 4/30/2005 $12,303 $11,931 $12,999 5/31/2005 $12,490 $12,310 $13,239 6/30/2005 $12,708 $12,328 $13,360 7/31/2005 $12,998 $12,786 $13,830 8/31/2005 $13,061 $12,670 $13,940 9/30/2005 $13,185 $12,772 $14,306 10/31/2005 $12,801 $12,559 $13,962 11/30/2005 $12,967 $13,034 $14,435 12/31/2005 $13,277 $13,038 $14,758 1/31/2006 $13,671 $13,384 $15,420 2/28/2006 $13,735 $13,420 $15,404 3/31/2006 $13,968 $13,587 $15,749 4/30/2006 $14,207 $13,769 $16,236 5/31/2006 $13,968 $13,373 $15,696 6/30/2006 $14,001 $13,391 $15,698 7/31/2006 $14,196 $13,474 $15,799 8/31/2006 $14,500 $13,794 $16,217 9/30/2006 $14,662 $14,149 $16,415 10/31/2006 $15,096 $14,610 $17,021 11/30/2006 $15,443 $14,887 $17,447 12/31/2006 $15,437 $15,096 $17,806 18 | Annual Report Performance Summary (CONTINUED) CLASS C (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT FOUNDING FUNDS ALLOCATION FUND - DATE CLASS C S&P 500 5 MSCI WORLD INDEX 5 ---------- ------------------ --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,100 $10,113 9/30/2003 $10,090 $ 9,994 $10,177 10/31/2003 $10,390 $10,559 $10,783 11/30/2003 $10,610 $10,651 $10,950 12/31/2003 $11,129 $11,210 $11,639 1/31/2004 $11,270 $11,415 $11,829 2/29/2004 $11,471 $11,574 $12,031 3/31/2004 $11,391 $11,399 $11,956 4/30/2004 $11,229 $11,221 $11,718 5/31/2004 $11,229 $11,374 $11,832 6/30/2004 $11,401 $11,595 $12,080 7/31/2004 $11,240 $11,212 $11,689 8/31/2004 $11,360 $11,257 $11,745 9/30/2004 $11,542 $11,379 $11,971 10/31/2004 $11,723 $11,552 $12,267 11/30/2004 $12,216 $12,020 $12,917 12/31/2004 $12,565 $12,428 $13,414 1/31/2005 $12,298 $12,126 $13,114 2/28/2005 $12,688 $12,381 $13,536 3/31/2005 $12,500 $12,162 $13,280 4/30/2005 $12,303 $11,931 $12,999 5/31/2005 $12,490 $12,310 $13,239 6/30/2005 $12,697 $12,328 $13,360 7/31/2005 $12,998 $12,786 $13,830 8/31/2005 $13,060 $12,670 $13,940 9/30/2005 $13,185 $12,772 $14,306 10/31/2005 $12,801 $12,559 $13,962 11/30/2005 $12,967 $13,034 $14,435 12/31/2005 $13,272 $13,038 $14,758 1/31/2006 $13,670 $13,384 $15,420 2/28/2006 $13,734 $13,420 $15,404 3/31/2006 $13,969 $13,587 $15,749 4/30/2006 $14,209 $13,769 $16,236 5/31/2006 $13,969 $13,373 $15,696 6/30/2006 $13,991 $13,391 $15,698 7/31/2006 $14,198 $13,474 $15,799 8/31/2006 $14,504 $13,794 $16,217 9/30/2006 $14,668 $14,149 $16,415 10/31/2006 $15,094 $14,610 $17,021 11/30/2006 $15,444 $14,887 $17,447 12/31/2006 $15,728 $15,096 $17,806 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS C 12/31/06 ------------------------------------------ 1-Year +17.50% ------------------------------------------ 3-Year +12.22% ------------------------------------------ Since Inception (8/15/03) +14.35% ------------------------------------------ CLASS R (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT FOUNDING FUNDS ALLOCATION FUND - DATE CLASS R S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,100 $10,113 9/30/2003 $10,100 $ 9,994 $10,177 10/31/2003 $10,410 $10,559 $10,783 11/30/2003 $10,630 $10,651 $10,950 12/31/2003 $11,168 $11,210 $11,639 1/31/2004 $11,319 $11,415 $11,829 2/29/2004 $11,521 $11,574 $12,031 3/31/2004 $11,440 $11,399 $11,956 4/30/2004 $11,279 $11,221 $11,718 5/31/2004 $11,289 $11,374 $11,832 6/30/2004 $11,471 $11,595 $12,080 7/31/2004 $11,309 $11,212 $11,689 8/31/2004 $11,440 $11,257 $11,745 9/30/2004 $11,622 $11,379 $11,971 10/31/2004 $11,803 $11,552 $12,267 11/30/2004 $12,307 $12,020 $12,917 12/31/2004 $12,668 $12,428 $13,414 1/31/2005 $12,400 $12,126 $13,114 2/28/2005 $12,803 $12,381 $13,536 3/31/2005 $12,624 $12,162 $13,280 4/30/2005 $12,426 $11,931 $12,999 5/31/2005 $12,614 $12,310 $13,239 6/30/2005 $12,843 $12,328 $13,360 7/31/2005 $13,145 $12,786 $13,830 8/31/2005 $13,207 $12,670 $13,940 9/30/2005 $13,343 $12,772 $14,306 10/31/2005 $12,957 $12,559 $13,962 11/30/2005 $13,134 $13,034 $14,435 12/31/2005 $13,444 $13,038 $14,758 1/31/2006 $13,852 $13,384 $15,420 2/28/2006 $13,928 $13,420 $15,404 3/31/2006 $14,163 $13,587 $15,749 4/30/2006 $14,414 $13,769 $16,236 5/31/2006 $14,174 $13,373 $15,696 6/30/2006 $14,217 $13,391 $15,698 7/31/2006 $14,414 $13,474 $15,799 8/31/2006 $14,743 $13,794 $16,217 9/30/2006 $14,907 $14,149 $16,415 10/31/2006 $15,356 $14,610 $17,021 11/30/2006 $15,717 $14,887 $17,447 12/31/2006 $16,018 $15,096 $17,806 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS R 12/31/06 ------------------------------------------ 1-Year +19.15% ------------------------------------------ 3-Year +12.77% ------------------------------------------ Since Inception (8/15/03) +14.97% ------------------------------------------ Annual Report | 19 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ ADVISOR CLASS 12/31/06 ------------------------------------------ 1-Year +19.73% ------------------------------------------ 3-Year +13.34% ------------------------------------------ Since Inception (8/15/03) +15.50% ------------------------------------------ ADVISOR CLASS (8/15/03-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT FOUNDING FUNDS ALLOCATION FUND - DATE ADVISOR CLASS S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,100 $10,113 9/30/2003 $10,100 $ 9,994 $10,177 10/31/2003 $10,420 $10,559 $10,783 11/30/2003 $10,640 $10,651 $10,950 12/31/2003 $11,175 $11,210 $11,639 1/31/2004 $11,326 $11,415 $11,829 2/29/2004 $11,538 $11,574 $12,031 3/31/2004 $11,457 $11,399 $11,956 4/30/2004 $11,306 $11,221 $11,718 5/31/2004 $11,326 $11,374 $11,832 6/30/2004 $11,508 $11,595 $12,080 7/31/2004 $11,346 $11,212 $11,689 8/31/2004 $11,477 $11,257 $11,745 9/30/2004 $11,669 $11,379 $11,971 10/31/2004 $11,861 $11,552 $12,267 11/30/2004 $12,375 $12,020 $12,917 12/31/2004 $12,744 $12,428 $13,414 1/31/2005 $12,475 $12,126 $13,114 2/28/2005 $12,889 $12,381 $13,536 3/31/2005 $12,710 $12,162 $13,280 4/30/2005 $12,511 $11,931 $12,999 5/31/2005 $12,710 $12,310 $13,239 6/30/2005 $12,940 $12,328 $13,360 7/31/2005 $13,253 $12,786 $13,830 8/31/2005 $13,326 $12,670 $13,940 9/30/2005 $13,472 $12,772 $14,306 10/31/2005 $13,086 $12,559 $13,962 11/30/2005 $13,263 $13,034 $14,435 12/31/2005 $13,589 $13,038 $14,758 1/31/2006 $14,011 $13,384 $15,420 2/28/2006 $14,087 $13,420 $15,404 3/31/2006 $14,335 $13,587 $15,749 4/30/2006 $14,599 $13,769 $16,236 5/31/2006 $14,357 $13,373 $15,696 6/30/2006 $14,401 $13,391 $15,698 7/31/2006 $14,621 $13,474 $15,799 8/31/2006 $14,952 $13,794 $16,217 9/30/2006 $15,128 $14,149 $16,415 10/31/2006 $15,591 $14,610 $17,021 11/30/2006 $15,955 $14,887 $17,447 12/31/2006 $16,270 $15,096 $17,806 ENDNOTES BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS THAT MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THIS FUND OF FUNDS IS SUBJECT TO THESE SAME RISKS. STOCKS HISTORICALLY HAVE OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. BONDS ARE AFFECTED BY CHANGES IN INTEREST RATES AND THE CREDITWORTHINESS OF THEIR ISSUERS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. HIGHER-YIELDING, LOWER-RATED CORPORATE BONDS ENTAIL A GREATER DEGREE OF CREDIT RISK COMPARED TO INVESTMENT-GRADE SECURITIES. FOREIGN INVESTING HAS ADDITIONAL RISKS SUCH AS CURRENCY AND MARKET VOLATILITY AND POLITICAL AND SOCIAL INSTABILITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. The manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. 20 | Annual Report Your Fund's Expenses FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 21 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,128.40 $2.68 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 ------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,124.00 $6.16 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.41 $5.85 ------------------------------------------------------------------------------------------------------- CLASS C ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,124.20 $6.16 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.41 $5.85 ------------------------------------------------------------------------------------------------------- CLASS R ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,126.60 $3.48 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.93 $3.31 ------------------------------------------------------------------------------------------------------- ADVISOR CLASS ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,129.80 $0.81 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.45 $0.77 -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; B: 1.15%; C: 1.15%; R: 0.65%; and Advisor: 0.15%) multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 22 | Annual Report Franklin Templeton Perspectives Allocation Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Templeton Perspectives Allocation Fund seeks capital appreciation through investments in an equally weighted combination of Franklin Flex Cap Growth Fund, Mutual Shares Fund and Templeton Growth Fund. -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- This annual report for Franklin Templeton Perspectives Allocation Fund covers the fiscal year ended December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton Perspectives Allocation Fund - Class A posted a +14.69% cumulative total return for the year under review. The Fund underperformed its hybrid benchmark, which comprised a weighted combination of the Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) World Index. For the reporting period, the hybrid benchmark's total return was +17.38%. 1 You can find other performance data in the Performance Summary beginning on page 25. INVESTMENT STRATEGY The Fund invests its assets in an equally weighted combination of Franklin Flex Cap Growth Fund, Mutual Shares Fund and Templeton Growth Fund. These underlying funds, in turn, invest primarily in U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund's allocations to maintain the predetermined equal weightings of approximately 33 1/3% of total net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages. 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. The benchmark index's weightings are as follows: S&P 500 67% and MSCI World Index 33%. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 48. Annual Report | 23 ASSET ALLOCATION* Franklin Templeton Perspectives Allocation Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] Domestic Equity 66.4% Foreign Equity 33.4% Short-Term Investments & Other Net Assets 0.2% * The asset allocation is based on the SOI, which classifies each underlying fund into a broad asset class. PORTFOLIO REVIEW The Fund's performance can be attributed largely to maintaining a relatively static allocation among domestic and foreign equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. During the year under review, the Fund's performance benefited from Templeton Growth Fund - Advisor Class and Mutual Shares Fund - Class Z. Franklin Flex Cap Growth Fund - Advisor Class performance hindered the Fund's overall return relative to its hybrid benchmark. Thank you for your continued participation in Franklin Templeton Perspectives Allocation Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Vice President of Advisers Franklin Templeton Perspectives Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. 24 | Annual Report Performance Summary as of 12/31/06 FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: FPAAX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.11 $ 12.90 $ 11.79 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.1850 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0001 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4228 -------------------------------------------------------------------------------- TOTAL $ 0.6079 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FPCAX) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.08 $ 12.82 $ 11.74 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.1174 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0001 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4228 -------------------------------------------------------------------------------- TOTAL $ 0.5403 -------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.11 $ 12.90 $ 11.79 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.1613 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0001 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4228 -------------------------------------------------------------------------------- TOTAL $ 0.5842 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 12/31/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.12 $ 12.93 $ 11.81 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $ 0.2217 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0001 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4228 -------------------------------------------------------------------------------- TOTAL $ 0.6446 -------------------------------------------------------------------------------- Annual Report | 25 Performance Summary (CONTINUED) PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. -------------------------------------------------------------------------------- CLASS A 1-YEAR INCEPTION (8/2/04) -------------------------------------------------------------------------------- Cumulative Total Return 2 +14.69% +39.79% -------------------------------------------------------------------------------- Average Annual Total Return 3 +8.09% +12.10% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 10,809 $ 13,175 -------------------------------------------------------------------------------- CLASS C 1-YEAR INCEPTION (8/2/04) -------------------------------------------------------------------------------- Cumulative Total Return 2 +13.92% +37.61% -------------------------------------------------------------------------------- Average Annual Total Return 3 +12.92% +14.14% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,292 $ 13,761 -------------------------------------------------------------------------------- CLASS R 1-YEAR INCEPTION (8/2/04) -------------------------------------------------------------------------------- Cumulative Total Return 2 +14.49% +39.31% -------------------------------------------------------------------------------- Average Annual Total Return 3 +14.49% +14.72% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,449 $ 13,931 -------------------------------------------------------------------------------- ADVISOR CLASS 1-YEAR INCEPTION (8/2/04) -------------------------------------------------------------------------------- Cumulative Total Return 2 +15.07% +40.85% -------------------------------------------------------------------------------- Average Annual Total Return 3 +15.07% +15.25% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $ 11,507 $ 14,085 -------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 26 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (8/2/04-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT PERSPECTIVES ALLOCATION FUND - DATE CLASS A S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/2/2004 $ 9,425 $10,000 $10,000 8/31/2004 $ 9,510 $10,040 $10,048 9/30/2004 $ 9,670 $10,149 $10,241 10/31/2004 $ 9,840 $10,304 $10,494 11/30/2004 $10,311 $10,721 $11,050 12/31/2004 $10,643 $11,085 $11,475 1/31/2005 $10,367 $10,815 $11,219 2/28/2005 $10,681 $11,043 $11,580 3/31/2005 $10,519 $10,847 $11,361 4/30/2005 $10,328 $10,642 $11,120 5/31/2005 $10,566 $10,980 $11,326 6/30/2005 $10,624 $10,996 $11,429 7/31/2005 $10,958 $11,404 $11,831 8/31/2005 $11,006 $11,300 $11,926 9/30/2005 $11,168 $11,392 $12,239 10/31/2005 $10,910 $11,202 $11,944 11/30/2005 $11,273 $11,625 $12,349 12/31/2005 $11,488 $11,629 $12,626 1/31/2006 $11,916 $11,937 $13,192 2/28/2006 $11,945 $11,970 $13,178 3/31/2006 $12,169 $12,118 $13,473 4/30/2006 $12,318 $12,281 $13,890 5/31/2006 $11,903 $11,928 $13,428 6/30/2006 $11,942 $11,944 $13,429 7/31/2006 $11,922 $12,017 $13,516 8/31/2006 $12,189 $12,303 $13,874 9/30/2006 $12,377 $12,620 $14,043 10/31/2006 $12,753 $13,031 $14,562 11/30/2006 $13,030 $13,278 $14,926 12/31/2006 $13,175 $13,465 $15,233 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS A 12/31/06 ------------------------------------------ 1-Year +8.09% ------------------------------------------ Since Inception (8/2/04) +12.10% ------------------------------------------ CLASS C (8/2/04-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT PERSPECTIVES ALLOCATION FUND - DATE CLASS C S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/2/2004 $10,000 $10,000 $10,000 8/31/2004 $10,090 $10,040 $10,048 9/30/2004 $10,250 $10,149 $10,241 10/31/2004 $10,430 $10,304 $10,494 11/30/2004 $10,910 $10,721 $11,050 12/31/2004 $11,266 $11,085 $11,475 1/31/2005 $10,964 $10,815 $11,219 2/28/2005 $11,286 $11,043 $11,580 3/31/2005 $11,115 $10,847 $11,361 4/30/2005 $10,902 $10,642 $11,120 5/31/2005 $11,155 $10,980 $11,326 6/30/2005 $11,206 $10,996 $11,429 7/31/2005 $11,550 $11,404 $11,831 8/31/2005 $11,591 $11,300 $11,926 9/30/2005 $11,763 $11,392 $12,239 10/31/2005 $11,479 $11,202 $11,944 11/30/2005 $11,854 $11,625 $12,349 12/31/2005 $12,080 $11,629 $12,626 1/31/2006 $12,512 $11,937 $13,192 2/28/2006 $12,543 $11,970 $13,178 3/31/2006 $12,769 $12,118 $13,473 4/30/2006 $12,915 $12,281 $13,890 5/31/2006 $12,476 $11,928 $13,428 6/30/2006 $12,518 $11,944 $13,429 7/31/2006 $12,487 $12,017 $13,516 8/31/2006 $12,758 $12,303 $13,874 9/30/2006 $12,946 $12,620 $14,043 10/31/2006 $13,333 $13,031 $14,562 11/30/2006 $13,615 $13,278 $14,926 12/31/2006 $13,761 $13,465 $15,233 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS C 12/31/06 ------------------------------------------ 1-Year +12.92% ------------------------------------------ Since Inception (8/2/04) +14.14% ------------------------------------------ Annual Report | 27 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS R 12/31/06 ------------------------------------------ 1-Year +14.49% ------------------------------------------ Since Inception (8/2/04) +14.72% ------------------------------------------ CLASS R (8/2/04-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT PERSPECTIVES ALLOCATION FUND - DATE CLASS R S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/2/2004 $10,000 $10,000 $10,000 8/31/2004 $10,080 $10,040 $10,048 9/30/2004 $10,250 $10,149 $10,241 10/31/2004 $10,440 $10,304 $10,494 11/30/2004 $10,930 $10,721 $11,050 12/31/2004 $11,281 $11,085 $11,475 1/31/2005 $10,989 $10,815 $11,219 2/28/2005 $11,322 $11,043 $11,580 3/31/2005 $11,159 $10,847 $11,361 4/30/2005 $10,946 $10,642 $11,120 5/31/2005 $11,199 $10,980 $11,326 6/30/2005 $11,260 $10,996 $11,429 7/31/2005 $11,605 $11,404 $11,831 8/31/2005 $11,655 $11,300 $11,926 9/30/2005 $11,828 $11,392 $12,239 10/31/2005 $11,554 $11,202 $11,944 11/30/2005 $11,939 $11,625 $12,349 12/31/2005 $12,168 $11,629 $12,626 1/31/2006 $12,612 $11,937 $13,192 2/28/2006 $12,643 $11,970 $13,178 3/31/2006 $12,880 $12,118 $13,473 4/30/2006 $13,037 $12,281 $13,890 5/31/2006 $12,587 $11,928 $13,428 6/30/2006 $12,639 $11,944 $13,429 7/31/2006 $12,608 $12,017 $13,516 8/31/2006 $12,890 $12,303 $13,874 9/30/2006 $13,089 $12,620 $14,043 10/31/2006 $13,487 $13,031 $14,562 11/30/2006 $13,781 $13,278 $14,926 12/31/2006 $13,931 $13,465 $15,233 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ ADVISOR CLASS 12/31/06 ------------------------------------------ 1-Year +15.07% ------------------------------------------ Since Inception (8/2/04) +15.25% ------------------------------------------ ADVISOR CLASS (8/2/04-12/31/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT PERSPECTIVES ALLOCATION FUND - DATE ADVISOR CLASS S&P 500 5 MSCI WORLD INDEX 5 ---------- ----------------- --------- ------------------ 8/2/2004 $10,000 $10,000 $10,000 8/31/2004 $10,090 $10,040 $10,048 9/30/2004 $10,260 $10,149 $10,241 10/31/2004 $10,450 $10,304 $10,494 11/30/2004 $10,950 $10,721 $11,050 12/31/2004 $11,301 $11,085 $11,475 1/31/2005 $11,008 $10,815 $11,219 2/28/2005 $11,341 $11,043 $11,580 3/31/2005 $11,178 $10,847 $11,361 4/30/2005 $10,975 $10,642 $11,120 5/31/2005 $11,239 $10,980 $11,326 6/30/2005 $11,300 $10,996 $11,429 7/31/2005 $11,655 $11,404 $11,831 8/31/2005 $11,705 $11,300 $11,926 9/30/2005 $11,888 $11,392 $12,239 10/31/2005 $11,614 $11,202 $11,944 11/30/2005 $12,010 $11,625 $12,349 12/31/2005 $12,241 $11,629 $12,626 1/31/2006 $12,697 $11,937 $13,192 2/28/2006 $12,728 $11,970 $13,178 3/31/2006 $12,977 $12,118 $13,473 4/30/2006 $13,134 $12,281 $13,890 5/31/2006 $12,693 $11,928 $13,428 6/30/2006 $12,745 $11,944 $13,429 7/31/2006 $12,724 $12,017 $13,516 8/31/2006 $13,019 $12,303 $13,874 9/30/2006 $13,218 $12,620 $14,043 10/31/2006 $13,618 $13,031 $14,562 11/30/2006 $13,923 $13,278 $14,926 12/31/2006 $14,085 $13,465 $15,233 28 | Annual Report Performance Summary (CONTINUED) ENDNOTES BECAUSE THE FUND INVESTS IN UNDERLYING FUNDS THAT MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THIS FUND OF FUNDS IS SUBJECT TO THESE SAME RISKS. STOCKS HISTORICALLY HAVE OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. FOREIGN INVESTING HAS ADDITIONAL RISKS SUCH AS CURRENCY AND MARKET VOLATILITY AND POLITICAL AND SOCIAL INSTABILITY. THE PORTFOLIO MAY INCLUDE INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN HIGHLY VOLATILE AND INVOLVES SPECIAL RISKS. FRANKLIN FLEX CAP GROWTH FUND NORMALLY INVESTS A MAJORITY OF ITS ASSETS IN SECURITIES LINKED TO THE STATE OF CALIFORNIA, WHICH MAY INVOLVE INCREASED VOLATILITY ASSOCIATED WITH ECONOMIC OR REGULATORY DEVELOPMENTS IN THE STATE. SMALLER OR RELATIVELY NEW OR UNSEASONED COMPANIES CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. The manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets. Annual Report | 29 Your Fund's Expenses FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 30 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06 ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,103.30 $2.65 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 ------------------------------------------------------------------------------------------------------- CLASS C ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,099.20 $5.98 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.51 $5.75 ------------------------------------------------------------------------------------------------------- CLASS R ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,102.20 $3.44 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.93 $3.31 ------------------------------------------------------------------------------------------------------- ADVISOR CLASS ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,105.10 $0.80 ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.45 $0.77 -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A:0.50%; C:1.13%; R:0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Annual Report | 31 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS A 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.71 $ 12.20 $ 11.02 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.11 0.09 0.09 0.01 Net realized and unrealized gains (losses) ........ 1.81 0.71 1.21 1.07 ------------------------------------------------------------------- Total from investment operations ................... 1.92 0.80 1.30 1.08 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.16) (0.10) (0.07) -- Tax return of capital ............................. -- -- -- (0.06) Net realized gains (losses) ....................... (0.38) (0.19) (0.05) -- ------------------------------------------------------------------- Total distributions ................................ (0.54) (0.29) (0.12) (0.06) ------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 14.09 $ 12.71 $ 12.20 $ 11.02 =================================================================== Total return d ..................................... 15.25% 6.63% 11.77% 10.85% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 458,460 $ 353,016 $ 238,564 $ 157,792 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.65% 0.66% 0.68% h 0.74% h Expenses net of waiver and payments by affiliates e 0.50% 0.58% 0.68% h 0.47% h Net investment income c ........................... 0.82% 0.72% 1.86% h 0.14% h Portfolio turnover rate ............................ 1.66% 2.49% 1.02% 0.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. 32 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS B 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.62 $ 12.12 $ 10.95 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b,c .................. 0.01 0.01 0.06 (0.06) Net realized and unrealized gains (losses) ........ 1.81 0.70 1.20 1.06 ------------------------------------------------------------------- Total from investment operations ................... 1.82 0.71 1.26 1.00 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.07) (0.02) (0.04) -- Tax return of capital ............................. -- -- -- (0.05) Net realized gains (losses) ....................... (0.38) (0.19) (0.05) -- ------------------------------------------------------------------- Total distributions ................................ (0.45) (0.21) (0.09) (0.05) ------------------------------------------------------------------- Redemption fees..................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.99 $ 12.62 $ 12.12 $ 10.95 =================================================================== Total return d ..................................... 14.55% 5.89% 11.50% 10.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 76,408 $ 71,496 $ 66,562 $ 44,297 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.30% 1.31% 1.33% h 1.39% h Expenses net of waiver and payments by affiliates e 1.15% 1.23% 1.33% h 1.12% h Net investment income (loss) c .................... 0.17% 0.07% 1.21% h (0.51)% h Portfolio turnover rate ............................ 1.66% 2.49% 1.02% 0.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. Annual Report | The accompanying notes are an integral part of these financial statements. | 33 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS C 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.61 $ 12.11 $ 10.94 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.02 0.01 0.06 0.05 Net realized and unrealized gains (losses) ........ 1.79 0.71 1.20 1.04 ------------------------------------------------------------------- Total from investment operations ................... 1.81 0.72 1.26 0.99 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.08) (0.03) (0.04) -- Tax return of capital ............................. -- -- -- (0.05) Net realized gains (losses) ....................... (0.38) (0.19) (0.05) -- ------------------------------------------------------------------- Total distributions ................................ (0.46) (0.22) (0.09) (0.05) ------------------------------------------------------------------- Redemption fees..................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.96 $ 12.61 $ 12.11 $ 10.94 =================================================================== Total return d ..................................... 14.48% 6.02% 11.49% 9.93% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 166,688 $ 132,459 $ 96,487 $ 73,272 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.29% 1.29% 1.33% h 1.39% h Expenses net of waiver and payments by affiliates e 1.14% 1.21% 1.33% h 1.12% h Net investment income (loss) c .................... 0.18% 0.09% 1.21% h (0.51)% h Portfolio turnover rate ............................ 1.66% 2.49% 1.02% 0.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. 34 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS R 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.69 $ 12.18 $ 11.00 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b,c .................. 0.09 0.05 0.08 (0.02) Net realized and unrealized gains (losses) ........ 1.81 0.73 1.21 1.08 ------------------------------------------------------------------- Total from investment operations ................... 1.90 0.78 1.29 1.06 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.14) (0.08) (0.06) -- Tax return of capital ............................. -- -- -- (0.06) Net realized gains (losses) ....................... (0.38) (0.19) (0.05) -- ------------------------------------------------------------------- Total distributions ................................ (0.52) (0.27) (0.11) (0.06) ------------------------------------------------------------------- Redemption fees..................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 14.07 $ 12.69 $ 12.18 $ 11.00 =================================================================== Total return d ..................................... 15.10% 6.43% 11.73% 10.65% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 2,534 $ 2,190 $ 1,944 $ 1,408 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.80% 0.81% 0.83% h 0.89% h Expenses net of waiver and payments by affiliates e 0.65% 0.73% 0.83% h 0.62% h Net investment income (loss) c .................... 0.67% 0.57% 1.71% h (0.01)% h Portfolio turnover rate ............................ 1.66% 2.49% 1.02% 0.62% g
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. Annual Report | The accompanying notes are an integral part of these financial statements. | 35 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, ADVISOR CLASS 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.73 $ 12.21 $ 11.02 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.15 0.13 0.11 0.04 Net realized and unrealized gains (losses) ........ 1.83 0.72 1.21 1.05 ------------------------------------------------------------------- Total from investment operations ................... 1.98 0.85 1.32 1.09 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.21) (0.14) (0.08) -- Tax return of capital ............................. -- -- -- (0.07) Net realized gains (losses) ....................... (0.38) (0.19) (0.05) -- ------------------------------------------------------------------- Total distributions ................................ (0.59) (0.33) (0.13) (0.07) ------------------------------------------------------------------- Redemption fees..................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 14.12 $ 12.73 $ 12.21 $ 11.02 =================================================================== Total return d ..................................... 15.65% 6.93% 12.09% 10.92% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 3,073 $ 2,792 $ 2,097 $ 1,181 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.30% 0.31% 0.33% h 0.39% h Expenses net of waiver and payments by affiliates e 0.15% 0.23% 0.33% h 0.12% h Net investment income c ........................... 1.17% 1.07% 2.21% h 0.49% h Portfolio turnover rate ............................ 1.66% 2.49% 1.02% 0.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.75% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. 36 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
----------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND SHARES VALUE ----------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 99.9% DOMESTIC EQUITY 74.7% Franklin Capital Growth Fund, Advisor Class ......................... 14,686,437 $ 175,356,056 Franklin Growth Fund, Advisor Class ................................. 4,203,753 175,002,227 Mutual Shares Fund, Class Z ......................................... 6,833,613 178,288,955 ----------------- 528,647,238 ----------------- FOREIGN EQUITY 25.2% Templeton Growth Fund Inc., Advisor Class ........................... 6,936,340 178,125,222 ----------------- TOTAL LONG TERM INVESTMENTS (COST $594,675,074) ..................... 706,772,460 ----------------- SHORT TERM INVESTMENT (COST $1,530) 0.0% b MONEY MARKET FUND 0.0% b c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 1,530 1,530 ----------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $594,676,604) 99.9% ..... 706,773,990 OTHER ASSETS, LESS LIABILITIES 0.1% ................................. 389,136 ----------------- NET ASSETS 100.0% ................................................... $ 707,163,126 =================
a See Note 6 regarding investments in Underlying Funds. b Rounds to less than 0.1% of net assets. c The rate shown is the annualized seven-day yield at period end. Annual Report | The accompanying notes are an integral part of these financial statements. | 37 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS A 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.50 $ 12.28 $ 11.21 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.40 0.37 0.22 0.23 Net realized and unrealized gains (losses) ........ 1.99 0.40 1.14 1.07 ------------------------------------------------------------------- Total from investment operations ................... 2.39 0.77 1.36 1.30 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.44) (0.30) (0.23) (0.09) Net realized gains (losses) ....................... (0.47) (0.25) (0.06) -- ------------------------------------------------------------------- Total distributions ................................ (0.91) (0.55) (0.29) (0.09) ------------------------------------------------------------------- Redemption fees..................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.98 $ 12.50 $ 12.28 $ 11.21 =================================================================== Total return d ..................................... 19.34% 6.31% 12.16% 13.00% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 7,288,143 $ 4,051,695 $ 1,640,876 $ 882,175 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.57% 0.58% 0.60% h 0.61% h Expenses net of waiver and payments by affiliates e 0.50% 0.54% 0.60% h 0.49% h Net investment income c ........................... 3.00% 2.98% 4.48% h 2.16% h Portfolio turnover rate ............................ 0.96% 0.74% 0.37% 0.71%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.70% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. 38 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS B 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.46 $ 12.23 $ 11.16 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.28 0.26 0.19 0.16 Net realized and unrealized gains (losses) ........ 2.00 0.43 1.13 1.08 ------------------------------------------------------------------- Total from investment operations ................... 2.28 0.69 1.32 1.24 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.34) (0.21) (0.19) (0.08) Net realized gains (losses) ....................... (0.47) (0.25) (0.06) -- ------------------------------------------------------------------- Total distributions ................................ (0.81) (0.46) (0.25) (0.08) ------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.93 $ 12.46 $ 12.23 $ 11.16 =================================================================== Total return d ..................................... 18.53% 5.58% 11.90% 12.39% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 766,452 $ 688,590 $ 612,553 $ 357,282 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.22% 1.23% 1.25% h 1.26% h Expenses net of waiver and payments by affiliates e 1.15% 1.19% 1.25% h 1.14% h Net investment income c ........................... 2.35% 2.33% 3.83% h 1.51% h Portfolio turnover rate ............................ 0.96% 0.74% 0.37% 0.71%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.70% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. Annual Report | The accompanying notes are an integral part of these financial statements. | 39 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS C 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.36 $ 12.23 $ 11.16 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.31 0.29 0.19 0.17 Net realized and unrealized gains (losses) ........ 1.95 0.39 1.13 1.07 ------------------------------------------------------------------- Total from investment operations ................... 2.26 0.68 1.32 1.24 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.37) (0.30) (0.19) (0.08) Net realized gains (losses) ....................... (0.47) (0.25) (0.06) -- ------------------------------------------------------------------- Total distributions ................................ (0.84) (0.55) (0.25) (0.08) ------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.78 $ 12.36 $ 12.23 $ 11.16 =================================================================== Total return d ..................................... 18.50% 5.63% 11.79% 12.40% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 3,692,307 $ 2,075,041 $ 927,786 $ 535,778 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.22% 1.20% 1.25% h 1.26% h Expenses net of waiver and payments by affiliates e 1.15% 1.16% 1.25% h 1.14% h Net investment income c ........................... 2.35% 2.36% 3.83% h 1.51% h Portfolio turnover rate ............................ 0.96% 0.74% 0.37% 0.71%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.70% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. 40 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS R 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.50 $ 12.28 $ 11.22 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.37 0.33 0.22 0.20 Net realized and unrealized gains (losses) ........ 1.99 0.42 1.13 1.11 ------------------------------------------------------------------- Total from investment operations ................... 2.36 0.75 1.35 1.31 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.41) (0.28) (0.23) (0.09) Net realized gains (losses) ....................... (0.47) (0.25) (0.06) -- ------------------------------------------------------------------- Total distributions ................................ (0.88) (0.53) (0.29) (0.09) ------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 13.98 $ 12.50 $ 12.28 $ 11.22 =================================================================== Total return d ..................................... 19.15% 6.12% 12.02% 13.09% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 24,435 $ 17,247 $ 12,101 $ 5,225 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.72% 0.73% 0.75% h 0.76% h Expenses net of waiver and payments by affiliates e 0.65% 0.69% 0.75% h 0.64% h Net investment income c ........................... 2.85% 2.83% 4.33% h 2.01% h Portfolio turnover rate ............................ 0.96% 0.74% 0.37% 0.71%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.70% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. Annual Report | The accompanying notes are an integral part of these financial statements. | 41 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND
------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, ADVISOR CLASS 2006 2005 2004 g 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 12.55 $ 12.32 $ 11.25 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.47 0.39 0.24 0.25 Net realized and unrealized gains (losses) ........ 1.98 0.42 1.14 1.09 ------------------------------------------------------------------- Total from investment operations ................... 2.45 0.81 1.38 1.34 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.48) (0.33) (0.25) (0.09) Net realized gains (losses) ....................... (0.47) (0.25) (0.06) -- ------------------------------------------------------------------- Total distributions ................................ (0.95) (0.58) (0.31) (0.09) ------------------------------------------------------------------- Redemption fees .................................... -- f -- f -- f -- f ------------------------------------------------------------------- Net asset value, end of year ....................... $ 14.05 $ 12.55 $ 12.32 $ 11.25 =================================================================== Total return d ..................................... 19.73% 6.63% 12.32% 13.46% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 25,124 $ 12,535 $ 7,792 $ 4,991 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.22% 0.23% 0.25% h 0.26% h Expenses net of waiver and payments by affiliates e 0.15% 0.19% 0.25% h 0.14% h Net investment income c ........................... 3.35% 3.33% 4.83% h 2.51% h Portfolio turnover rate ............................ 0.96% 0.74% 0.37% 0.71%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.70% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 1, 2004 to December 31, 2004. h Annualized. i For the period August 15, 2003 (commencement of operations) to July 31, 2004. 42 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
----------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND SHARES VALUE ----------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 99.4% DOMESTIC EQUITY 33.2% Mutual Shares Fund, Class Z ......................................... 149,818,988 $ 3,908,777,402 ----------------- DOMESTIC HYBRID 33.1% Franklin Income Fund Inc., Advisor Class ............................ 1,474,279,687 3,906,841,171 ----------------- FOREIGN EQUITY 33.1% Templeton Growth Fund Inc., Advisor Class ........................... 152,052,220 3,904,700,999 ----------------- TOTAL LONG TERM INVESTMENTS (COST $10,669,862,499) .................. 11,720,319,572 ----------------- SHORT TERM INVESTMENT (COST $137,267) 0.0% b MONEY MARKET FUND 0.0% b c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 137,267 137,267 ----------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $10,669,999,766) 99.4% .. 11,720,456,839 OTHER ASSETS, LESS LIABILITIES 0.6% ................................. 76,004,393 ----------------- NET ASSETS 100.0% ................................................... $ 11,796,461,232 =================
a See Note 6 regarding investments in Underlying Funds. b Rounds to less than 0.1% of net assets. c The rate shown is the annualized seven-day yield at period end. Annual Report | The accompanying notes are an integral part of these financial statements. | 43 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
-------------------------------------------------- YEAR ENDED DECEMBER 31, CLASS A 2006 2005 2004 g -------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 11.79 $ 11.19 $ 10.00 -------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.17 0.16 0.17 Net realized and unrealized gains (losses) ........ 1.55 0.73 1.12 -------------------------------------------------- Total from investment operations ................... 1.72 0.89 1.29 -------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.19) (0.13) (0.07) Net realized gains (losses) ....................... (0.42) (0.16) (0.03) -------------------------------------------------- Total distributions ................................ (0.61) (0.29) (0.10) -------------------------------------------------- Redemption fees .................................... -- f -- f -- f -------------------------------------------------- Net asset value, end of year ....................... $ 12.90 $ 11.79 $ 11.19 ================================================== Total return d ..................................... 14.69% 7.93% 12.93% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 190,189 $ 103,348 $ 16,155 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.72% 0.90% 2.31% h Expenses net of waiver and payments by affiliates e 0.50% 0.46% 0.39% h Net investment income c ........................... 1.18% 1.41% 3.78% h Portfolio turnover rate ............................ 0.98% 0.68% 0.51%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 2, 2004 to December 31, 2004. h Annualized. 44 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
-------------------------------------------------- YEAR ENDED DECEMBER 31, CLASS C 2006 2005 2004 g -------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 11.74 $ 11.18 $ 10.00 -------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.08 0.09 0.15 Net realized and unrealized gains (losses) ........ 1.54 0.72 1.12 -------------------------------------------------- Total from investment operations ................... 1.62 0.81 1.27 -------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.12) (0.09) (0.06) Net realized gains (losses) ....................... (0.42) (0.16) (0.03) -------------------------------------------------- Total distributions ................................ (0.54) (0.25) (0.09) -------------------------------------------------- Redemption fees .................................... -- f -- f -- f -------------------------------------------------- Net asset value, end of year ....................... $ 12.82 $ 11.74 $ 11.18 ================================================== Total return d ..................................... 13.92% 7.22% 12.66% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 68,482 $ 36,568 $ 4,558 Ratios to average net assets: Expenses before waiver and payments by affiliates e 1.36% 1.55% 2.96% h Expenses net of waiver and payments by affiliates e 1.14% 1.11% 1.04% h Net investment income c ........................... 0.54% 0.76% 3.13% h Portfolio turnover rate ............................ 0.98% 0.68% 0.51%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 2, 2004 (commencement of operations) to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 45 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
-------------------------------------------------- YEAR ENDED DECEMBER 31, CLASS R 2006 2005 2004 g -------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 11.79 $ 11.18 $ 10.00 -------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.14 0.11 0.15 Net realized and unrealized gains (losses) ........ 1.55 0.77 1.13 -------------------------------------------------- Total from investment operations ................... 1.69 0.88 1.28 -------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.16) (0.11) (0.07) Net realized gains (losses) ....................... (0.42) (0.16) (0.03) -------------------------------------------------- Total distributions ................................ (0.58) (0.27) (0.10) -------------------------------------------------- Redemption fees .................................... -- f -- f -- f -------------------------------------------------- Net asset value, end of year ....................... $ 12.90 $ 11.79 $ 11.18 ================================================== Total return d ..................................... 14.49% 7.86% 12.81% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 1,539 $ 1,287 $ 260 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.87% 1.05% 2.46% h Expenses net of waiver and payments by affiliates e 0.65% 0.61% 0.54% h Net investment income c ........................... 1.03% 1.26% 3.63% h Portfolio turnover rate ............................ 0.98% 0.68% 0.51%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 2, 2004 (commencement of operations) to December 31, 2004. h Annualized. 46 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND
-------------------------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 2004 g -------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 11.81 $ 11.19 $ 10.00 -------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.22 0.11 0.14 Net realized and unrealized gains (losses) ........ 1.54 0.82 1.16 -------------------------------------------------- Total from investment operations ................... 1.76 0.93 1.30 -------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................ (0.22) (0.15) (0.08) Net realized gains (losses) ....................... (0.42) (0.16) (0.03) -------------------------------------------------- Total distributions ................................ (0.64) (0.31) (0.11) -------------------------------------------------- Redemption fees .................................... -- f -- f -- f -------------------------------------------------- Net asset value, end of year ....................... $ 12.93 $ 11.81 $ 11.19 ================================================== Total return d ..................................... 15.07% 8.31% 13.01% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 1,931 $ 1,104 $ 196 Ratios to average net assets: Expenses before waiver and payments by affiliates e 0.37% 0.55% 1.96% h Expenses net of waiver and payments by affiliates e 0.15% 0.11% 0.04% h Net investment income c ........................... 1.53% 1.76% 4.13% h Portfolio turnover rate ............................ 0.98% 0.68% 0.51%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market values of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.77% for the year ended December 31, 2006. f Amount rounds to less than $0.01 per share. g For the period August 2, 2004 (commencement of operations) to December 31, 2004. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 47 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
----------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND SHARES VALUE ----------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 99.8% DOMESTIC EQUITY 66.4% Franklin Flex Cap Growth Fund, Advisor Class ........................ 2,019,049 $ 86,112,432 Mutual Shares Fund, Class Z ......................................... 3,372,668 87,992,907 ----------------- 174,105,339 ----------------- FOREIGN EQUITY 33.4% Templeton Growth Fund Inc., Advisor Class ........................... 3,409,918 87,566,686 ----------------- TOTAL LONG TERM INVESTMENTS (COST $240,709,696) ..................... 261,672,025 ----------------- SHORT TERM INVESTMENT (COST $1,954) 0.0% b MONEY MARKET FUND 0.0% b c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 1,954 1,954 ----------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $240,711,650) 99.8% ..... 261,673,979 OTHER ASSETS, LESS LIABILITIES 0.2% ................................. 467,129 ----------------- NET ASSETS 100.0% ................................................... $ 262,141,108 =================
a See Note 6 regarding investments in Underlying Funds. b Rounds to less than 0.1% of net assets. c The rate shown is the annualized seven-day yield at period end. 48 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES December 31, 2006
------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------ Assets: Investments in Underlying Funds (Note 6): Cost ........................................................... $ 594,676,604 $ 10,669,999,766 $ 240,711,650 ====================================================== Value .......................................................... 706,773,990 11,720,456,839 261,673,979 Receivables: Investment securities sold ..................................... 812,000 22,458,000 322,000 Capital shares sold ............................................ 1,643,996 100,437,912 868,177 ------------------------------------------------------ Total assets ................................................... 709,229,986 11,843,352,751 262,864,156 ------------------------------------------------------ Liabilities: Payables: Capital shares redeemed ........................................ 708,985 12,562,318 320,459 Affiliates ..................................................... 493,910 11,605,941 45,118 Funds advanced by custodian .................................... 811,503 22,457,264 321,138 Accrued expenses and other liabilities .......................... 52,462 265,996 36,333 ------------------------------------------------------ Total liabilities .............................................. 2,066,860 46,891,519 723,048 ------------------------------------------------------ Net assets, at value .......................................... $ 707,163,126 $ 11,796,461,232 $ 262,141,108 ====================================================== Net assets consist of: Paid-in capital ................................................. $ 583,466,097 $ 10,530,433,736 $ 236,954,882 Undistributed net investment income ............................. 746,559 6,495,779 105,807 Net unrealized appreciation (depreciation) ...................... 112,097,386 1,050,457,073 20,962,329 Accumulated net realized gain (loss) ............................ 10,853,084 209,074,644 4,118,090 ------------------------------------------------------ Net assets, at value .......................................... $ 707,163,126 $ 11,796,461,232 $ 262,141,108 ======================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 49 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) December 31, 2006
------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------ CLASS A: Net assets, at value ............................................ $ 458,459,950 $ 7,288,143,185 $ 190,189,388 ====================================================== Shares outstanding .............................................. 32,534,123 521,488,419 14,738,800 ====================================================== Net asset value per share a ..................................... $ 14.09 $ 13.98 $ 12.90 ====================================================== Maximum offering price per share (net asset value per share / 94.25%) ........................... $ 14.95 $ 14.83 $ 13.69 ====================================================== CLASS B: Net assets, at value ............................................ $ 76,408,092 $ 766,451,554 ==================================== Shares outstanding .............................................. 5,462,327 55,038,857 ==================================== Net asset value and maximum offering price per share a .......... $ 13.99 $ 13.93 ==================================== CLASS C: Net assets, at value ............................................ $ 166,687,877 $ 3,692,307,354 $ 68,481,519 ====================================================== Shares outstanding .............................................. 11,941,411 267,882,647 5,340,433 ====================================================== Net asset value and maximum offering price per share a .......... $ 13.96 $ 13.78 $ 12.82 ====================================================== CLASS R: Net assets, at value ............................................ $ 2,534,524 $ 24,435,410 $ 1,538,932 ====================================================== Shares outstanding .............................................. 180,129 1,748,024 119,273 ====================================================== Net asset value and maximum offering price per share a .......... $ 14.07 $ 13.98 $ 12.90 ====================================================== ADVISOR CLASS: Net assets, at value ............................................ $ 3,072,683 $ 25,123,729 $ 1,931,269 ====================================================== Shares outstanding .............................................. 217,617 1,787,873 149,348 ====================================================== Net asset value and maximum offering price per share a .......... $ 14.12 $ 14.05 $ 12.93 ======================================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 50 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended December 31, 2006
------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------ Investment income: Dividends from Underlying Funds (Note 6) ........................ $ 8,308,459 $ 313,066,089 $ 3,485,443 ------------------------------------------------------ Expenses: Administrative fees (Note 3a) ................................... 629,576 8,919,710 206,903 Distribution fees (Note 3b) Class A ........................................................ 1,410,720 19,036,332 524,258 Class B ........................................................ 729,062 7,177,849 -- Class C ........................................................ 1,476,767 27,550,385 541,930 Class R ........................................................ 11,542 102,831 6,933 Transfer agent fees (Note 3d) ................................... 1,019,219 8,609,733 418,147 Reports to shareholders ......................................... 76,392 840,531 -- Registration and filing fees .................................... 128,235 1,311,796 109,517 Professional fees ............................................... 27,200 71,595 20,580 Trustees' fees and expenses ..................................... 1,599 16,128 480 Excise tax (Note 3e) ............................................ 7,923 50,318 -- Other ........................................................... 19,209 218,018 5,189 ------------------------------------------------------ Total expenses ................................................. 5,537,444 73,905,226 1,833,937 Expenses waived/paid by affiliates (Note 3e) ................... (964,999) (6,658,046) (450,456) ------------------------------------------------------ Net expenses .................................................. 4,572,445 67,247,180 1,383,481 ------------------------------------------------------ Net investment income ........................................ 3,736,014 245,818,909 2,101,962 ------------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Sale of investments in Underlying Funds ........................ (206,396) (3,041,778) (73,648) Realized gain distributions by Underlying Funds ................ 24,235,506 500,788,915 10,315,569 ------------------------------------------------------ Net realized gain (loss) from Underlying Funds ............... 24,029,110 497,747,137 10,241,921 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ................................ 61,294,086 866,728,549 16,328,995 ------------------------------------------------------ Net realized and unrealized gain (loss) .......................... 85,323,196 1,364,475,686 26,570,916 ------------------------------------------------------ Net increase (decrease) in net assets resulting from operations .. $ 89,059,210 $ 1,610,294,595 $ 28,672,878 ======================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 51 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------- FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND ----------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................................................. $ 3,736,014 $ 2,315,230 Net realized gain (loss) from Underlying Funds ............................... 24,029,110 13,151,666 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ......................................................... 61,294,086 18,583,049 ----------------------------------- Net increase (decrease) in net assets resulting from operations ............ 89,059,210 34,049,945 ----------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ..................................................................... (5,156,182) (2,706,666) Class B ..................................................................... (395,188) (95,540) Class C ..................................................................... (951,148) (304,721) Class R ..................................................................... (25,068) (13,374) Advisor Class ............................................................... (44,139) (29,711) Net realized gains: Class A ..................................................................... (11,448,102) (4,722,069) Class B ..................................................................... (2,054,806) (1,090,043) Class C ..................................................................... (4,266,699) (1,827,556) Class R ..................................................................... (65,663) (35,570) Advisor Class ............................................................... (79,089) (38,361) ----------------------------------- Total distributions to shareholders ............................................ (24,486,084) (10,863,611) ----------------------------------- Capital share transactions: (Note 2) Class A ..................................................................... 63,989,093 99,800,451 Class B ..................................................................... (2,554,475) 2,004,829 Class C ..................................................................... 19,093,712 30,562,322 Class R ..................................................................... 112,639 157,640 Advisor Class ............................................................... (5,903) 586,231 ----------------------------------- Total capital share transactions .............................................. 80,635,066 133,111,473 ----------------------------------- Redemption fees ............................................................... 2,409 1,413 ----------------------------------- Net increase (decrease) in net assets ........................................ 145,210,601 156,299,220 Net assets: Beginning of year ............................................................. 561,952,525 405,653,305 ----------------------------------- End of year ................................................................... $ 707,163,126 $ 561,952,525 =================================== Undistributed net investment income included in net assets: End of year ................................................................... $ 746,559 $ 940,742 ===================================
52 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
----------------------------------- FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND ----------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................................ $ 245,818,909 $ 135,297,386 Net realized gain (loss) from Underlying Funds ............................... 497,747,137 224,073,373 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ......................................................... 866,728,549 (20,377,278) ----------------------------------- Net increase (decrease) in net assets resulting from operations ............ 1,610,294,595 338,993,481 ----------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ..................................................................... (215,722,803) (95,113,986) Class B ..................................................................... (18,066,213) (11,435,618) Class C ..................................................................... (93,577,572) (49,892,165) Class R ..................................................................... (683,952) (376,341) Advisor Class ............................................................... (799,059) (324,505) Net realized gains: Class A ..................................................................... (202,445,425) (60,077,962) Class B ..................................................................... (25,277,173) (13,364,975) Class C ..................................................................... (104,093,208) (31,902,414) Class R ..................................................................... (727,036) (307,043) Advisor Class ............................................................... (652,974) (208,794) ----------------------------------- Total distributions to shareholders ........................................... (662,045,415) (263,003,803) ----------------------------------- Capital share transactions: (Note 2) Class A ..................................................................... 2,657,895,916 2,363,047,363 Class B ..................................................................... (1,624,509) 63,159,382 Class C ..................................................................... 1,330,975,579 1,132,276,775 Class R ..................................................................... 4,909,568 4,908,962 Advisor Class ............................................................... 10,900,983 4,573,450 ----------------------------------- Total capital share transactions .............................................. 4,003,057,537 3,567,965,932 ----------------------------------- Redemption fees ............................................................... 45,813 45,042 ----------------------------------- Net increase (decrease) in net assets ........................................ 4,951,352,530 3,644,000,652 Net assets: Beginning of year ............................................................. 6,845,108,702 3,201,108,050 ----------------------------------- End of year ................................................................... $11,796,461,232 $ 6,845,108,702 =================================== Undistributed net investment income included in net assets: End of year ................................................................... $ 6,495,779 $ 6,654,521 ===================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 53 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
----------------------------------- FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ----------------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................................ $ 2,101,962 $ 994,678 Net realized gain (loss) from Underlying Funds ............................... 10,241,921 4,184,830 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ......................................................... 16,328,995 3,733,521 ----------------------------------- Net increase (decrease) in net assets resulting from operations ............ 28,672,878 8,913,029 ----------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A .................................................................... (2,636,779) (1,096,845) Class C .................................................................... (608,817) (266,589) Class R .................................................................... (18,516) (11,813) Advisor Class .............................................................. (31,836) (14,047) Net realized gains: Class A .................................................................... (5,309,666) (1,039,446) Class C .................................................................... (1,947,481) (369,003) Class R .................................................................... (48,316) (14,705) Advisor Class .............................................................. (51,944) (16,038) ----------------------------------- Total distributions to shareholders ........................................... (10,653,355) (2,828,486) ----------------------------------- Capital share transactions: (Note 2) Class A .................................................................... 73,695,077 82,792,372 Class C .................................................................... 27,278,019 30,465,502 Class R .................................................................... 129,556 964,795 Advisor Class .............................................................. 709,790 830,434 ----------------------------------- Total capital share transactions .............................................. 101,812,442 115,053,103 ----------------------------------- Redemption fees ............................................................... 1,365 598 ----------------------------------- Net increase (decrease) in net assets ........................................ 119,833,330 121,138,244 Net assets: Beginning of year ............................................................. 142,307,778 21,169,534 ----------------------------------- End of year ................................................................... $ 262,141,108 $ 142,307,778 =================================== Undistributed net investment income included in net assets: End of year ................................................................... $ 105,807 $ 13,510 ===================================
54 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Fund Allocator Series (the Trust) is registered under the Investment Company Act of 1940, as amended, (the 1940 Act) as an open-end investment company, consisting of ten separate funds. All funds included in this report (the Funds) are non-diversified. The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (the Underlying Funds). The classes of shares offered within each of the funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
------------------------------------------------------------------------------------------------------- CLASS A, CLASS B, CLASS C, CLASS R & ADVISOR CLASS CLASS A, CLASS C, CLASS R & ADVISOR CLASS ------------------------------------------------------------------------------------------------------- Franklin Templeton Corefolio Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Founding Funds Allocation Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. B. INCOME TAXES No provision has been made for U.S. income taxes because each Fund intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. C. 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. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to Shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. 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. Annual Report | 55 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. The Funds indirectly bear their proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Funds will vary. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in class-level expenses may result in payment of different per share distributions by class. D. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. E. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the Funds and accounted for as an addition to paid-in capital. F. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 56 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At December 31, 2006, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Funds' shares were as follows:
----------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS ALLOCATION FUND ALLOCATION FUND ----------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------- CLASS A SHARES Year ended December 31, 2006 Shares sold ............................... 8,161,304 $ 108,477,197 226,522,568 $ 3,030,923,306 Shares issued in reinvestment of distributions ............................ 1,144,598 15,782,576 28,515,695 392,894,378 Shares redeemed ........................... (4,542,041) (60,270,680) (57,633,916) (765,921,768) ----------------------------------------------------------------------- Net increase (decrease) ................... 4,763,861 $ 63,989,093 197,404,347 $ 2,657,895,916 ======================================================================= Year ended December 31, 2005 Shares sold ............................... 11,802,924 $ 143,272,069 205,902,418 $ 2,554,554,739 Shares issued in reinvestment of distributions ............................ 564,044 7,056,287 11,595,629 145,008,575 Shares redeemed ........................... (4,146,832) (50,527,905) (27,001,853) (336,515,951) ----------------------------------------------------------------------- Net increase (decrease) ................... 8,220,136 $ 99,800,451 190,496,194 $ 2,363,047,363 ======================================================================= CLASS B SHARES Year ended December 31, 2006 Shares sold ............................... 192,527 $ 2,536,173 2,512,203 $ 32,986,440 Shares issued in reinvestment of distributions ............................ 171,568 2,330,160 2,959,112 40,296,439 Shares redeemed ........................... (565,350) (7,420,808) (5,704,616) (74,907,388) ----------------------------------------------------------------------- Net increase (decrease) ................... (201,255) $ (2,554,475) (233,301) $ (1,624,509) ======================================================================= Year ended December 31, 2005 Shares sold ............................... 645,771 $ 7,713,279 7,897,683 $ 96,144,049 Shares issued in reinvestment of distributions ............................ 92,725 1,135,896 1,870,110 23,230,543 Shares redeemed ........................... (567,650) (6,844,346) (4,565,605) (56,215,210) ----------------------------------------------------------------------- Net increase (decrease) ................... 170,846 $ 2,004,829 5,202,188 $ 63,159,382 ======================================================================= CLASS C SHARES Year ended December 30, 2006 Shares sold ............................... 2,801,164 $ 36,821,258 112,866,790 $ 1,492,839,628 Shares issued in reinvestment of distributions ............................ 355,817 4,836,589 12,624,288 171,288,034 Shares redeemed ........................... (1,723,290) (22,564,135) (25,455,349) (333,152,083) ----------------------------------------------------------------------- Net increase (decrease) ................... 1,433,691 $ 19,093,712 100,035,729 $ 1,330,975,579 ======================================================================= Year ended December 31, 2005 Shares sold ............................... 3,974,019 $ 47,718,754 98,797,473 $ 1,216,236,357 Shares issued in reinvestment of distributions ............................ 160,950 1,981,215 5,708,288 70,631,355 Shares redeemed ........................... (1,592,178) (19,137,647) (12,509,107) (154,590,937) ----------------------------------------------------------------------- Net increase (decrease) ................... 2,542,791 $ 30,562,322 91,966,654 $ 1,132,276,775 =======================================================================
Annual Report | 57 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
----------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS ALLOCATION FUND ALLOCATION FUND ----------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------- CLASS R SHARES Year ended December 31, 2006 Shares sold ............................... 14,097 $ 190,555 435,024 $ 5,763,678 Shares issued in reinvestment of distributions ............................ 6,585 90,465 102,353 1,406,218 Shares redeemed ........................... (13,061) (168,381) (168,735) (2,260,328) ----------------------------------------------------------------------- Net increase (decrease) ................... 7,621 $ 112,639 368,642 $ 4,909,568 ======================================================================= Year ended December 31, 2005 Shares sold ............................... 67,774 $ 812,103 519,654 $ 6,419,637 Shares issued in reinvestment of distributions ............................ 3,923 48,574 54,182 676,457 Shares redeemed ........................... (58,782) (703,037) (179,863) (2,187,132) ----------------------------------------------------------------------- Net increase (decrease) ................... 12,915 $ 157,640 393,973 $ 4,908,962 ======================================================================= ADVISOR CLASS SHARES Year ended December 31, 2006 Shares sold ............................... 19,054 $ 257,559 930,526 $ 12,764,223 Shares issued in reinvestment of distributions ............................ 8,496 117,490 99,300 1,378,303 Shares redeemed ........................... (29,233) (380,952) (240,484) (3,241,543) ----------------------------------------------------------------------- Net increase (decrease) ................... (1,683) $ (5,903) 789,342 $ 10,900,983 ======================================================================= Year ended December 31, 2005 Shares sold ............................... 64,949 $ 791,637 463,739 $ 5,801,455 Shares issued in reinvestment of distributions ............................ 5,243 65,758 39,624 497,040 Shares redeemed ........................... (22,551) (271,164) (137,456) (1,725,045) ----------------------------------------------------------------------- Net increase (decrease) ................... 47,641 $ 586,231 365,907 $ 4,573,450 =======================================================================
------------------------------------ FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ------------------------------------ SHARES AMOUNT ------------------------------------ CLASS A SHARES Year ended December 31, 2006 Shares sold ................................................................. 6,964,227 $ 85,684,048 Shares issued in reinvestment of distributions .............................. 597,951 7,641,648 Shares redeemed ............................................................. (1,586,137) (19,630,619) ------------------------------------ Net increase (decrease) ..................................................... 5,976,041 $ 73,695,077 ==================================== Year ended December 31, 2005 ................................................. Shares sold ................................................................. 7,590,421 $ 85,816,339 Shares issued in reinvestment of distributions .............................. 172,606 2,037,347 Shares redeemed ............................................................. (443,646) (5,061,314) ------------------------------------ Net increase (decrease) ..................................................... 7,319,381 $ 82,792,372 ====================================
58 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------ FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ------------------------------------ SHARES AMOUNT ------------------------------------ CLASS C SHARES Year ended December 31, 2006 Shares sold ................................................................. 2,515,614 $ 30,767,210 Shares issued in reinvestment of distributions .............................. 185,518 2,351,317 Shares redeemed ............................................................. (475,818) (5,840,508) ------------------------------------ Net increase (decrease) ..................................................... 2,225,314 $ 27,278,019 ==================================== Year ended December 31, 2005 Shares sold ................................................................. 2,775,287 $ 31,221,952 Shares issued in reinvestment of distributions .............................. 49,625 582,828 Shares redeemed ............................................................. (117,652) (1,339,278) ------------------------------------ Net increase (decrease) ..................................................... 2,707,260 $ 30,465,502 ==================================== CLASS R SHARES Year ended December 31, 2006 Shares sold ................................................................. 26,399 $ 325,236 Shares issued in reinvestment of distributions .............................. 5,252 66,832 Shares redeemed ............................................................. (21,571) (262,512) ------------------------------------ Net increase(decrease) ...................................................... 10,080 $ 129,556 ==================================== Year ended December 31, 2005 Shares sold ................................................................. 89,527 $ 1,003,624 Shares issued in reinvestment of distributions .............................. 2,251 26,469 Shares redeemed ............................................................. (5,834) (65,298) ------------------------------------ Net increase (decrease) ..................................................... 85,944 $ 964,795 ==================================== ADVISOR CLASS SHARES: Year ended December 31, 2006 Shares sold ................................................................. 77,632 $ 985,355 Shares issued in reinvestment of distributions .............................. 6,364 81,641 Shares redeemed ............................................................. (28,121) (357,206) ------------------------------------ Net increase(decrease) ...................................................... 55,875 $ 709,790 ==================================== Year ended December 31, 2005 Shares sold ................................................................. 192,680 $ 2,146,894 Shares issued in reinvestment of distributions .............................. 2,508 29,357 Shares redeemed ............................................................. (119,260) (1,345,817) ------------------------------------ Net increase(decrease) ...................................................... 75,928 $ 830,434 ====================================
Annual Report | 59 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of some of the Underlying Funds and of the following subsidiaries:
------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION ------------------------------------------------------------------------------------------- Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. ADMINISTRATIVE FEES The Funds pay an administrative fee to FT Services of 0.10% per year of each fund's average daily net assets for administrative services including monitoring and rebalancing the percentage of each Fund's investment in the Underlying Funds. B. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
-------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND -------------------------------------------------------------- Class A .......................................... 0.35% 0.35% 0.35% Class B .......................................... 1.00% 1.00% -- Class C .......................................... 1.00% 1.00% 1.00% Class R .......................................... 0.50% 0.50% 0.50%
C. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
-------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND -------------------------------------------------------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ............. $606,605 $16,307,166 $467,084 Contingent deferred sales charges retained ....... $138,604 $ 1,929,342 $ 13,176
60 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
-------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND -------------------------------------------------------------- Transfer agent fees .............................. $745,404 $5,302,359 $222,726
E. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS FT Services agreed in advance to voluntarily waive all or a portion of administrative fees and assume payment of other expenses. Total expenses waived/paid by FT Services are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. FT Services may discontinue this waiver at any time. The Franklin Templeton Corefolio Allocation Fund and Franklin Templeton Founding Funds Allocation Fund incurred excise taxes which FT Services voluntarily agreed to reimburse as noted in the Statements of Operations. 4. INCOME TAXES The tax character of distributions paid during the years ended December 31, 2006 and December 31, 2005, was as follows:
----------------------------- FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND ----------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ----------------------------- Distributions paid from: Ordinary Income ................................................................. $ 6,624,465 $ 3,161,106 Long term capital gain .......................................................... 17,861,619 7,702,505 ----------------------------- $ 24,486,084 $ 10,863,611 =============================
----------------------------- FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND ----------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ----------------------------- Distributions paid from: Ordinary Income ................................................................. $ 329,011,319 $ 157,142,615 Long term capital gain .......................................................... 333,034,096 105,861,188 ----------------------------- $ 662,045,415 $ 263,003,803 =============================
Annual Report | 61 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED)
----------------------------- FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ----------------------------- YEAR ENDED DECEMBER 31, 2006 2005 ----------------------------- Distributions paid from: Ordinary Income ................................................................. $ 3,297,921 $ 1,389,294 Long term capital gain .......................................................... 7,355,434 1,439,192 ----------------------------- $ 10,653,355 $ 2,828,486 =============================
At December 31, 2006, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------------- Cost of investments ..................... $ 595,328,863 $ 10,674,489,147 $ 240,796,076 ============================================================= Unrealized appreciation ................. $ 111,445,127 $ 1,045,967,692 $ 20,877,903 Unrealized depreciation ................. -- -- -- ------------------------------------------------------------- Net unrealized appreciation (depreciation) $ 111,445,127 $ 1,045,967,692 $ 20,877,903 ============================================================= Undistributed ordinary income ........... $ 778,996 $ 6,495,781 $ 105,807 Undistributed long term capital gains ... 11,472,906 213,564,025 4,202,516 ------------------------------------------------------------- Distributable earnings .................. $ 12,251,902 $ 220,059,806 $ 4,308,323 =============================================================
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of short term capital gain distributions from Underlying Funds. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of short term capital gain distributions from Underlying Funds and wash sales. 5. INVESTMENT TRANSACTIONS Purchases and sales of Underlying Funds (excluding short term securities) for the year ended December 31, 2006, were as follows:
-------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND -------------------------------------------------------------- Purchases ............................... $77,711,891 $4,099,418,012 $107,015,903 Sales ................................... $10,498,157 $ 86,037,397 $ 2,023,940
62 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. INVESTMENTS IN UNDERLYING FUNDS The Funds invest primarily in the Underlying Funds which are managed by Franklin Advisers, Inc., (Advisers), an affiliate of FT Services, or by an affiliate of Advisers. The Funds do not invest in the Underlying Funds for the purpose of exercising management or control. At December 31, 2006, the Funds' held the following positions which exceed 5% of the Underlying Funds' shares outstanding: -------------------------------------------------------------------------------- NAME OF ISSUER % OF SHARES HELD -------------------------------------------------------------------------------- FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND Franklin Capital Growth Fund ........................ 11.47% Franklin Growth Fund ................................ 6.77% FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND Mutual Shares Fund .................................. 18.01% Templeton Growth Fund Inc. .......................... 10.88% Franklin Income Fund Inc. ........................... 7.51% The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Pursuant to a SEC exemptive order specific to the Funds' investment in the Sweep Money Fund, administrative fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 7. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares ("marketing support"), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 23, 2006, the SEC approved the proposed plan of distribution for the marketing support settlement, and disbursement of the settlement monies to the designated funds, in accordance with the terms and conditions of that settlement and plan, was completed in September 2006. The Trust did not participate in that Settlement. The plan of distribution for the market timing settlement is currently under review by the SEC staff. After publication of notice of the plan and a 30-day comment period, the proposed plan of distribution will be submitted to the SEC for approval. Following the SEC's approval of the plan of distribution, with modifications as appropriate, distribution of the settlement monies will begin in accordance with the terms and conditions of the settlement and plan. Annual Report | 63 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. REGULATORY MATTERS (CONTINUED) In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above, as well as to allegedly excessive commissions and advisory and distribution fees. The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Trust, it is committed to making the Trust or its shareholders whole, as appropriate. 8. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. On December 22, 2006, the Securities and Exchange Commission extended the implementation date to no later than the last net asset value calculation in the first semi-annual reporting period in 2007. The Fund is currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will have no material impact on its financial statements. 64 | Annual Report Franklin Templeton Fund Allocator Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN TEMPLETON FUND ALLOCATOR SERIES In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Templeton Corefolio Allocation Fund, Franklin Templeton Founding Funds Allocation Fund, and Franklin Templeton Perspectives Allocation Fund (separate portfolios of Franklin Templeton Fund Allocator Series, hereafter referred to as the "Funds") at December 31, 2006, the results of each of their operations for the year then ended and the changes in each of their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments in the Underlying Funds at December 31, 2006 by correspondence with the transfer agent of the Underlying Funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 22, 2007 Annual Report | 65 Franklin Templeton Fund Allocator Series TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds designate the maximum amount allowable but no less than the following amounts as long term capital gain dividends for the fiscal year ended December 31, 2006: ------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------------ $21,593,978 $417,852,495 $9,028,339 Under Section 871(k)(2)(C) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006: ------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------------ $69,258 $97,247 $1,673 Under Section 854(b)(2) of the Code, the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2006. ------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------------ 66.35% 35.83% 42.97% In January 2007, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2006. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2006. ------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------------ $7,364,842 $189,010,158 $3,046,462 Under Section 871(k)(1)(C) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006. ------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------------ $1,102,386 $135,746,611 $546,684 66 | Annual Report Franklin Templeton Fund Allocator Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Trustee Since 1995 142 Director, Bar-S Foods One Franklin Parkway (meat packing company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ------------------------------------------------------------------------------------------------------------------------------------ ROBERT F. CARLSON (1928) Trustee Since 2005 57 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, senior member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS); and FORMERLY, member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Director, Hess One Franklin Parkway Corporation (formerly San Mateo, CA 94403-1906 Amerada Hess Corporation) (exploration and refining of oil and gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (1929) Trustee Since 1995 116 Director, Center for One Franklin Parkway Creative Land Recycling San Mateo, CA 94403-1906 (redevelopment). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 67
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ JOHN B. WILSON (1959) Trustee Since February 46 None One Franklin Parkway 2006 San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (1986-1990). ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Trustee and Chairman of Since 1995 142 None One Franklin Parkway the Board San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, JR. (1940) Trustee, President and Trustee since 1995 126 None One Franklin Parkway Chief Executive Officer and President and San Mateo, CA 94403-1906 - Investment Management Chief Executive Officer - Investment Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; and Templeton Worldwide, Inc. Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Compliance Officer Chief Compliance Not Applicable Not Applicable One Franklin Parkway and Vice President - AML Officer since 2004 San Mateo, CA 94403-1906 Compliance and Vice President - AML Compliance since February 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). ------------------------------------------------------------------------------------------------------------------------------------
68 | Annual Report
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 30 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice President Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. and Chief Executive Suite 2100 Officer - Finance and Fort Lauderdale, FL 33394-3091 Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). ------------------------------------------------------------------------------------------------------------------------------------ KAREN L. SKIDMORE (1952) Vice President and Vice President Not Applicable Not Applicable One Franklin Parkway Secretary since February San Mateo, CA 94403-1906 2006 and Secretary since April 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company; and officer of 30 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 69
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (1951) Chief Financial Officer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. and Chief Accounting Suite 2100 Fort Lauderdale, FL Officer 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust and under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Prior to December 31, 2006, S. Joseph Fortunato and Gordon S. Macklin ceased to be a trustee of the Trust. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. 70 | Annual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 71 This page intentionally left blank. Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund 1 GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Blue Chip Fund 1 Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund RETIREMENT TARGET FUNDS Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 4 Franklin Floating Rate Daily Access Fund Franklin High Income Fund 5 Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 4 Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 4 Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME 6 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 7 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California 8 Colorado Connecticut Florida 8 Georgia Kentucky Louisiana Maryland Massachusetts 7 Michigan 7 Minnesota 7 Missouri New Jersey New York 8 North Carolina Ohio 7 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 9 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to Franklin High Income Fund. The fund's investment goal and strategy remained the same. 6. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 7. Portfolio of insured municipal securities. 8. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 9. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 01/07 Not part of the annual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN TEMPLETON FUND ALLOCATOR SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FAS2 A2006 02/07 [GRAPHIC OMITTED] -------------------------------------------------------------------------------- DECEMBER 31, 2006 -------------------------------------------------------------------------------- Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund -------------------------------------------------------------------------------- ANNUAL REPORT AND SHAREHOLDER LETTER ASSET ALLOCATION -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FRANKLIN TEMPLETON FASTER VIA EMAIL? FUND ALLOCATOR SERIES Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. -------------------------------------------------------------------------------- [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS Franklin o Templeton o Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) 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 aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Annual Report Economic and Market Overview During the five months ended December 31, 2006, the U.S. economy advanced at a moderate pace. Gross domestic product grew an annualized 2.0% in the third quarter and an estimated annualized 3.5% in the fourth quarter. The housing market weakened, while corporate profits and consumer and government spending generally remained robust. Exports picked up some momentum, but the country's trade deficit, while improving, was still historically high. Labor costs rose and hiring generally increased as the unemployment rate fell from 4.8% to 4.5%. 1 Although energy and other commodity prices fell during the period, they remained historically high and were a primary economic concern for much of the period. Oil prices declined from a record high $77 per barrel in July to $61 at period-end. Consumers curbed spending on large purchases, such as homes and cars. Home prices fell in many parts of the country as mortgage rates crept higher, and borrowing against home equity flattened. Retail prices for many goods fell in late 2006 as energy prices slid. However, after two months of large declines, wholesale prices surged in November, reflecting higher energy and other prices. Overall, the core Consumer Price Index (CPI) rose 2.6% for the 12 months ended December 31, 2006, which was higher than the 2.2% 10-year average. 2 Following 17 consecutive increases beginning in 2004, the Federal Reserve Board (Fed) left the federal funds target rate at 5.25% during the period, citing a slowing economy, widespread cooling in the housing market and the lagging effect of prior tightening. The Fed stated that even with lower oil prices toward period-end, inflation risks remained. The Fed's decision to leave rates steady through period-end helped restore investor confidence. Outside the U.S., the economy continued to grow. The economic drivers remained consistent over the past four years: strong corporate and consumer demand, reasonably low inflation, a tight or improving labor market, and a relatively moderate interest rate environment, despite recent interest rate hikes by many of the world's central banks. However, the global economy also faced headwinds from elevated energy prices, higher global interest rates and a weaker U.S. housing market. These factors dampened investor confidence mid-year, when many equity markets declined, before rebounding through year-end 2006. 1. Source: Bureau of Labor Statistics. 2. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. Annual Report | 3 Despite such challenges, global economic activity was healthy. Strong global liquidity -- whether petrodollars, corporate cash, private equity, household savings or central banks' reserves -- continued to search for a home. Record global merger and acquisition activity in 2006 also reflected the abundance of cash in the capital markets. Bond yield spreads over U.S. Treasuries narrowed, and global equity and commodity markets rose in the latter part of the year. U.S equity markets performed well for the five-month period in this environment. The blue chip stocks of the Dow Jones Industrial Average posted a five-month total return of +12.01%, and the broader Standard & Poor's 500 Index (S&P 500) returned +12.04%, while the technology-heavy NASDAQ Composite Index rose +16.79%. 3 Telecommunications, utilities and consumer discretionary stocks performed particularly well. All major non-U.S. regions also had strong returns for the period. Stock market indexes in the U.S. and most European countries reached six-year highs in the fourth quarter, and many emerging market indexes in Asia, Europe and Latin America neared or reached all-time highs. Fixed income markets, on the other hand, were somewhat constrained by higher interest rates, threats of climbing inflation and the robust equity markets. 3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2006. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 4 | Annual Report Franklin Templeton 2015 Retirement Target Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Templeton 2015 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund invests among the broad asset classes of equity, fixed-income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date, indicated in the Fund's name, approaches. -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton 2015 Retirement Target Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ......................... 48.3% Foreign Equity .......................... 21.9% Domestic Fixed Income ................... 16.0% Foreign Fixed Income .................... 7.1% Short-Term Investments & Other Net Assets 6.7% * The asset allocation is based on the Statement of Investments, which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- This inaugural annual report for Franklin Templeton 2015 Retirement Target Fund covers the period since inception on August 1, 2006, through December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton 2015 Retirement Target Fund - Class A posted a cumulative total return of +8.59% for the period since inception on August 1, 2006, through December 31, 2006. By comparison the Fund's benchmarks, the S&P 500 and Morgan Stanley Capital International (MSCI) Europe, Australasia, THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 37. Annual Report | 5 TOP 10 FUND HOLDINGS Franklin Templeton 2015 Retirement Target Fund 12/31/06 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS Franklin Small Cap Growth Fund II 14.4% - Advisor Class -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund 12.6% - Advisor Class -------------------------------------------------------------------------------- Mutual Shares Fund 11.4% - Class Z -------------------------------------------------------------------------------- Mutual European Fund 11.2% - Class Z -------------------------------------------------------------------------------- Templeton Global Bond Fund 7.1% - Advisor Class -------------------------------------------------------------------------------- Franklin U.S. Government Securities 6.9% Fund - Advisor Class -------------------------------------------------------------------------------- Franklin Strategic Mortgage Portfolio 4.6% -------------------------------------------------------------------------------- Franklin Total Return Fund 4.5% - Advisor Class -------------------------------------------------------------------------------- Templeton Foreign Fund 4.0% - Advisor Class -------------------------------------------------------------------------------- Franklin Real Estate Securities Fund 3.5% - Advisor Class -------------------------------------------------------------------------------- Far East (EAFE) Index for equities, the Lehman Brothers (LB) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +12.04%, +13.66%, +3.69% and +2.14%, respectively, during the same time. 1 You can find other performance data in the Performance Summary beginning on page 8. INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on obtaining a maximum amount of current income. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each Fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. 1. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 6 | Annual Report At period-end, Franklin Templeton 2015 Retirement Target Fund's domestic equity exposure was 68.7% of its total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2006, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Small Cap Growth Fund II - Advisor Class, representing 14.4% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 69.2% of the Fund's total fixed income weighting, with the balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 7.1% of total net assets. Our largest domestic growth fund holding, Franklin Small Cap Growth Fund II - Advisor Class, slightly underperformed the S&P 500, as did our largest domestic value fund holding, Mutual Shares Fund - Class Z. However, our largest foreign equity holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class outperformed the LB U.S. Aggregate Index. Thank you for your participation in Franklin Templeton 2015 Retirement Target Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2015 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. Annual Report | 7 Performance Summary as of 12/31/06 FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION ------------------------------------------------------------------------------ CLASS A (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.69 $10.69 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1499 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0014 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0178 ------------------------------------------------------------------------------ TOTAL $0.1691 ------------------------------------------------------------------------------ CLASS C (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.67 $10.67 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1413 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0014 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0178 ------------------------------------------------------------------------------ TOTAL $0.1605 ------------------------------------------------------------------------------ CLASS R (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.68 $10.68 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1493 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0014 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0178 ------------------------------------------------------------------------------ TOTAL $0.1685 ------------------------------------------------------------------------------ ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.70 $10.70 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1563 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0014 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0178 ------------------------------------------------------------------------------ TOTAL $0.1755 ------------------------------------------------------------------------------ 8 | Annual Report Performance Summary (CONTINUED) PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. -------------------------------------------------------------------------------- CLASS A INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +8.59% -------------------------------------------------------------------------------- Aggregate Total Return 3 +2.35% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,235 -------------------------------------------------------------------------------- CLASS C INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +8.30% -------------------------------------------------------------------------------- Aggregate Total Return 3 +7.30% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,730 -------------------------------------------------------------------------------- CLASS R INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +8.48% -------------------------------------------------------------------------------- Aggregate Total Return 3 +8.48% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,848 -------------------------------------------------------------------------------- ADVISOR CLASS INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +8.75% -------------------------------------------------------------------------------- Aggregate Total Return 3 +8.75% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,875 -------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. TYPICALLY, THE MORE AGGRESSIVE THE INVESTMENT, OR THE GREATER THE POTENTIAL RETURN, THE MORE RISK INVOLVED. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH SOME FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BECAUSE THESE FUNDS INVEST IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. After 12/31/07, the manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the period indicated. 3. Aggregate total return represents the change in value of an investment over the period indicated. Since the Fund has existed for less than one year, average annual total returns are not available. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the period indicated. Annual Report | 9 Your Fund's Expenses FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 10 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
------------------------------------------------------------------------------------------------------------ EXPENSES PAID BEGINNING ACCOUNT DURING PERIOD* VALUE ACTUAL 8/1/06-12/31/06 ACTUAL 8/1/06 ENDING ACCOUNT HYPOTHETICAL CLASS A HYPOTHETICAL 7/1/06 VALUE 12/31/06 7/1/06-12/31/06 ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,085.90 $2.19 ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 ------------------------------------------------------------------------------------------------------------ CLASS C ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,083.00 $5.02 ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,019.41 $5.85 ------------------------------------------------------------------------------------------------------------ CLASS R ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,084.80 $2.88 ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.88 $3.36 ------------------------------------------------------------------------------------------------------------ ADVISOR CLASS ------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,087.50 $0.66 ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,024.45 $0.77 ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 184/365 (Hypothetical) to reflect the one-half year period. For actual expenses, the multiplier is 153/365 to reflect the number of days since commencement of operations. Annual Report | 11 Franklin Templeton 2025 Retirement Target Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Templeton 2025 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund invests among the broad asset classes of equity, fixed-income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date, indicated in the Fund's name, approaches. -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton 2025 Retirement Target Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ......................... 57.2% Foreign Equity .......................... 26.0% Domestic Fixed Income ................... 7.9% Foreign Fixed Income .................... 3.5% Short-Term Investments & Other Net Assets 5.4% * The asset allocation is based on the Statement of Investments, which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- This inaugural annual report for Franklin Templeton 2025 Retirement Target Fund covers the period since inception on August 1, 2006, through December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton 2025 Retirement Target Fund - Class A posted a +9.41% cumulative total return for the period since inception on August 1, 2006, through December 31, 2006. By comparison the Fund's benchmarks, the S&P 500 and Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 42. 12 | Annual Report (EAFE) Index for equities, the Lehman Brothers (LB) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +12.04%, +13.66%, +3.69% and +2.14%, respectively, during the same time. 1 You can find other performance data in the Performance Summary beginning on page 15. INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on obtaining a maximum amount of current income. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each Fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. TOP 10 FUND HOLDINGS Franklin Templeton 2025 Retirement Target Fund 12/31/06 ------------------------------------------------------------------------------- % OF TOTAL NET ASSETS ------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II 16.9% - Advisor Class ------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund 14.9% - Advisor Class ------------------------------------------------------------------------------- Mutual Shares Fund 13.7% - Class Z ------------------------------------------------------------------------------- Mutual European Fund 13.3% - Class Z ------------------------------------------------------------------------------- Templeton Foreign Fund 4.6% - Advisor Class ------------------------------------------------------------------------------- Franklin Gold and Precious Metals Fund 4.2% - Advisor Class ------------------------------------------------------------------------------- Franklin Aggressive Growth Fund 4.1% - Advisor Class ------------------------------------------------------------------------------- Franklin Real Estate Securities Fund 4.1% - Advisor Class ------------------------------------------------------------------------------- Templeton China World Fund 3.9% - Advisor Class ------------------------------------------------------------------------------- Franklin Natural Resources Fund 3.6% - Advisor Class ------------------------------------------------------------------------------- 1. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Annual Report | 13 At period-end, Franklin Templeton 2025 Retirement Target Fund's domestic equity exposure was 68.8% of its total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2006, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Small Cap Growth Fund II - Advisor Class, representing 16.9% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 69.1% of the Fund's total fixed income weighting, with the balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 3.5% of total net assets. Our largest domestic growth fund holding, Franklin Small Cap Growth Fund II - Advisor Class, slightly underperformed the S&P 500, as did our largest domestic value fund holding, Mutual Shares Fund - Class Z. However, our largest foreign equity holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class outperformed the LB U.S. Aggregate Index. Thank you for your participation in Franklin Templeton 2025 Retirement Target Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2025 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. 14 | Annual Report Performance Summary as of 12/31/06 FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.78 $10.78 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1416 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0007 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0191 -------------------------------------------------------------------------------- TOTAL $0.1614 -------------------------------------------------------------------------------- CLASS C (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.77 $10.77 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1299 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0007 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0191 -------------------------------------------------------------------------------- TOTAL $0.1497 -------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.77 $10.77 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1412 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0007 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0191 -------------------------------------------------------------------------------- TOTAL $0.1610 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.79 $10.79 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1479 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0007 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0191 -------------------------------------------------------------------------------- TOTAL $0.1677 -------------------------------------------------------------------------------- Annual Report | 15 Performance Summary (CONTINUED) PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. ------------------------------------------------------------------------------- CLASS A INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +9.41% ------------------------------------------------------------------------------- Aggregate Total Return 3 +3.12% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,312 ------------------------------------------------------------------------------- CLASS C INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +9.20% ------------------------------------------------------------------------------- Aggregate Total Return 3 +8.20% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,820 ------------------------------------------------------------------------------- CLASS R INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +9.31% ------------------------------------------------------------------------------- Aggregate Total Return 3 +9.31% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,931 ------------------------------------------------------------------------------- ADVISOR CLASS INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +9.57% ------------------------------------------------------------------------------- Aggregate Total Return 3 +9.57% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,957 ------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. TYPICALLY, THE MORE AGGRESSIVE THE INVESTMENT, OR THE GREATER THE POTENTIAL RETURN, THE MORE RISK INVOLVED. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH SOME FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BECAUSE THESE FUNDS INVEST IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. After 12/31/07, the manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the period indicated. 3. Aggregate total return represents the change in value of an investment over the period indicated. Since the Fund has existed for less than one year, average annual total returns are not available. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the period indicated. 16 | Annual Report Your Fund's Expenses FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 17 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
--------------------------------------------------------------------------------------------------------------- EXPENSES PAID BEGINNING ACCOUNT DURING PERIOD* VALUE ACTUAL 8/1/06-12/31/06 ACTUAL 8/1/06 ENDING ACCOUNT HYPOTHETICAL CLASS A HYPOTHETICAL 7/1/06 VALUE 12/31/06 7/1/06-12/31/06 --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,094.10 $2.19 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 --------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,092.00 $5.04 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.41 $5.85 --------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,093.10 $2.90 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.88 $3.36 --------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,095.70 $0.66 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.45 $0.77 ---------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 184/365 (Hypothetical) to reflect the one-half year period. For actual expenses, the multiplier is 153/365 to reflect the number of days since commencement of operations. 18 | Annual Report Franklin Templeton 2035 Retirement Target Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Templeton 2035 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund invests among the broad asset classes of equity, fixed-income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date, indicated in the Fund's name, approaches. -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton 2035 Retirement Target Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] Domestic Equity 63.2% Foreign Equity 28.5% Domestic Fixed Income 0.5% Foreign Fixed Income 0.3% Short-Term Investments & Other Net Assets 7.5% * The asset allocation is based on the Statement of Investments, which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- This inaugural annual report for Franklin Templeton 2035 Retirement Target Fund covers the period since inception on August 1, 2006, through December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton 2035 Retirement Target Fund - Class A posted a +10.44% cumulative total return for the period since inception on August 1, 2006, through December 31, 2006. By comparison the Fund's benchmarks, the S&P 500 and Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Lehman Brothers (LB) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +12.04%, +13.66%, +3.69% and +2.14%, respectively, during the same time. 1 You can find other performance data in the Performance Summary beginning on page 22. 1. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 47. Annual Report | 19 TOP 10 FUND HOLDINGS Franklin Templeton 2035 Retirement Target Fund 12/31/06 ------------------------------------------------------------------------------- % OF TOTAL NET ASSETS ------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II 18.8% - Advisor Class ------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund 16.6% - Advisor Class ------------------------------------------------------------------------------- Mutual Shares Fund 15.1% - Class Z ------------------------------------------------------------------------------- Mutual European Fund 14.6% - Class Z ------------------------------------------------------------------------------- Templeton Foreign Fund 5.1% - Advisor Class ------------------------------------------------------------------------------- Franklin Gold and Precious Metals Fund 4.6% - Advisor Class ------------------------------------------------------------------------------- Franklin Real Estate Securities Fund 4.5% - Advisor Class ------------------------------------------------------------------------------- Franklin Aggressive Growth Fund 4.4% - Advisor Class ------------------------------------------------------------------------------- Templeton China World Fund 4.2% - Advisor Class ------------------------------------------------------------------------------- Franklin Natural Resources Fund 3.8% - Advisor Class ------------------------------------------------------------------------------- INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on obtaining a maximum amount of current income. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each Fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities, fixed income securities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. At period-end, Franklin Templeton 2035 Retirement Target Fund's domestic equity exposure was 68.9% of its total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2006, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Small Cap Growth Fund II - Advisor Class, representing 18.8% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 68.0% of the Fund's total fixed income weighting, with the balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 0.02% of total net assets. Our largest domestic growth fund holding, Franklin Small Cap Growth Fund II - Advisor Class, slightly underperformed the S&P 500, as did our largest domestic value fund holding, Mutual Shares Fund - Class Z. However, our largest foreign equity holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index. On the fixed income side, Templeton Global Bond Fund - Advisor Class outperformed the LB U.S. Aggregate Index. 20 | Annual Report Thank you for your participation in Franklin Templeton 2035 Retirement Target Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2035 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. Annual Report | 21 Performance Summary as of 12/31/06 FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION -------------------------------------------------------------------------------- CLASS A (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.88 $10.88 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1317 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0068 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0254 -------------------------------------------------------------------------------- TOTAL $0.1639 -------------------------------------------------------------------------------- CLASS C (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.86 $10.86 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1218 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0068 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0254 -------------------------------------------------------------------------------- TOTAL $0.1540 -------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.88 $10.88 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1278 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0068 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0254 -------------------------------------------------------------------------------- TOTAL $0.1600 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.89 $10.89 $10.00 -------------------------------------------------------------------------------- DISTRIBUTIONS (8/1/06-12/31/06) -------------------------------------------------------------------------------- Dividend Income $0.1385 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0068 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0254 -------------------------------------------------------------------------------- TOTAL $0.1707 -------------------------------------------------------------------------------- 22 | Annual Report Performance Summary (CONTINUED) PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. -------------------------------------------------------------------------------- CLASS A INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +10.44% -------------------------------------------------------------------------------- Aggregate Total Return 3 +4.09% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,409 -------------------------------------------------------------------------------- CLASS C INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +10.14% -------------------------------------------------------------------------------- Aggregate Total Return 3 +9.14% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,914 -------------------------------------------------------------------------------- CLASS R INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +10.40% -------------------------------------------------------------------------------- Aggregate Total Return 3 +10.40% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,040 -------------------------------------------------------------------------------- ADVISOR CLASS INCEPTION (8/1/06) -------------------------------------------------------------------------------- Cumulative Total Return 2 +10.60% -------------------------------------------------------------------------------- Aggregate Total Return 3 +10.60% -------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,060 -------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. TYPICALLY, THE MORE AGGRESSIVE THE INVESTMENT, OR THE GREATER THE POTENTIAL RETURN, THE MORE RISK INVOLVED. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH SOME FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BECAUSE THESE FUNDS INVEST IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. After 12/31/07, the manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the period indicated. 3. Aggregate total return represents the change in value of an investment over the period indicated. Since the Fund has existed for less than one year, average annual total returns are not available. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the period indicated. Annual Report | 23 Your Fund's Expenses FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 /$1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 24 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
-------------------------------------------------------------------------------------------------------------- EXPENSES PAID BEGINNING ACCOUNT DURING PERIOD* VALUE ACTUAL 8/1/06-12/31/06 ACTUAL 8/1/06 ENDING ACCOUNT HYPOTHETICAL CLASS A HYPOTHETICAL 7/1/06 VALUE 12/31/06 7/1/06-12/31/06 -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,104.40 $2.21 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.74 $2.55 -------------------------------------------------------------------------------------------------------------- CLASS C -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,101.40 $5.06 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.03 $5.85 -------------------------------------------------------------------------------------------------------------- CLASS R -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,104.00 $2.87 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.12 $3.31 -------------------------------------------------------------------------------------------------------------- ADVISOR CLASS -------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,106.00 $0.66 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.20 $0.77 --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; C: 1.15%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 184/365 (Hypothetical) to reflect the one-half year period. For actual expenses, the multiplier is 153/365 to reflect the number of days since commencement of operations. Annual Report | 25 Franklin Templeton 2045 Retirement Target Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Templeton 2045 Retirement Target Fund seeks the highest level of long-term total return, which consists of capital appreciation and income, consistent with the Fund's asset allocation. The Fund invests among the broad asset classes of equity, fixed-income and short-term (money market) investments by investing in a distinctly weighted combination of Franklin Templeton mutual funds (underlying funds), within an increasing emphasis on income as the target date, indicated in the Fund's name, approaches. -------------------------------------------------------------------------------- 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton 2045 Retirement Target Fund Based on Total Net Assets as of 12/31/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ......................... 63.6% Foreign Equity .......................... 28.7% Short-Term Investments & Other Net Assets 7.7% * The asset allocation is based on the Statement of Investments, which classifies each underlying fund into a broad asset class. This inaugural annual report for Franklin Templeton 2045 Retirement Target Fund covers the period since inception on August 1, 2006, through December 31, 2006. PERFORMANCE OVERVIEW Franklin Templeton 2045 Retirement Target Fund - Class A posted a +10.55% cumulative total return for the period since inception on August 1, 2006, through December 31, 2006. By comparison the Fund's benchmarks, the S&P 500 and THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 52. 26 | Annual Report Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index for equities, the Lehman Brothers (LB) U.S. Aggregate Index for fixed income, and the Payden & Rygel (P&R) 90 Day U.S. T-Bill Index for short-term investments and other net assets, posted total returns of +12.04%, +13.66%, +3.69% and +2.14%, respectively, during the same time. 1 You can find other performance data in the Performance Summary beginning on page 29. INVESTMENT STRATEGY When selecting equity funds, we consider the underlying funds' foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed income funds, our primary focus is on obtaining a maximum amount of current income. In evaluating the risk level of the underlying funds, we analyze such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next). We attempt to invest the assets of each Fund in the same underlying funds and will vary the underlying funds' allocation percentages based upon each Fund's risk/return level. We change the Fund's target asset allocation gradually over time, and it becomes increasingly conservative as the stated target date draws near. MANAGER'S DISCUSSION The Fund's performance can be attributed largely to its allocation among equities, and short-term investments and other net assets, and by the actual performance of the selected underlying funds. This allocation shifts every year, in accordance with the retirement date associated with the portfolio. TOP 10 FUND HOLDINGS Franklin Templeton 2045 Retirement Target Fund 12/31/06 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II 18.9% - Advisor Class -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund 16.6% - Advisor Class -------------------------------------------------------------------------------- Mutual Shares Fund 15.1% - Class Z -------------------------------------------------------------------------------- Mutual European Fund 14.7% - Class Z -------------------------------------------------------------------------------- Templeton Foreign Fund 5.1% - Advisor Class -------------------------------------------------------------------------------- Franklin Aggressive Growth Fund 4.6% - Advisor Class -------------------------------------------------------------------------------- Franklin Gold and Precious Metals Fund 4.6% - Advisor Class -------------------------------------------------------------------------------- Franklin Real Estate Securities Fund 4.5% - Advisor Class -------------------------------------------------------------------------------- Templeton China World Fund 4.3% - Advisor Class -------------------------------------------------------------------------------- Franklin Natural Resources Fund 3.9% - Advisor Class -------------------------------------------------------------------------------- 1. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The P&R 90 Day U.S. T-Bill Index is a total return index based on a constant maturity instrument. Payden & Rygel includes both accrued interest and change in market price in its monthly total return calculations. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Annual Report | 27 At period-end, Franklin Templeton 2045 Retirement Target Fund's domestic equity exposure was 68.9% of its total equity weighting, with the balance represented by foreign equity. The portfolio was diversified across capitalization sizes and investment styles, and on December 31, 2006, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Franklin Small Cap Growth Fund II - Advisor Class, representing 18.9% of the Fund's total net assets, was our largest equity fund weighting at period-end. Our largest domestic growth fund holding, Franklin Small Cap Growth Fund II - Advisor Class, slightly underperformed the S&P 500, as did our largest domestic value fund holding, Mutual Shares Fund - Class Z. However, our largest foreign equity holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index. Thank you for your participation in Franklin Templeton 2045 Retirement Target Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Manager Franklin Templeton 2045 Retirement Target Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2006, 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. 28 | Annual Report Performance Summary as of 12/31/06 FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION ------------------------------------------------------------------------------ CLASS A (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.89 $10.89 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1338 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0056 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0264 ------------------------------------------------------------------------------ TOTAL $0.1658 ------------------------------------------------------------------------------ CLASS C (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.87 $10.87 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1278 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0056 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0264 ------------------------------------------------------------------------------ TOTAL $0.1598 ------------------------------------------------------------------------------ CLASS R (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.88 $10.88 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1326 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0056 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0264 ------------------------------------------------------------------------------ TOTAL $0.1646 ------------------------------------------------------------------------------ ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/06 8/1/06 ------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.90 $10.90 $10.00 ------------------------------------------------------------------------------ DISTRIBUTIONS (8/1/06-12/31/06) ------------------------------------------------------------------------------ Dividend Income $0.1403 ------------------------------------------------------------------------------ Short-Term Capital Gain $0.0056 ------------------------------------------------------------------------------ Long-Term Capital Gain $0.0264 ------------------------------------------------------------------------------ TOTAL $0.1723 ------------------------------------------------------------------------------ Annual Report | 29 Performance Summary (CONTINUED) PERFORMANCE 1 CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE. ------------------------------------------------------------------------------- CLASS A INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +10.55% ------------------------------------------------------------------------------- Aggregate Total Return 3 +4.20% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,420 ------------------------------------------------------------------------------- CLASS C INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +10.30% ------------------------------------------------------------------------------- Aggregate Total Return 3 +9.30% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,930 ------------------------------------------------------------------------------- CLASS R INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +10.44% ------------------------------------------------------------------------------- Aggregate Total Return 3 +10.44% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,044 ------------------------------------------------------------------------------- ADVISOR CLASS INCEPTION (8/1/06) ------------------------------------------------------------------------------- Cumulative Total Return 2 +10.72% ------------------------------------------------------------------------------- Aggregate Total Return 3 +10.72% ------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,072 ------------------------------------------------------------------------------- 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. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. ENDNOTES WHILE AN ASSET ALLOCATION PLAN CAN BE A VALUABLE TOOL TO HELP REDUCE OVERALL VOLATILITY, ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. TYPICALLY, THE MORE AGGRESSIVE THE INVESTMENT, OR THE GREATER THE POTENTIAL RETURN, THE MORE RISK INVOLVED. GENERALLY, INVESTORS SHOULD BE COMFORTABLE WITH SOME FLUCTUATION IN THE VALUE OF THEIR INVESTMENTS, ESPECIALLY OVER THE SHORT TERM. STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, BUT THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORTER TERM. BECAUSE THESE FUNDS INVEST IN UNDERLYING FUNDS, WHICH MAY ENGAGE IN A VARIETY OF INVESTMENT STRATEGIES INVOLVING CERTAIN RISKS, THE FUND MAY BE SUBJECT TO THOSE SAME RISKS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. The Fund's manager and administrator have agreed in advance to waive all or a portion of their fees and to make certain payments to reduce expenses. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. After 12/31/07, the manager and administrator may end this arrangement at any time upon notice to the Fund's board. 2. Cumulative total return represents the change in value of an investment over the period indicated. 3. Aggregate total return represents the change in value of an investment over the period indicated. Since the Fund has existed for less than one year, average annual total returns are not available. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the period indicated. 30 | Annual Report Your Fund's Expenses FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 31 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
------------------------------------------------------------------------------------------------------------------- EXPENSES PAID BEGINNING ACCOUNT DURING PERIOD* VALUE ACTUAL 8/1/06-12/31/06 ACTUAL 8/1/06 ENDING ACCOUNT HYPOTHETICAL CLASS A HYPOTHETICAL 7/1/06 VALUE 12/31/06 7/1/06-12/31/06 ------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,105.50 $2.21 ------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 ------------------------------------------------------------------------------------------------------------------- CLASS C ------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,103.00 $4.80 ------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.71 $5.55 ------------------------------------------------------------------------------------------------------------------- CLASS R ------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,104.40 $2.87 ------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.93 $3.31 ------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS ------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,107.20 $0.66 ------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.45 $0.77 -------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.50%; C: 1.09%; R: 0.65%; and Advisor: 0.15%), multiplied by the average account value over the period, multiplied by 184/365 (Hypothetical) to reflect the one-half year period. For actual expenses, the multiplier is 153/365 to reflect the number of days since commencement of operations. 32 | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS A 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.13 Net realized and unrealized gains (losses) .............................. 0.73 ----------- Total from investment operations ......................................... 0.86 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.15) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.17) ----------- Net asset value, end of period ........................................... $ 10.69 =========== Total return d ........................................................... 8.59% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 1,364 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 12.13% g Expenses net of waiver and payments by affiliates e ..................... 0.50% g Net investment income c ................................................. 2.92% g Portfolio turnover rate .................................................. 2.42%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 33 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS C 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.14 Net realized and unrealized gains (losses) .............................. 0.69 ----------- Total from investment operations ......................................... 0.83 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.14) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.16) ----------- Net asset value, end of period ........................................... $ 10.67 =========== Total return d ........................................................... 8.30% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 63 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 12.78% g Expenses net of waiver and payments by affiliates e ..................... 1.15% g Net investment income c ................................................. 2.27% g Portfolio turnover rate .................................................. 2.42%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. 34 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
------------- PERIOD ENDED DECEMBER 31, CLASS R 2006 f ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.11 Net realized and unrealized gains (losses) .............................. 0.74 ----------- Total from investment operations ......................................... 0.85 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.15) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.17) ----------- Net asset value, end of period ........................................... $ 10.68 =========== Total return d ........................................................... 8.48% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 11 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 12.28% g Expenses net of waiver and payments by affiliates e ..................... 0.65% g Net investment income c ................................................. 2.77% g Portfolio turnover rate .................................................. 2.42%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 35 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
------------- PERIOD ENDED DECEMBER 31, ADVISOR CLASS 2006 f ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.17 Net realized and unrealized gains (losses) .............................. 0.71 ----------- Total from investment operations ......................................... 0.88 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.16) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.18) ----------- Net asset value, end of period ........................................... $ 10.70 =========== Total return d ........................................................... 8.75% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 20 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 11.78% g Expenses net of waiver and payments by affiliates e ..................... 0.15% g Net investment income c ................................................. 3.27% g Portfolio turnover rate .................................................. 2.42%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.82% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. 36 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
----------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND SHARES VALUE ----------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 93.3% DOMESTIC EQUITY 48.3% b Franklin Aggressive Growth Fund, Advisor Class ...................... 2,662 $ 48,164 Franklin Flex Cap Growth Fund, Advisor Class ........................ 4,324 184,417 Franklin Natural Resources Fund, Advisor Class ...................... 1,251 43,660 Franklin Real Estate Securities Fund, Advisor Class ................. 1,939 51,471 b Franklin Small Cap Growth Fund II, Advisor Class .................... 16,806 209,905 Mutual Shares Fund, Class Z ......................................... 6,389 166,695 ---------- 704,312 ---------- DOMESTIC FIXED INCOME 16.0% Franklin Strategic Mortgage Portfolio ............................... 7,024 67,433 Franklin Total Return Fund, Advisor Class ........................... 6,544 65,051 Franklin U.S. Government Securities Fund, Advisor Class ............. 15,559 100,356 ---------- 232,840 ---------- FOREIGN EQUITY 21.9% Franklin Gold and Precious Metals Fund, Advisor Class ............... 1,558 51,236 Mutual European Fund, Class Z ....................................... 6,637 163,198 Templeton China World Fund, Advisor Class ........................... 1,489 47,751 Templeton Foreign Fund, Advisor Class ............................... 4,240 57,617 ---------- 319,802 ---------- FOREIGN FIXED INCOME 7.1% Templeton Global Bond Fund, Advisor Class ........................... 9,395 103,534 ---------- TOTAL LONG TERM INVESTMENTS (COST $1,327,211) ....................... 1,360,488 ---------- SHORT TERM INVESTMENT (COST $66) 0.0%c MONEY MARKET FUND 0.0%c d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 66 66 ---------- TOTAL INVESTMENTS (COST $1,327,277) 93.3% ........................... 1,360,554 OTHER ASSETS, LESS LIABILITIES 6.7% ................................. 97,577 ---------- NET ASSETS 100.0% ................................................... $1,458,131 ==========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2006. c Rounds to less than 0.1% of net assets. d The rate shown is the annualized seven-day yield at period end. Annual Report | The accompanying notes are an integral part of these financial statements. | 37 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS A 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.12 Net realized and unrealized gains (losses) .............................. 0.82 ----------- Total from investment operations ......................................... 0.94 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.14) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.16) ----------- Redemption fees .......................................................... -- g ----------- Net asset value, end of period ........................................... $ 10.78 =========== Total return d ........................................................... 9.41% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 1,699 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 10.76% h Expenses net of waiver and payments by affiliates e ..................... 0.50% h Net investment income c ................................................. 2.78% h Portfolio turnover rate .................................................. 5.36%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Amount rounds to less than $0.01 per share. h Annualized. 38 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
------------- PERIOD ENDED DECEMBER 31, CLASS C 2006 f ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.10 Net realized and unrealized gains (losses) .............................. 0.82 ----------- Total from investment operations ......................................... 0.92 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.13) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.15) ----------- Redemption fees .......................................................... -- g ----------- Net asset value, end of period ........................................... $ 10.77 =========== Total return d ........................................................... 9.20% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 54 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 11.41% h Expenses net of waiver and payments by affiliates e ..................... 1.15% h Net investment income c ................................................. 2.13% h
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Amount rounds to less than $0.01 per share. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 39 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS R 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.11 Net realized and unrealized gains (losses) .............................. 0.82 ----------- Total from investment operations ......................................... 0.93 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.14) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.16) ----------- Redemption fees .......................................................... -- g ----------- Net asset value, end of period ........................................... $ 10.77 =========== Total return d ........................................................... 9.31% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 19 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 10.91% h Expenses net of waiver and payments by affiliates e ..................... 0.65% h Net investment income c ................................................. 2.63% h Portfolio turnover rate .................................................. 5.36%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Amount rounds to less than $0.01 per share. h Annualized. 40 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
------------- PERIOD ENDED DECEMBER 31, ADVISOR CLASS 2006 f ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.20 Net realized and unrealized gains (losses) .............................. 0.76 ----------- Total from investment operations ......................................... 0.96 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.15) Net realized gains ...................................................... (0.02) ----------- Total distributions ...................................................... (0.17) ----------- Redemption fees .......................................................... -- g ----------- Net asset value, end of period ........................................... $ 10.79 =========== Total return d ........................................................... 9.57% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 51 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 10.41% h Expenses net of waiver and payments by affiliates e ..................... 0.15% h Net investment income c ................................................. 3.13% h Portfolio turnover rate .................................................. 5.36%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.85% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Amount rounds to less than $0.01 per share. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 41 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
------------------------------------------------------------------------------------------------ FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND SHARES VALUE ------------------------------------------------------------------------------------------------ INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 94.6% DOMESTIC EQUITY 57.2% b Franklin Aggressive Growth Fund, Advisor Class ...................... 4,145 $ 74,989 Franklin Flex Cap Growth Fund, Advisor Class ........................ 6,377 271,959 Franklin Natural Resources Fund, Advisor Class ...................... 1,861 64,961 Franklin Real Estate Securities Fund, Advisor Class ................. 2,815 74,748 b Franklin Small Cap Growth Fund II, Advisor Class .................... 24,633 307,662 Mutual Shares Fund, Class Z ......................................... 9,535 248,778 ---------- 1,043,097 ---------- DOMESTIC FIXED INCOME 7.9% Franklin Strategic Mortgage Portfolio ............................... 4,400 42,239 Franklin Total Return Fund, Advisor Class ........................... 3,885 38,617 Franklin U.S. Government Securities Fund, Advisor Class ............. 9,596 61,894 ---------- 142,750 ---------- FOREIGN EQUITY 26.0% Franklin Gold and Precious Metals Fund, Advisor Class ............... 2,325 76,457 Mutual European Fund, Class Z ....................................... 9,845 242,079 Templeton China World Fund, Advisor Class ........................... 2,197 70,486 Templeton Foreign Fund, Advisor Class ............................... 6,226 84,611 ---------- 473,633 ---------- FOREIGN FIXED INCOME 3.5% Templeton Global Bond Fund, Advisor Class ........................... 5,790 63,809 ---------- TOTAL LONG TERM INVESTMENTS (COST $1,689,753) ....................... 1,723,289 ---------- SHORT TERM INVESTMENT (COST $42) 0.0% c MONEY MARKET FUND 0.0% c d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 42 42 ---------- TOTAL INVESTMENTS (COST $1,689,795) 94.6% ........................... 1,723,331 OTHER ASSETS, LESS LIABILITIES 5.4% ................................. 99,119 ---------- NET ASSETS 100.0% ................................................... $1,822,450 ==========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2006. c Rounds to less than 0.1% of net assets. d The rate shown is the annualized seven-day yield at period end. 42 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS A 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.09 Net realized and unrealized gains (losses) .............................. 0.95 ----------- Total from investment operations ......................................... 1.04 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.13) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.16) ----------- Net asset value, end of period ........................................... $ 10.88 =========== Total return d ........................................................... 10.44% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 1,171 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 13.47% g Expenses net of waiver and payments by affiliates e ..................... 0.50% g Net investment income c ................................................. 2.04% g Portfolio turnover rate .................................................. 8.29%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 43 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS C 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.12 Net realized and unrealized gains (losses) .............................. 0.89 ----------- Total from investment operations ......................................... 1.01 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.12) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.15) ----------- Net asset value, end of period ........................................... $ 10.86 =========== Total return d ........................................................... 10.14% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 57 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 14.12% g Expenses net of waiver and payments by affiliates e ..................... 1.15% g Net investment income c ................................................. 1.39% g Portfolio turnover rate .................................................. 8.29%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. 44 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS R 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.11 Net realized and unrealized gains (losses) .............................. 0.93 ----------- Total from investment operations ......................................... 1.04 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.13) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.16) ----------- Net asset value, end of period ........................................... $ 10.88 =========== Total return d ........................................................... 10.40% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 23 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 13.62% g Expenses net of waiver and payments by affiliates e ..................... 0.65% g Net investment income c ................................................. 1.89% g Portfolio turnover rate .................................................. 8.29%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 45 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
------------- PERIOD ENDED DECEMBER 31, ADVISOR CLASS 2006 f ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.18 Net realized and unrealized gains (losses) .............................. 0.88 ----------- Total from investment operations ......................................... 1.06 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.14) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.17) ----------- Net asset value, end of period ........................................... $ 10.89 =========== Total return d ........................................................... 10.60% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 59 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 13.12% g Expenses net of waiver and payments by affiliates e ..................... 0.15% g Net investment income c ................................................. 2.39% g Portfolio turnover rate .................................................. 8.29%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. 46 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
----------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND SHARES VALUE ----------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 92.5% DOMESTIC EQUITY 63.2% b Franklin Aggressive Growth Fund, Advisor Class ...................... 3,155 $ 57,079 Franklin Flex Cap Growth Fund, Advisor Class ........................ 5,089 217,053 Franklin Natural Resources Fund, Advisor Class ...................... 1,437 50,154 Franklin Real Estate Securities Fund, Advisor Class ................. 2,235 59,329 b Franklin Small Cap Growth Fund II, Advisor Class .................... 19,758 246,774 Mutual Shares Fund, Class Z ......................................... 7,581 197,792 ---------- 828,181 ---------- DOMESTIC FIXED INCOME 0.5% Franklin Strategic Mortgage Portfolio ............................... 206 1,979 Franklin Total Return Fund, Advisor Class ........................... 200 1,987 Franklin U.S. Government Securities Fund, Advisor Class ............. 460 2,969 ---------- 6,935 ---------- FOREIGN EQUITY 28.5% Franklin Gold and Precious Metals Fund, Advisor Class ............... 1,840 60,508 Mutual European Fund, Class Z ....................................... 7,790 191,567 Templeton China World Fund, Advisor Class ........................... 1,710 54,861 Templeton Foreign Fund, Advisor Class ............................... 4,928 66,976 ---------- 373,912 ---------- FOREIGN FIXED INCOME 0.3% Templeton Global Bond Fund, Advisor Class ........................... 297 3,270 ---------- TOTAL LONG TERM INVESTMENTS (COST $1,171,007) ....................... 1,212,298 ---------- SHORT TERM INVESTMENT (COST $32) 0.0% c MONEY MARKET FUND 0.0% c d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 32 32 ---------- TOTAL INVESTMENTS (COST $1,171,039) 92.5% ........................... 1,212,330 OTHER ASSETS, LESS LIABILITIES 7.5% ................................. 97,623 ---------- NET ASSETS 100.0% ................................................... $1,309,953 ==========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2006. c Rounds to less than 0.1% of net assets. d The rate shown is the annualized seven-day yield at period end. Annual Report | The accompanying notes are an integral part of these financial statements. | 47 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
------------- PERIOD ENDED DECEMBER 31, CLASS A 2006 f ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.08 Net realized and unrealized gains (losses) .............................. 0.97 ----------- Total from investment operations ......................................... 1.05 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.13) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.16) ----------- Net asset value, end of period ........................................... $ 10.89 =========== Total return d ........................................................... 10.55% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 1,169 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 13.15% g Expenses net of waiver and payments by affiliates e ..................... 0.50% g Net investment income c ................................................. 1.97% g Portfolio turnover rate .................................................. 8.01%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. 48 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, CLASS C 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.16 Net realized and unrealized gains (losses) .............................. 0.87 ----------- Total from investment operations ......................................... 1.03 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.13) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.16) ----------- Net asset value, end of period ........................................... $ 10.87 =========== Total return d ........................................................... 10.30% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 67 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 13.74% g Expenses net of waiver and payments by affiliates e ..................... 1.09% g Net investment income c ................................................. 1.38% g Portfolio turnover rate .................................................. 8.01%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 49 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
------------- PERIOD ENDED DECEMBER 31, CLASS R 2006 f ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.08 Net realized and unrealized gains (losses) .............................. 0.96 ----------- Total from investment operations ......................................... 1.04 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.13) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.16) ----------- Net asset value, end of period ........................................... $ 10.88 =========== Total return d ........................................................... 10.44% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 12 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 13.30% g Expenses net of waiver and payments by affiliates e ..................... 0.65% g Net investment income c ................................................. 1.82% g Portfolio turnover rate .................................................. 8.01%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return does not reflect sales commissions or the contingent deferred sales charge, if applicable, and is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. 50 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
-------------- PERIOD ENDED DECEMBER 31, ADVISOR CLASS 2006 f -------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................................... $ 10.00 ----------- Income from investment operations a: Net investment income b, c .............................................. 0.12 Net realized and unrealized gains (losses) .............................. 0.95 ----------- Total from investment operations ......................................... 1.07 ----------- Less distributions from: Net investment income and short term gains received from Underlying Funds (0.14) Net realized gains ...................................................... (0.03) ----------- Total distributions ...................................................... (0.17) ----------- Net asset value, end of period ........................................... $ 10.90 =========== Total return d ........................................................... 10.72% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........................................ $ 17 Ratios to average net assets: Expenses before waiver and payments by affiliates e ..................... 12.80% g Expenses net of waiver and payments by affiliates e ..................... 0.15% g Net investment income c ................................................. 2.32% g Portfolio turnover rate .................................................. 8.01%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Recognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests. d Total return is not annualized for periods less than one year. e Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.89% for the period ended December 31, 2006. f For the period August 1, 2006 (commencement of operations) to December 31, 2006. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 51 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
--------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND SHARES VALUE --------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 92.3% DOMESTIC EQUITY 63.6% b Franklin Aggressive Growth Fund, Advisor Class ...................... 3,207 $ 58,017 Franklin Flex Cap Growth Fund, Advisor Class ........................ 4,928 210,187 Franklin Natural Resources Fund, Advisor Class ...................... 1,413 49,321 Franklin Real Estate Securities Fund, Advisor Class ................. 2,150 57,076 b Franklin Small Cap Growth Fund II, Advisor Class .................... 19,137 239,017 Mutual Shares Fund, Class Z ......................................... 7,312 190,781 ---------- 804,399 ---------- FOREIGN EQUITY 28.7% Franklin Gold and Precious Metals Fund, Advisor Class ............... 1,763 57,953 Mutual European Fund, Class Z ....................................... 7,570 186,151 Templeton China World Fund, Advisor Class ........................... 1,690 54,203 Templeton Foreign Fund, Advisor Class ............................... 4,738 64,391 ---------- 362,698 ---------- TOTAL LONG TERM INVESTMENTS (COST $1,125,168) ....................... 1,167,097 ---------- SHORT TERM INVESTMENT (COST $13) 0.0% c MONEY MARKET FUND 0.0% c d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.97% 13 13 ---------- TOTAL INVESTMENTS (COST $1,125,181) 92.3% ........................... 1,167,110 OTHER ASSETS, LESS LIABILITIES 7.7% ................................. 97,808 ---------- NET ASSETS 100.0% ................................................... $1,264,918 ==========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2006. c Rounds to less than 0.1% of net assets. d The rate shown is the annualized seven-day yield at period end. 52 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES December 31, 2006
------------------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------------------------- Assets: Investments in Underlying Funds (Note 6): Cost .................................... $1,327,277 $1,689,795 $1,171,039 $1,125,181 =========================================================================== Value ................................... $1,360,554 $1,723,331 $1,212,330 $1,167,110 Receivables: Investment securities sold .............. 11,592 15,974 16,100 12,790 Capital shares sold ..................... -- 3,815 -- 388 Affiliates .............................. 57,033 56,708 58,429 57,240 Offering costs ........................... 46,181 46,181 46,181 46,181 --------------------------------------------------------------------------- Total assets ...................... 1,475,360 1,846,009 1,333,040 1,283,709 --------------------------------------------------------------------------- Liabilities: Payables: Reports to shareholders ................. 1,500 1,500 1,700 1,500 Professional fees ....................... 250 250 250 250 Funds advanced by custodian .............. 11,580 15,972 16,096 12,786 Accrued expenses and other liabilities ... 3,899 5,837 5,041 4,255 --------------------------------------------------------------------------- Total liabilities ................. 17,229 23,559 23,087 18,791 --------------------------------------------------------------------------- Net assets, at value ........ $1,458,131 $1,822,450 $1,309,953 $1,264,918 =========================================================================== Net assets consist of: Paid-in capital .......................... $1,378,829 $1,721,621 $1,216,686 $1,171,165 Undistributed net investment income ...... 467 533 389 366 Net unrealized appreciation (depreciation) 33,277 33,536 41,291 41,929 Accumulated net realized gain (loss) ..... 45,558 66,760 51,587 51,458 --------------------------------------------------------------------------- Net assets, at value ........ $1,458,131 $1,822,450 $1,309,953 $1,264,918 ===========================================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 53 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) December 31, 2006
------------------------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------------------------ CLASS A: Net assets, at value ...................... $1,364,190 $1,698,741 $1,171,321 $1,169,324 ========================================================================== Shares outstanding ........................ 127,642 157,578 107,638 107,404 ========================================================================== Net asset value per share a ............... $ 10.69 $ 10.78 $ 10.88 $ 10.89 ========================================================================== Maximum offering price per share (net asset value per share / 94.25%) ................ $ 11.34 $ 11.44 $ 11.54 $ 11.55 ========================================================================== CLASS C: Net assets, at value ...................... $ 63,341 $ 53,687 $ 56,781 $ 66,799 ========================================================================== Shares outstanding ........................ 5,938 4,987 5,230 6,146 ========================================================================== Net asset value and maximum offering price per share a .............................. $ 10.67 $ 10.77 $ 10.86 $ 10.87 ========================================================================== CLASS R: Net assets, at value ...................... $ 10,681 $ 18,941 $ 23,200 $ 12,194 ========================================================================== Shares outstanding ........................ 1,000 1,758 2,133 1,121 ========================================================================== Net asset value and maximum offering price per share a .............................. $ 10.68 $ 10.77 $ 10.88 $ 10.88 ========================================================================== ADVISOR CLASS: Net assets, at value ...................... $ 19,919 $ 51,081 $ 58,651 $ 16,601 ========================================================================== Shares outstanding ........................ 1,862 4,732 5,384 1,523 ========================================================================== Net asset value and maximum offering price per share a .............................. $ 10.70 $ 10.79 $ 10.89 $ 10.90 ==========================================================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 54 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the period ended December 31, 2006 a
------------------------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------------------------ Investment income: Dividends from Underlying Funds (Note 6) .................................... $ 17,430 $ 18,956 $ 11,864 $ 11,532 --------------------------------------------------------------------------- Expenses: Asset allocation fees (Note 3a) .............. 1,217 1,399 1,162 1,161 Distribution fees: (Note 3c) Class A ..................................... 1,700 1,918 1,518 1,564 Class C ..................................... 134 162 121 102 Class R ..................................... 22 25 35 23 Transfer agent fees (Note 3e) ................ 333 542 501 427 Reports to shareholders ...................... 1,500 1,500 1,728 1,500 Registration and filing fees ................. 1,176 1,057 2,317 1,002 Professional fees ............................ 21,839 21,839 21,839 21,839 Trustees' fees and expenses .................. 25 25 25 25 Amortization of offering costs ............... 33,329 33,329 33,329 33,329 Other ........................................ 558 501 351 501 --------------------------------------------------------------------------- Total expenses ........................... 61,833 62,297 62,926 61,473 Expenses waived/paid by affiliates (Note 3f) ............................ (59,213) (59,326) (60,551) (59,083) --------------------------------------------------------------------------- Net expenses ....................... 2,620 2,971 2,375 2,390 --------------------------------------------------------------------------- Net investment income ............. 14,810 15,985 9,489 9,142 --------------------------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Sale of investments in Underlying Funds ..... (255) (1,579) (846) (735) Realized gain distributions by Underlying Funds .......................... 53,019 78,476 61,684 61,247 --------------------------------------------------------------------------- Net realized gain (loss) from Underlying Funds ................ 52,764 76,897 60,838 60,512 --------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ............................ 33,277 33,536 41,291 41,929 --------------------------------------------------------------------------- Net realized and unrealized gain (loss) ....... 86,041 110,433 102,129 102,441 --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations .............................. $ 100,851 $ 126,418 $ 111,618 $ 111,583 ===========================================================================
a For the period August 1, 2006 (commencement of operations) to December 31, 2006. Annual Report | The accompanying notes are an integral part of these financial statements. | 55 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ---------------------------------------------------------------------------- PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2006 a 2006 a 2006 a 2006 a ---------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................. $ 14,810 $ 15,985 $ 9,489 $ 9,142 Net realized gain (loss) from Underlying Funds ..................... 52,764 76,897 60,838 60,512 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ..................... 33,277 33,536 41,291 41,929 ---------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ..... 100,851 126,418 111,618 111,583 ---------------------------------------------------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A .............................. (19,061) (22,186) (14,155) (14,304) Class C .............................. (827) (641) (627) (776) Class R .............................. (149) (247) (271) (145) Advisor Class ........................ (289) (691) (736) (213) Net realized gains: Class A .............................. (2,441) (3,104) (3,461) (3,421) Class C .............................. (112) (97) (166) (194) Class R .............................. (19) (34) (68) (35) Advisor Class ........................ (36) (92) (171) (48) ---------------------------------------------------------------------------- Total distributions to shareholders ..... (22,934) (27,092) (19,655) (19,136) ---------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A .............................. 1,289,499 1,604,063 1,084,636 1,079,556 Class C .............................. 61,466 50,514 54,747 65,871 Class R .............................. 10,000 18,158 21,604 11,306 Advisor Class ........................ 19,249 50,386 57,003 15,738 ---------------------------------------------------------------------------- Total capital share transactions ........ 1,380,214 1,723,121 1,217,990 1,172,471 ---------------------------------------------------------------------------- Redemption fees ......................... -- 3 -- -- ---------------------------------------------------------------------------- Net increase (decrease) in net assets ........................ 1,458,131 1,822,450 1,309,953 1,264,918 Net assets: Beginning of period ..................... $ -- $ -- $ -- $ -- ---------------------------------------------------------------------------- End of period ........................... $ 1,458,131 $ 1,822,450 $ 1,309,953 $ 1,264,918 ============================================================================ Undistributed net investment income included in net assets: End of period $ 467 $ 533 $ 389 $ 366 ============================================================================
a For the period August 1, 2006 (commencement of operations) to December 31, 2006. 56 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Fund Allocator Series (the Trust) is registered under the Investment Company Act of 1940, as amended, (the 1940 Act) as an open-end investment company, consisting of ten separate funds. All funds included in this report (the Funds) are diversified. The financial statements of the remaining funds in the Trust are presented separately. The Funds invest primarily in Franklin Templeton mutual funds (the Underlying Funds). The Funds offer four classes of shares: Class A, Class C, Class R, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day. B. INCOME TAXES No provision has been made for U.S. income taxes because each fund intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. C. 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. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. 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. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Annual Report | 57 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) The Funds indirectly bear their proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Funds may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Funds will vary. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in class-level expenses may result in payment of different per share distributions by class. D. OFFERING COSTS Offering costs are amortized on a straight line basis over twelve months. E. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. F. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the Funds and accounted for as an addition to paid-in capital. G. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and directors are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 58 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At December 31, 2006, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Funds' shares were as follows:
----------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT TARGET FUND TARGET FUND ----------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------- CLASS A SHARES: Period ended December 31, 2006 a Shares sold .................................. 127,176 $ 1,284,518 157,296 $ 1,600,839 Shares issued in reinvestment of distributions 473 5,061 892 9,629 Shares redeemed .............................. (7) (80) (610) (6,405) ----------------------------------------------------------- Net increase (decrease) ...................... 127,642 $ 1,289,499 157,578 $ 1,604,063 =========================================================== CLASS C SHARES: Period ended December 31, 2006 a Shares sold .................................. 5,865 $ 60,687 4,935 $ 49,955 Shares issued in reinvestment of distributions 73 779 53 574 Shares redeemed .............................. -- -- (1) (15) ----------------------------------------------------------- Net increase (decrease) ...................... 5,938 $ 61,466 4,987 $ 50,514 =========================================================== CLASS R SHARES: Period ended December 31, 2006 a Shares sold .................................. 1,000 $ 10,000 1,748 $ 18,053 Shares issued in reinvestment of distributions -- -- 11 120 Shares redeemed .............................. -- -- (1) (15) ----------------------------------------------------------- Net increase (decrease) ...................... 1,000 $ 10,000 1,758 $ 18,158 =========================================================== ADVISOR CLASS SHARES: Period ended December 31, 2006 a Shares sold .................................. 1,848 $ 19,100 6,173 $ 65,450 Shares issued in reinvestment of distributions 14 149 57 616 Shares redeemed .............................. -- -- (1,498) (15,680) ----------------------------------------------------------- Net increase (decrease) ...................... 1,862 $ 19,249 4,732 $ 50,386 =========================================================== ----------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND ----------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------- CLASS A SHARES: Period ended December 31, 2006 a Shares sold .................................. 107,501 $ 1,083,143 107,433 $ 1,079,816 Shares issued in reinvestment of distributions 158 1,718 151 1,642 Shares redeemed .............................. (21) (225) (180) (1,902) ----------------------------------------------------------- Net increase (decrease) ...................... 107,638 $ 1,084,636 107,404 $ 1,079,556 =========================================================== CLASS C SHARES: Period ended December 31, 2006 a Shares sold .................................. 5,178 $ 54,184 6,073 $ 65,075 Shares issued in reinvestment of distributions 59 638 74 811 Shares redeemed .............................. (7) (75) (1) (15) ----------------------------------------------------------- Net increase (decrease) ...................... 5,230 $ 54,747 6,146 $ 65,871 ===========================================================
Annual Report | 59 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
--------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND --------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------- CLASS R SHARES: Period ended December 31, 2006 a Shares sold .................................. 2,120 $ 21,455 1,122 $ 11,320 Shares issued in reinvestment of distributions 16 179 2 16 Shares redeemed .............................. (3) (30) (3) (30) --------------------------------------------------------- Net increase (decrease) ...................... 2,133 $ 21,604 1,121 $ 11,306 ========================================================= ADVISOR CLASS SHARES: Period ended December 31, 2006 a Shares sold .................................. 5,318 $ 56,281 1,515 $ 15,649 Shares issued in reinvestment of distributions 67 737 8 89 Shares redeemed .............................. (1) (15) -- -- --------------------------------------------------------- Net increase (decrease) ...................... 5,384 $ 57,003 1,523 $ 15,738 =========================================================
a For the period August 1, 2006 (commencement of operations) to December 31, 2006. 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of some of the Underlying Funds and of the following subsidiaries:
SUBSIDIARY AFFILIATION --------------------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. ASSET ALLOCATION FEES The Funds pay an asset allocation fee to Advisers of 0.25% per year of the average daily net assets of each of the Funds for investment advisory services, consisting principally of determining the allocation of assets of the Funds among the designated Underlying Funds. B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds. 60 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: Class A ................................. 0.35% Class C ................................. 1.00% Class R ................................. 0.50% D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ....................... $881 $2,676 $478 $581
E. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
-------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND -------------------------------------------------------------------- Transfer agent fees ................................. $215 $419 $344 $292
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS Advisers agreed in advance to voluntarily waive asset allocation fees and assume payment of other expenses through December 31, 2007. Total expenses waived/paid by Advisers are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. After December 31, 2007, Advisers may discontinue this waiver at any time. Annual Report | 61 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) G. OTHER AFFILIATED TRANSACTIONS At December 31, 2006, Advisers owned a percentage of the Funds' outstanding shares as listed below:
--------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND --------------------------------------------------------------------------------------------- 73.29% 59.15% 83.07% 86.06%
4. INCOME TAXES The tax character of distributions paid during the period ended December 31, 2006, was as follows:
--------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND --------------------------------------------------------- Distributions paid from: Ordinary income .......... $ 20,516 $ 23,883 $ 16,605 $ 16,084 Long-term capital gain ... 2,418 3,209 3,050 3,052 --------------------------------------------------------- $ 22,934 $ 27,092 $ 19,655 $ 19,136 =========================================================
At December 31, 2006, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------ Cost of investments ...................... $ 1,327,730 $ 1,691,597 $ 1,172,708 $ 1,126,657 ============================================================ Unrealized appreciation .................. $ 36,755 $ 42,130 $ 42,472 $ 43,107 Unrealized depreciation .................. (3,931) (10,396) (2,850) (2,654) ------------------------------------------------------------ Net unrealized appreciation (depreciation) $ 32,824 $ 31,734 $ 39,622 $ 40,453 ============================================================ Undistributed ordinary income ............ $ 475 $ 638 $ 508 $ 510 Undistributed long term capital gains .... 46,003 68,457 53,137 52,789 ------------------------------------------------------------ Distributable earnings ................... $ 46,478 $ 69,095 $ 53,645 $ 53,299 ============================================================
62 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) Net investment income differs for financial statement and tax purposes primarily due to differing treatments of short term capital gain distributions from Underlying Funds and offering costs. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of short term capital gain distributions from Underlying Funds and wash sales. 5. INVESTMENT TRANSACTIONS Purchases and sales of Underlying Funds (excluding short term securities) for the period ended December 31, 2006, were as follows: ------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON TEMPLETON 2015 2025 2035 2045 RETIREMENT RETIREMENT RETIREMENT RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------ Purchases ..... $ 1,354,828 $ 1,760,362 $ 1,260,852 $ 1,211,092 Sales ......... $ 27,361 $ 69,031 $ 89,017 $ 85,189 6. INVESTMENTS IN UNDERLYING FUNDS The Funds invest primarily in the Underlying Funds which are managed by Advisers or an affiliate of Advisers. The Funds do not invest in the Underlying Funds for the purpose of exercising management or control. At December 31, 2006, the Funds held no positions which exceed 5% of the Underlying Funds' shares outstanding. The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Pursuant to a SEC exemptive order specific to the Funds' investment in the Sweep Money Fund, asset allocation fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 7. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares ("marketing support"), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. Annual Report | 63 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. REGULATORY MATTERS (CONTINUED) On June 23, 2006, the SEC approved the proposed plan of distribution for the marketing support settlement, and disbursement of the settlement monies to the designated funds, in accordance with the terms and conditions of that settlement and plan, was completed in September 2006. The Trust did not participate in that Settlement. The plan of distribution for the market timing settlement is currently under review by the SEC staff. After publication of notice of the plan and a 30-day comment period, the proposed plan of distribution will be submitted to the SEC for approval. Following the SEC's approval of the plan of distribution, with modifications as appropriate, distribution of the settlement monies will begin in accordance with the terms and conditions of the settlement and plan. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above, as well as to allegedly excessive commissions and advisory and distribution fees. The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Trust, it is committed to making the Trust or their shareholders whole, as appropriate. 64 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. On December 22, 2006, the Securities and Exchange Commission extended the implementation date to no later than the last net asset value calculation in the first semi-annual reporting period in 2007. The Funds are currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will have no material impact on its financial statements. Annual Report | 65 Franklin Templeton Fund Allocator Series REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN TEMPLETON FUND ALLOCATOR SERIES In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Templeton 2015 Retirement Target Fund, Franklin Templeton 2025 Retirement Target Fund, Franklin Templeton 2035 Retirement Target Fund, and Franklin Templeton 2045 Retirement Target Fund (separate portfolios of Franklin Templeton Fund Allocator Series, hereafter referred to as the "Funds") at December 31, 2006, the results of each of their operations, the changes in each of their net assets and the financial highlights for the period August 1, 2006 (commencement of operations) to December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments in the Underlying Funds at December 31, 2006 by correspondence with the transfer agent of the Underlying Funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 22, 2007 66 | Annual Report Franklin Templeton Fund Allocator Series TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds designate the maximum amount allowable but no less than the following amounts as long term capital gain dividends for the fiscal year ended December 31, 2006:
---------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ---------------------------------------------------------------------------------------------------------------- $48,421 $71,666 $56,187 $55,841
Under Section 871(k)(2)(C) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2006:
---------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ---------------------------------------------------------------------------------------------------------------- $198 $223 $ 935 $791
Under Section 854(b)(2) of the Code, the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2006.
---------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ---------------------------------------------------------------------------------------------------------------- 11.65% 14.81% 16.68% 16.99%
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2006.
---------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ---------------------------------------------------------------------------------------------------------------- $9,455 $13,877 $11,053 $11,009
In January 2007, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2006. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Annual Report | 67 Franklin Templeton Fund Allocator Series BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ----------------------------------------------------------------------------------------------------------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1995 142 Director, Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ----------------------------------------------------------------------------------------------------------------------------------- ROBERT F. CARLSON (1928) Trustee Since 2005 57 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, senior member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS); and FORMERLY, member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. ----------------------------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Director, Hess Corporation (formerly One Franklin Parkway Amerada Hess Corporation) San Mateo, CA 94403-1906 (exploration and refining of oil and gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). ----------------------------------------------------------------------------------------------------------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1995 116 Director, Center for Creative Land One Franklin Parkway Recycling (redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). ------------------------------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ----------------------------------------------------------------------------------------------------------------------------------- JOHN B. WILSON (1959) Trustee Since February 46 None One Franklin Parkway 2006 San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (1986-1990). -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ----------------------------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON (1933) Trustee and Since 1995 142 None One Franklin Parkway Chairman of San Mateo, CA 94403-1906 the Board PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments. ----------------------------------------------------------------------------------------------------------------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 126 None One Franklin Parkway President and 1995 and San Mateo, CA 94403-1906 Chief President and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. ----------------------------------------------------------------------------------------------------------------------------------- JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since 2004 San Mateo, CA 94403-1906 Officer and and Vice Vice President President - AML - AML Compliance since Compliance February 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 69
----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ----------------------------------------------------------------------------------------------------------------------------------- LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 30 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). ----------------------------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. ----------------------------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. ----------------------------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; Vice President, Templeton Global Advisors Limited and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). ----------------------------------------------------------------------------------------------------------------------------------- KAREN L. SKIDMORE (1952) Vice President Vice President Not Applicable Not Applicable One Franklin Parkway and Secretary since February San Mateo, CA 94403-1906 2006 and Secretary since April 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company; and officer of 30 of the investment companies in Franklin Templeton Investments. -----------------------------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ----------------------------------------------------------------------------------------------------------------------------------- CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). ----------------------------------------------------------------------------------------------------------------------------------- GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Officer and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). -----------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust and under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Prior to December 31, 2006, S. Joseph Fortunato and Gordon S. Macklin ceased to be a trustee of the Trust. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. Annual Report | 71 FRANKLIN TEMPLETON FUND ALLOCATOR SERIES SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust has established Proxy Voting Policies and Procedures ("Policies") that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 72 | Annual Report Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund 1 GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Blue Chip Fund 1 Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund RETIREMENT TARGET FUNDS Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 4 Franklin Floating Rate Daily Access Fund Franklin High Income Fund 5 Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 4 Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 4 Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME 6 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 7 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Michigan 7 Arizona Minnesota 7 California 8 Missouri Colorado New Jersey Connecticut New York 8 Florida 8 North Carolina Georgia Ohio 7 Kentucky Oregon Louisiana Pennsylvania Maryland Tennessee Massachusetts 7 Virginia INSURANCE FUNDS Templeton Variable Insurance Products Trust 9 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to Franklin High Income Fund. The fund's investment goal and strategy remained the same. 6. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 7. Portfolio of insured municipal securities. 8. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 9. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 01/07 Not part of the annual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN TEMPLETON FUND ALLOCATOR SERIES INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632 -2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. RTF A2006 02/07 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is Frank W. T. LaHaye, and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN TEMPLETON FUND ALLOCATOR SERIES By /S/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date February 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date February 27, 2007 By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Financial Officer Date February 27, 2007