N-CSR 1 ncsr.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: 12/31/07 -------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] -------------------------------------------------------------------------------- DECEMBER 31, 2007 -------------------------------------------------------------------------------- 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] Not part of the annual report Contents SHAREHOLDER LETTER ........................................................ 1 ANNUAL REPORT Economic and Market Overview .............................................. 3 Franklin Templeton Conservative Target Fund ............................... 5 Franklin Templeton Moderate Target Fund ................................... 15 Franklin Templeton Growth Target Fund ..................................... 25 Financial Highlights and Statements of Investments ........................ 35 Financial Statements ...................................................... 53 Notes to Financial Statements ............................................. 58 Report of Independent Registered Public Accounting Firm ................... 68 Tax Designation ........................................................... 69 Board Members and Officers ................................................ 70 Shareholder Information ................................................... 75 -------------------------------------------------------------------------------- Annual Report Economic and Market Overview During the 12 months ended December 31, 2007, the U.S. economy advanced at a moderate but uneven pace. After slow first quarter growth, gross domestic product (GDP) advanced solidly in the second quarter, supported by federal defense spending, accelerating exports and declining imports, and greater business spending. In the third quarter, growth accelerated despite a struggling housing market and the abrupt unraveling of the subprime mortgage market. The housing downturn affected the overall economy by fourth quarter 2007 when GDP growth decelerated as credit conditions worsened and consumer spending slowed. Consumer confidence declined through period-end largely due to rising mortgage and fuel costs, falling home prices and a weaker job market. Oil prices were volatile and established a new record high in November, nearing $99 per barrel. For the 12 months ended December 31, 2007, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher than its 10-year average rate. 1 Facing the prospect of slower economic growth, the Federal Reserve Board lowered the federal funds target rate to 4.25% from 5.25% during the period. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year Treasury note yield fell from 4.71% at the beginning of the period to 4.04% on December 31, 2007. The global economy remained resilient despite elevated energy prices and widespread fears of contagion from the deteriorating U.S. housing situation. Consumer and corporate demand strength, particularly in China and other developing economies, generally favorable employment and accommodative monetary policies continued to underpin the current global expansionary period that began in 2002. These factors also contributed to the strength of global equity markets during 2007. However, concerns about slower growth and declining asset quality surfaced in the first quarter. Initially centered on the U.S. subprime mortgage market, they spread in August to global capital markets. Difficulties in assessing risk and the value of collateral in the structured finance industry contributed to declining risk appetite among lenders and investors. The private equity industry, which relies on the availability of cheap credit, played a pivotal role 1. Source: Bureau of Labor Statistics. Annual Report | 3 in several large and high-profile acquisitions, helped boost merger and acquisition activity in the first half of 2007, and was an important driver of equity performance. A second-half tightening of liquidity led to slower deal activity and weighed on market performance. However, in 2007, global merger and acquisition activity still reached record levels. To alleviate the credit crunch and restore investor confidence, the world's major central banks infused capital into the system. However, credit and equity markets continued to face headwinds as write-downs and losses from subprime mortgage financing affected many large financial institutions toward the end of the year, and equity prices remained volatile. For the year, however, global and non-U.S. equity markets registered the fifth consecutive year of double-digit total returns. Broad-based stock performance by European and Asian shares at least doubled that of U.S. stocks, while emerging market equity returns more than tripled those in developed markets. In addition, U.S. dollar weakness versus the currencies of many major trading partners enhanced equity returns for U.S.-based investors holding stocks denominated in these currencies. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. 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 -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton Conservative Target Fund Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ................................ 27.8% Domestic Fixed Income .......................... 26.5% Foreign Fixed Income ........................... 12.7% Foreign Equity ................................. 12.6% Short-Term Investments & Other Net Assets ...... 20.4% *The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 Conservative Target Fund's annual report for the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton Conservative Target Fund - Class A posted a cumulative total return of +8.29% for the 12 months 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) 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, WHICH BEGINS ON PAGE 40. Annual Report | 5 TOP 10 FUND HOLDINGS Franklin Templeton Conservative Target Fund 12/31/07 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Templeton Global Bond Fund - Advisor Class 12.7% -------------------------------------------------------------------------------- Franklin U.S. Government Securities Fund - Advisor Class 12.4% -------------------------------------------------------------------------------- Franklin Total Return Fund - Advisor Class 9.5% -------------------------------------------------------------------------------- Mutual Shares Fund - Class Z 8.9% -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund - Advisor Class 7.6% -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II - Advisor Class 6.5% -------------------------------------------------------------------------------- Franklin Strategic Mortgage Portfolio 4.7% -------------------------------------------------------------------------------- Mutual European Fund - Class Z 4.4% -------------------------------------------------------------------------------- Templeton Foreign Fund - Advisor Class 2.4% -------------------------------------------------------------------------------- Templeton China World Fund - Advisor Class 2.2% -------------------------------------------------------------------------------- period, the hybrid benchmark returned +6.83%.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 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, 2007, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Mutual Shares Fund - Class Z representing 8.9% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 67.6% of the Fund's total income weighting, with the 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 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 balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 12.7% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, outperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, underperformed 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 and Franklin U.S. Government Securities 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. [GRAPHIC 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, 2007, 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 12/31/07 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 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.26 $13.59 $13.33 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.4656 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0064 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3439 --------------------------------------------------------------------------------------- TOTAL $0.8159 --------------------------------------------------------------------------------------- CLASS B (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.26 $13.55 $13.29 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.3621 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0064 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3439 --------------------------------------------------------------------------------------- TOTAL $0.7124 --------------------------------------------------------------------------------------- CLASS C (SYMBOL: FTCCX) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.24 $13.42 $13.18 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.3708 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0064 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3439 --------------------------------------------------------------------------------------- TOTAL $0.7211 --------------------------------------------------------------------------------------- CLASS R (SYMBOL: FTCRX) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.25 $13.55 $13.30 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.4362 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0064 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3439 --------------------------------------------------------------------------------------- TOTAL $0.7865 --------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.26 $13.57 $13.31 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.4988 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0064 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3439 --------------------------------------------------------------------------------------- TOTAL $0.8491 ---------------------------------------------------------------------------------------
8 | 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 +8.29% +57.92% +92.14% ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +2.08% +8.28% +6.12% ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,208 $14,888 $18,116 ---------------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ---------------------------------------------------------------------------------------------------------------------- Without Waiver 1.42% ---------------------------------------------------------------------------------------------------------------------- With Waiver 1.18% ---------------------------------------------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (12/1/03) ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +7.42% +21.67% +32.72% ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +3.42% +5.87% +6.78% ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,342 $11,867 $13,072 ---------------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ---------------------------------------------------------------------------------------------------------------------- Without Waiver 2.17% ---------------------------------------------------------------------------------------------------------------------- With Waiver 1.93% ---------------------------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +7.48% +52.06% +78.25% ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +6.48% +8.74% +5.95% ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,648 $15,206 $17,825 ---------------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ---------------------------------------------------------------------------------------------------------------------- Without Waiver 2.16% ---------------------------------------------------------------------------------------------------------------------- With Waiver 1.92% ---------------------------------------------------------------------------------------------------------------------- CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +7.91% +55.87% +49.51% ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +7.91% +9.28% +6.94% ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,791 $15,587 $14,951 ---------------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ---------------------------------------------------------------------------------------------------------------------- Without Waiver 1.67% ---------------------------------------------------------------------------------------------------------------------- With Waiver 1.43% ---------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR ---------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +8.48% +58.60% +92.97% ---------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +8.48% +9.66% +6.79% ---------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,848 $15,860 $19,297 ---------------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ---------------------------------------------------------------------------------------------------------------------- Without Waiver 1.17% ---------------------------------------------------------------------------------------------------------------------- With Waiver 0.93% ----------------------------------------------------------------------------------------------------------------------
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. THE MANAGER HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 12/31/07 -------------------------------------------------------------------------------- 1-Year +2.08% -------------------------------------------------------------------------------- 5-Year +8.28% -------------------------------------------------------------------------------- 10-Year +6.12% -------------------------------------------------------------------------------- CLASS A (1/1/98-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE FT Conservative Target Fund S&P 500 7 MSCI EAFE Index 7 LB U.S. Aggregate Index 7 P&R 90 Day U.S. T-Bill Index 7 -------------------------------------------------------------------------------------------------------------------------------- 1/1/1998 $ 9,429 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,420 $10,111 $10,460 $10,128 $10,050 2/28/1998 $ 9,684 $10,840 $11,133 $10,121 $10,089 3/31/1998 $ 9,897 $11,395 $11,479 $10,156 $10,139 4/30/1998 $ 9,950 $11,510 $11,572 $10,209 $10,185 5/31/1998 $ 9,853 $11,312 $11,518 $10,305 $10,229 6/30/1998 $ 9,855 $11,771 $11,608 $10,393 $10,271 7/31/1998 $ 9,731 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 9,165 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 9,324 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 9,440 $11,463 $11,007 $10,775 $10,459 11/30/1998 $ 9,610 $12,157 $11,574 $10,836 $10,493 12/31/1998 $ 9,709 $12,858 $12,033 $10,869 $10,536 1/31/1999 $ 9,774 $13,396 $12,001 $10,946 $10,577 2/28/1999 $ 9,645 $12,979 $11,717 $10,755 $10,611 3/31/1999 $ 9,790 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,032 $14,021 $12,707 $10,849 $10,696 5/31/1999 $ 9,948 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,111 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,045 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,055 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,041 $13,548 $13,086 $10,793 $10,910 10/31/1999 $10,315 $14,405 $13,579 $10,832 $10,953 11/30/1999 $10,872 $14,698 $14,054 $10,832 $10,997 12/31/1999 $11,678 $15,563 $15,318 $10,779 $11,047 1/31/2000 $11,552 $14,781 $14,348 $10,744 $11,090 2/29/2000 $12,512 $14,502 $14,737 $10,874 $11,140 3/31/2000 $12,337 $15,920 $15,311 $11,017 $11,196 4/30/2000 $11,879 $15,441 $14,508 $10,986 $11,253 5/31/2000 $11,625 $15,124 $14,156 $10,981 $11,314 6/30/2000 $11,960 $15,497 $14,713 $11,209 $11,362 7/31/2000 $11,930 $15,255 $14,099 $11,311 $11,415 8/31/2000 $12,393 $16,203 $14,224 $11,475 $11,474 9/30/2000 $12,265 $15,347 $13,535 $11,547 $11,537 10/31/2000 $12,096 $15,282 $13,218 $11,623 $11,595 11/30/2000 $11,658 $14,078 $12,725 $11,813 $11,659 12/31/2000 $12,034 $14,146 $13,180 $12,033 $11,726 1/31/2001 $12,360 $14,648 $13,174 $12,229 $11,803 2/28/2001 $11,971 $13,313 $12,187 $12,336 $11,850 3/31/2001 $11,663 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,032 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,106 $13,528 $11,758 $12,421 $12,005 6/30/2001 $12,053 $13,199 $11,282 $12,468 $12,040 7/31/2001 $12,000 $13,069 $11,077 $12,746 $12,080 8/31/2001 $11,851 $12,251 $10,799 $12,892 $12,120 9/30/2001 $11,204 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $11,515 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $11,794 $12,357 $10,324 $13,132 $12,231 12/31/2001 $11,924 $12,465 $10,385 $13,049 $12,250 1/31/2002 $11,913 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $11,902 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $12,147 $12,499 $10,444 $13,061 $12,302 4/30/2002 $12,180 $11,741 $10,520 $13,314 $12,320 5/31/2002 $12,136 $11,655 $10,663 $13,427 $12,340 6/30/2002 $11,785 $10,825 $10,242 $13,543 $12,358 7/31/2002 $11,310 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $11,388 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $11,036 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $11,247 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $11,547 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $11,472 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $11,427 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $11,394 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $11,378 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $11,795 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $12,246 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $12,316 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $12,327 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $12,598 $11,259 $10,096 $14,545 $12,562 9/30/2003 $12,684 $11,139 $10,409 $14,930 $12,573 10/31/2003 $12,990 $11,769 $11,059 $14,791 $12,583 11/30/2003 $13,194 $11,873 $11,306 $14,826 $12,593 12/31/2003 $13,463 $12,495 $12,190 $14,977 $12,603 1/31/2004 $13,566 $12,725 $12,363 $15,098 $12,613 2/29/2004 $13,692 $12,902 $12,651 $15,261 $12,622 3/31/2004 $13,711 $12,707 $12,727 $15,375 $12,632 4/30/2004 $13,367 $12,508 $12,450 $14,975 $12,641 5/31/2004 $13,447 $12,679 $12,503 $14,915 $12,650 6/30/2004 $13,607 $12,926 $12,783 $15,000 $12,656 7/31/2004 $13,423 $12,498 $12,369 $15,148 $12,668 8/31/2004 $13,527 $12,549 $12,427 $15,437 $12,680 9/30/2004 $13,748 $12,684 $12,753 $15,479 $12,694 10/31/2004 $13,945 $12,878 $13,189 $15,609 $12,709 11/30/2004 $14,303 $13,399 $14,094 $15,485 $12,722 12/31/2004 $14,537 $13,855 $14,713 $15,627 $12,746 1/31/2005 $14,351 $13,518 $14,444 $15,725 $12,764 2/28/2005 $14,572 $13,802 $15,071 $15,632 $12,784 3/31/2005 $14,375 $13,558 $14,698 $15,552 $12,814 4/30/2005 $14,223 $13,300 $14,369 $15,762 $12,841 5/31/2005 $14,433 $13,724 $14,391 $15,933 $12,870 6/30/2005 $14,563 $13,743 $14,588 $16,020 $12,899 7/31/2005 $14,786 $14,254 $15,036 $15,874 $12,927 8/31/2005 $14,845 $14,124 $15,421 $16,078 $12,963 9/30/2005 $14,954 $14,239 $16,111 $15,912 $13,000 10/31/2005 $14,730 $14,001 $15,641 $15,786 $13,030 11/30/2005 $15,036 $14,531 $16,028 $15,856 $13,073 12/31/2005 $15,221 $14,536 $16,775 $16,007 $13,114 1/31/2006 $15,687 $14,921 $17,806 $16,007 $13,151 2/28/2006 $15,687 $14,961 $17,769 $16,061 $13,193 3/31/2006 $15,853 $15,147 $18,364 $15,903 $13,245 4/30/2006 $16,021 $15,351 $19,254 $15,874 $13,293 5/31/2006 $15,697 $14,909 $18,530 $15,857 $13,344 6/30/2006 $15,708 $14,929 $18,537 $15,891 $13,395 7/31/2006 $15,708 $15,021 $18,722 $16,106 $13,449 8/31/2006 $15,927 $15,379 $19,242 $16,352 $13,509 9/30/2006 $15,987 $15,775 $19,276 $16,496 $13,568 10/31/2006 $16,330 $16,289 $20,027 $16,605 $13,621 11/30/2006 $16,660 $16,599 $20,631 $16,798 $13,679 12/31/2006 $16,730 $16,832 $21,280 $16,700 $13,738 1/31/2007 $16,881 $17,086 $21,426 $16,693 $13,793 2/28/2007 $16,918 $16,752 $21,602 $16,951 $13,847 3/31/2007 $17,086 $16,939 $22,163 $16,951 $13,910 4/30/2007 $17,414 $17,690 $23,167 $17,043 $13,970 5/31/2007 $17,666 $18,307 $23,604 $16,914 $14,033 6/30/2007 $17,617 $18,003 $23,641 $16,863 $14,086 7/31/2007 $17,488 $17,445 $23,295 $17,004 $14,140 8/31/2007 $17,540 $17,706 $22,937 $17,213 $14,220 9/30/2007 $18,108 $18,368 $24,168 $17,343 $14,272 10/31/2007 $18,511 $18,661 $25,120 $17,499 $14,315 11/30/2007 $18,134 $17,880 $24,301 $17,814 $14,380 12/31/2007 $18,116 $17,756 $23,755 $17,864 $14,413
AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------------------------------------- CLASS B 12/31/07 -------------------------------------------------------------------------------- 1-Year +3.42% -------------------------------------------------------------------------------- 3-Year +5.87% -------------------------------------------------------------------------------- Since Inception (12/1/03) +6.78% -------------------------------------------------------------------------------- CLASS B (12/1/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE FT Conservative Target Fund S&P 500 7 MSCI EAFE Index 7 LB U.S. Aggregate Index 7 P&R 90 Day U.S. T-Bill Index 7 -------------------------------------------------------------------------------------------------------------------------------- 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 $10,718 $10,935 $10,183 $10,016 2/29/2004 $10,326 $10,867 $11,189 $10,293 $10,023 3/31/2004 $10,337 $10,703 $11,257 $10,370 $10,031 4/30/2004 $10,068 $10,535 $11,012 $10,101 $10,038 5/31/2004 $10,129 $10,679 $11,059 $10,060 $10,045 6/30/2004 $10,237 $10,887 $11,306 $10,117 $10,050 7/31/2004 $10,098 $10,527 $10,941 $10,217 $10,059 8/31/2004 $10,168 $10,569 $10,991 $10,412 $10,069 9/30/2004 $10,329 $10,684 $11,280 $10,440 $10,080 10/31/2004 $10,468 $10,847 $11,666 $10,528 $10,092 11/30/2004 $10,738 $11,286 $12,466 $10,444 $10,102 12/31/2004 $10,908 $11,670 $13,013 $10,540 $10,122 1/31/2005 $10,751 $11,385 $12,775 $10,606 $10,136 2/28/2005 $10,917 $11,625 $13,330 $10,544 $10,151 3/31/2005 $10,757 $11,419 $13,001 $10,489 $10,175 4/30/2005 $10,643 $11,202 $12,710 $10,631 $10,196 5/31/2005 $10,792 $11,559 $12,729 $10,746 $10,220 6/30/2005 $10,878 $11,575 $12,903 $10,805 $10,243 7/31/2005 $11,045 $12,006 $13,299 $10,707 $10,265 8/31/2005 $11,080 $11,896 $13,639 $10,844 $10,293 9/30/2005 $11,150 $11,993 $14,250 $10,732 $10,323 10/31/2005 $10,982 $11,793 $13,834 $10,647 $10,347 11/30/2005 $11,194 $12,239 $14,177 $10,694 $10,381 12/31/2005 $11,330 $12,243 $14,837 $10,796 $10,414 1/31/2006 $11,669 $12,567 $15,749 $10,797 $10,443 2/28/2006 $11,669 $12,601 $15,717 $10,833 $10,477 3/31/2006 $11,779 $12,758 $16,243 $10,726 $10,518 4/30/2006 $11,886 $12,929 $17,030 $10,707 $10,555 5/31/2006 $11,645 $12,557 $16,389 $10,695 $10,597 6/30/2006 $11,650 $12,574 $16,395 $10,718 $10,637 7/31/2006 $11,632 $12,652 $16,560 $10,863 $10,680 8/31/2006 $11,795 $12,953 $17,019 $11,029 $10,727 9/30/2006 $11,835 $13,287 $17,049 $11,126 $10,774 10/31/2006 $12,071 $13,720 $17,714 $11,200 $10,816 11/30/2006 $12,316 $13,981 $18,248 $11,330 $10,862 12/31/2006 $12,355 $14,177 $18,822 $11,264 $10,909 1/31/2007 $12,457 $14,391 $18,951 $11,259 $10,953 2/28/2007 $12,485 $14,110 $19,106 $11,433 $10,996 3/31/2007 $12,593 $14,267 $19,603 $11,433 $11,046 4/30/2007 $12,836 $14,899 $20,491 $11,495 $11,094 5/31/2007 $13,013 $15,419 $20,878 $11,408 $11,143 6/30/2007 $12,962 $15,163 $20,910 $11,374 $11,185 7/31/2007 $12,857 $14,693 $20,604 $11,469 $11,228 8/31/2007 $12,886 $14,913 $20,287 $11,609 $11,292 9/30/2007 $13,299 $15,471 $21,376 $11,698 $11,333 10/31/2007 $13,587 $15,717 $22,219 $11,803 $11,367 11/30/2007 $13,299 $15,060 $21,494 $12,015 $11,419 12/31/2007 $13,072 $14,955 $21,011 $12,049 $11,445
10 | Annual Report Performance Summary (CONTINUED) CLASS C (1/1/98-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE FT Conservative Target Fund S&P 500 7 MSCI EAFE Index 7 LB U.S. Aggregate Index 7 P&R 90 Day U.S. T-Bill Index 7 ------------------------------------------------------------------------------------------------------------------------------------ 1/1/1998 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,981 $10,111 $10,460 $10,128 $10,050 2/28/1998 $10,253 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,478 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,525 $11,510 $11,572 $10,209 $10,185 5/31/1998 $10,422 $11,312 $11,518 $10,305 $10,229 6/30/1998 $10,414 $11,771 $11,608 $10,393 $10,271 7/31/1998 $10,273 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 9,671 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 9,833 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 9,947 $11,463 $11,007 $10,775 $10,459 11/30/1998 $10,117 $12,157 $11,574 $10,836 $10,493 12/31/1998 $10,218 $12,858 $12,033 $10,869 $10,536 1/31/1999 $10,277 $13,396 $12,001 $10,946 $10,577 2/28/1999 $10,140 $12,979 $11,717 $10,755 $10,611 3/31/1999 $10,291 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,527 $14,021 $12,707 $10,849 $10,696 5/31/1999 $10,438 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,598 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,528 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,528 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,513 $13,548 $13,086 $10,793 $10,910 10/31/1999 $10,792 $14,405 $13,579 $10,832 $10,953 11/30/1999 $11,359 $14,698 $14,054 $10,832 $10,997 12/31/1999 $12,201 $15,563 $15,318 $10,779 $11,047 1/31/2000 $12,058 $14,781 $14,348 $10,744 $11,090 2/29/2000 $13,057 $14,502 $14,737 $10,874 $11,140 3/31/2000 $12,861 $15,920 $15,311 $11,017 $11,196 4/30/2000 $12,380 $15,441 $14,508 $10,986 $11,253 5/31/2000 $12,113 $15,124 $14,156 $10,981 $11,314 6/30/2000 $12,442 $15,497 $14,713 $11,209 $11,362 7/31/2000 $12,411 $15,255 $14,099 $11,311 $11,415 8/31/2000 $12,875 $16,203 $14,224 $11,475 $11,474 9/30/2000 $12,739 $15,347 $13,535 $11,547 $11,537 10/31/2000 $12,562 $15,282 $13,218 $11,623 $11,595 11/30/2000 $12,093 $14,078 $12,725 $11,813 $11,659 12/31/2000 $12,477 $14,146 $13,180 $12,033 $11,726 1/31/2001 $12,806 $14,648 $13,174 $12,229 $11,803 2/28/2001 $12,400 $13,313 $12,187 $12,336 $11,850 3/31/2001 $12,073 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,447 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,513 $13,528 $11,758 $12,421 $12,005 6/30/2001 $12,446 $13,199 $11,282 $12,468 $12,040 7/31/2001 $12,391 $13,069 $11,077 $12,746 $12,080 8/31/2001 $12,225 $12,251 $10,799 $12,892 $12,120 9/30/2001 $11,552 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $11,864 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $12,143 $12,357 $10,324 $13,132 $12,231 12/31/2001 $12,281 $12,465 $10,385 $13,049 $12,250 1/31/2002 $12,246 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $12,224 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $12,476 $12,499 $10,444 $13,061 $12,302 4/30/2002 $12,498 $11,741 $10,520 $13,314 $12,320 5/31/2002 $12,441 $11,655 $10,663 $13,427 $12,340 6/30/2002 $12,080 $10,825 $10,242 $13,543 $12,358 7/31/2002 $11,588 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $11,668 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $11,298 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $11,505 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $11,803 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $11,722 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $11,664 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $11,630 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $11,606 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $12,012 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $12,476 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $12,539 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $12,539 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $12,806 $11,259 $10,096 $14,545 $12,562 9/30/2003 $12,884 $11,139 $10,409 $14,930 $12,573 10/31/2003 $13,186 $11,769 $11,059 $14,791 $12,583 11/30/2003 $13,384 $11,873 $11,306 $14,826 $12,593 12/31/2003 $13,651 $12,495 $12,190 $14,977 $12,603 1/31/2004 $13,745 $12,725 $12,363 $15,098 $12,613 2/29/2004 $13,862 $12,902 $12,651 $15,261 $12,622 3/31/2004 $13,878 $12,707 $12,727 $15,375 $12,632 4/30/2004 $13,514 $12,508 $12,450 $14,975 $12,641 5/31/2004 $13,597 $12,679 $12,503 $14,915 $12,650 6/30/2004 $13,734 $12,926 $12,783 $15,000 $12,656 7/31/2004 $13,546 $12,498 $12,369 $15,148 $12,668 8/31/2004 $13,640 $12,549 $12,427 $15,437 $12,680 9/30/2004 $13,865 $12,684 $12,753 $15,479 $12,694 10/31/2004 $14,053 $12,878 $13,189 $15,609 $12,709 11/30/2004 $14,406 $13,399 $14,094 $15,485 $12,722 12/31/2004 $14,634 $13,855 $14,713 $15,627 $12,746 1/31/2005 $14,421 $13,518 $14,444 $15,725 $12,764 2/28/2005 $14,646 $13,802 $15,071 $15,632 $12,784 3/31/2005 $14,439 $13,558 $14,698 $15,552 $12,814 4/30/2005 $14,285 $13,300 $14,369 $15,762 $12,841 5/31/2005 $14,475 $13,724 $14,391 $15,933 $12,870 6/30/2005 $14,603 $13,743 $14,588 $16,020 $12,899 7/31/2005 $14,817 $14,254 $15,036 $15,874 $12,927 8/31/2005 $14,865 $14,124 $15,421 $16,078 $12,963 9/30/2005 $14,961 $14,239 $16,111 $15,912 $13,000 10/31/2005 $14,734 $14,001 $15,641 $15,786 $13,030 11/30/2005 $15,020 $14,531 $16,028 $15,856 $13,073 12/31/2005 $15,194 $14,536 $16,775 $16,007 $13,114 1/31/2006 $15,664 $14,921 $17,806 $16,007 $13,151 2/28/2006 $15,652 $14,961 $17,769 $16,061 $13,193 3/31/2006 $15,814 $15,147 $18,364 $15,903 $13,245 4/30/2006 $15,959 $15,351 $19,254 $15,874 $13,293 5/31/2006 $15,620 $14,909 $18,530 $15,857 $13,344 6/30/2006 $15,638 $14,929 $18,537 $15,891 $13,395 7/31/2006 $15,614 $15,021 $18,722 $16,106 $13,449 8/31/2006 $15,822 $15,379 $19,242 $16,352 $13,509 9/30/2006 $15,878 $15,775 $19,276 $16,496 $13,568 10/31/2006 $16,211 $16,289 $20,027 $16,605 $13,621 11/30/2006 $16,530 $16,599 $20,631 $16,798 $13,679 12/31/2006 $16,585 $16,832 $21,280 $16,700 $13,738 1/31/2007 $16,723 $17,086 $21,426 $16,693 $13,793 2/28/2007 $16,748 $16,752 $21,602 $16,951 $13,847 3/31/2007 $16,909 $16,939 $22,163 $16,951 $13,910 4/30/2007 $17,225 $17,690 $23,167 $17,043 $13,970 5/31/2007 $17,465 $18,307 $23,604 $16,914 $14,033 6/30/2007 $17,398 $18,003 $23,641 $16,863 $14,086 7/31/2007 $17,256 $17,445 $23,295 $17,004 $14,140 8/31/2007 $17,307 $17,706 $22,937 $17,213 $14,220 9/30/2007 $17,844 $18,368 $24,168 $17,343 $14,272 10/31/2007 $18,246 $18,661 $25,120 $17,499 $14,315 11/30/2007 $17,857 $17,880 $24,301 $17,814 $14,380 12/31/2007 $17,825 $17,756 $23,755 $17,864 $14,413
AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------------------------------------- CLASS C 12/31/07 -------------------------------------------------------------------------------- 1-Year +6.48% -------------------------------------------------------------------------------- 5-Year +8.74% -------------------------------------------------------------------------------- 10-Year +5.95% -------------------------------------------------------------------------------- CLASS R (1/1/02-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE FT Conservative Target Fund S&P 500 7 MSCI EAFE Index 7 LB U.S. Aggregate Index 7 P&R 90 Day U.S. T-Bill Index 7 ------------------------------------------------------------------------------------------------------------------------------------ 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 $10,027 $10,057 $10,009 $10,042 4/30/2002 $10,196 $ 9,420 $10,130 $10,203 $10,057 5/31/2002 $10,159 $ 9,350 $10,267 $10,290 $10,073 6/30/2002 $ 9,869 $ 8,684 $ 9,862 $10,379 $10,088 7/31/2002 $ 9,461 $ 8,007 $ 8,889 $10,504 $10,102 8/31/2002 $ 9,526 $ 8,060 $ 8,871 $10,682 $10,117 9/30/2002 $ 9,232 $ 7,184 $ 7,921 $10,855 $10,133 10/31/2002 $ 9,409 $ 7,816 $ 8,347 $10,805 $10,149 11/30/2002 $ 9,650 $ 8,276 $ 8,727 $10,802 $10,165 12/31/2002 $ 9,591 $ 7,790 $ 8,434 $11,025 $10,175 1/31/2003 $ 9,554 $ 7,586 $ 8,083 $11,035 $10,186 2/28/2003 $ 9,516 $ 7,472 $ 7,898 $11,188 $10,195 3/31/2003 $ 9,510 $ 7,545 $ 7,749 $11,179 $10,207 4/30/2003 $ 9,850 $ 8,166 $ 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 $ 8,859 $ 9,491 $11,073 $10,247 8/31/2003 $10,511 $ 9,032 $ 9,721 $11,147 $10,255 9/30/2003 $10,584 $ 8,936 $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 $10,172 $12,040 $11,431 $10,326 6/30/2004 $11,328 $10,370 $12,308 $11,495 $10,331 7/31/2004 $11,174 $10,026 $11,911 $11,609 $10,341 8/31/2004 $11,260 $10,067 $11,966 $11,831 $10,351 9/30/2004 $11,449 $10,176 $12,280 $11,863 $10,363 10/31/2004 $11,604 $10,332 $12,700 $11,962 $10,375 11/30/2004 $11,902 $10,750 $13,571 $11,867 $10,385 12/31/2004 $12,098 $11,115 $14,167 $11,976 $10,405 1/31/2005 $11,932 $10,844 $13,908 $12,051 $10,420 2/28/2005 $12,117 $11,073 $14,512 $11,980 $10,436 3/31/2005 $11,948 $10,877 $14,153 $11,919 $10,460 4/30/2005 $11,821 $10,670 $13,837 $12,080 $10,482 5/31/2005 $11,996 $11,010 $13,858 $12,211 $10,506 6/30/2005 $12,097 $11,025 $14,047 $12,277 $10,530 7/31/2005 $12,283 $11,435 $14,479 $12,165 $10,553 8/31/2005 $12,332 $11,331 $14,849 $12,321 $10,582 9/30/2005 $12,415 $11,423 $15,513 $12,194 $10,612 10/31/2005 $12,228 $11,232 $15,061 $12,098 $10,636 11/30/2005 $12,474 $11,657 $15,433 $12,151 $10,672 12/31/2005 $12,627 $11,661 $16,153 $12,267 $10,705 1/31/2006 $13,013 $11,970 $17,145 $12,268 $10,736 2/28/2006 $13,013 $12,003 $17,110 $12,308 $10,770 3/31/2006 $13,155 $12,152 $17,683 $12,188 $10,812 4/30/2006 $13,284 $12,315 $18,540 $12,165 $10,851 5/31/2006 $13,005 $11,961 $17,843 $12,152 $10,893 6/30/2006 $13,025 $11,977 $17,849 $12,178 $10,934 7/31/2006 $13,015 $12,051 $18,028 $12,343 $10,979 8/31/2006 $13,197 $12,338 $18,528 $12,532 $11,028 9/30/2006 $13,239 $12,655 $18,561 $12,642 $11,076 10/31/2006 $13,524 $13,068 $19,284 $12,726 $11,119 11/30/2006 $13,798 $13,316 $19,866 $12,873 $11,166 12/31/2006 $13,855 $13,503 $20,491 $12,798 $11,215 1/31/2007 $13,969 $13,707 $20,631 $12,793 $11,260 2/28/2007 $14,000 $13,439 $20,800 $12,990 $11,304 3/31/2007 $14,134 $13,590 $21,341 $12,991 $11,355 4/30/2007 $14,406 $14,192 $22,308 $13,061 $11,404 5/31/2007 $14,615 $14,687 $22,729 $12,962 $11,455 6/30/2007 $14,565 $14,443 $22,764 $12,924 $11,499 7/31/2007 $14,458 $13,995 $22,431 $13,031 $11,542 8/31/2007 $14,501 $14,205 $22,086 $13,191 $11,608 9/30/2007 $14,953 $14,736 $23,272 $13,291 $11,650 10/31/2007 $15,297 $14,970 $24,189 $13,411 $11,686 11/30/2007 $14,974 $14,344 $23,399 $13,652 $11,738 12/31/2007 $14,951 $14,245 $22,874 $13,690 $11,766
AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------------------------------------- CLASS R 12/31/07 -------------------------------------------------------------------------------- 1-Year +7.91% -------------------------------------------------------------------------------- 5-Year +9.28% -------------------------------------------------------------------------------- Since Inception (1/1/02) +6.94% -------------------------------------------------------------------------------- Annual Report | 11 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------------------------------------- ADVISOR CLASS 6 12/31/07 -------------------------------------------------------------------------------- 1-Year +8.48% -------------------------------------------------------------------------------- 5-Year +9.66% -------------------------------------------------------------------------------- 10-Year +6.79% -------------------------------------------------------------------------------- ADVISOR CLASS (1/1/98-12/31/07) 6 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE FT Conservative Target Fund S&P 500 7 MSCI EAFE Index 7 LB U.S. Aggregate Index 7 P&R 90 Day U.S. T-Bill Index 7 ------------------------------------------------------------------------------------------------------------------------------------ 1/1/1998 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,991 $10,111 $10,460 $10,128 $10,050 2/28/1998 $10,270 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,497 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,553 $11,510 $11,572 $10,209 $10,185 5/31/1998 $10,450 $11,312 $11,518 $10,305 $10,229 6/30/1998 $10,452 $11,771 $11,608 $10,393 $10,271 7/31/1998 $10,320 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 9,720 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 9,889 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $10,012 $11,463 $11,007 $10,775 $10,459 11/30/1998 $10,192 $12,157 $11,574 $10,836 $10,493 12/31/1998 $10,298 $12,858 $12,033 $10,869 $10,536 1/31/1999 $10,366 $13,396 $12,001 $10,946 $10,577 2/28/1999 $10,229 $12,979 $11,717 $10,755 $10,611 3/31/1999 $10,383 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,639 $14,021 $12,707 $10,849 $10,696 5/31/1999 $10,551 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,723 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,654 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,664 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,649 $13,548 $13,086 $10,793 $10,910 10/31/1999 $10,940 $14,405 $13,579 $10,832 $10,953 11/30/1999 $11,531 $14,698 $14,054 $10,832 $10,997 12/31/1999 $12,385 $15,563 $15,318 $10,779 $11,047 1/31/2000 $12,252 $14,781 $14,348 $10,744 $11,090 2/29/2000 $13,269 $14,502 $14,737 $10,874 $11,140 3/31/2000 $13,085 $15,920 $15,311 $11,017 $11,196 4/30/2000 $12,598 $15,441 $14,508 $10,986 $11,253 5/31/2000 $12,329 $15,124 $14,156 $10,981 $11,314 6/30/2000 $12,684 $15,497 $14,713 $11,209 $11,362 7/31/2000 $12,653 $15,255 $14,099 $11,311 $11,415 8/31/2000 $13,143 $16,203 $14,224 $11,475 $11,474 9/30/2000 $13,008 $15,347 $13,535 $11,547 $11,537 10/31/2000 $12,828 $15,282 $13,218 $11,623 $11,595 11/30/2000 $12,364 $14,078 $12,725 $11,813 $11,659 12/31/2000 $12,763 $14,146 $13,180 $12,033 $11,726 1/31/2001 $13,108 $14,648 $13,174 $12,229 $11,803 2/28/2001 $12,697 $13,313 $12,187 $12,336 $11,850 3/31/2001 $12,370 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,761 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,839 $13,528 $11,758 $12,421 $12,005 6/30/2001 $12,783 $13,199 $11,282 $12,468 $12,040 7/31/2001 $12,726 $13,069 $11,077 $12,746 $12,080 8/31/2001 $12,569 $12,251 $10,799 $12,892 $12,120 9/30/2001 $11,883 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $12,213 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $12,508 $12,357 $10,324 $13,132 $12,231 12/31/2001 $12,646 $12,465 $10,385 $13,049 $12,250 1/31/2002 $12,635 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $12,623 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $12,883 $12,499 $10,444 $13,061 $12,302 4/30/2002 $12,918 $11,741 $10,520 $13,314 $12,320 5/31/2002 $12,871 $11,655 $10,663 $13,427 $12,340 6/30/2002 $12,499 $10,825 $10,242 $13,543 $12,358 7/31/2002 $11,996 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $12,078 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $11,705 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $11,929 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $12,247 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $12,167 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $12,120 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $12,084 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $12,067 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $12,510 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $12,987 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $13,062 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $13,074 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $13,362 $11,259 $10,096 $14,545 $12,562 9/30/2003 $13,452 $11,139 $10,409 $14,930 $12,573 10/31/2003 $13,777 $11,769 $11,059 $14,791 $12,583 11/30/2003 $13,993 $11,873 $11,306 $14,826 $12,593 12/31/2003 $14,278 $12,495 $12,190 $14,977 $12,603 1/31/2004 $14,387 $12,725 $12,363 $15,098 $12,613 2/29/2004 $14,521 $12,902 $12,651 $15,261 $12,622 3/31/2004 $14,541 $12,707 $12,727 $15,375 $12,632 4/30/2004 $14,176 $12,508 $12,450 $14,975 $12,641 5/31/2004 $14,262 $12,679 $12,503 $14,915 $12,650 6/30/2004 $14,431 $12,926 $12,783 $15,000 $12,656 7/31/2004 $14,236 $12,498 $12,369 $15,148 $12,668 8/31/2004 $14,346 $12,549 $12,427 $15,437 $12,680 9/30/2004 $14,581 $12,684 $12,753 $15,479 $12,694 10/31/2004 $14,789 $12,878 $13,189 $15,609 $12,709 11/30/2004 $15,170 $13,399 $14,094 $15,485 $12,722 12/31/2004 $15,418 $13,855 $14,713 $15,627 $12,746 1/31/2005 $15,220 $13,518 $14,444 $15,725 $12,764 2/28/2005 $15,455 $13,802 $15,071 $15,632 $12,784 3/31/2005 $15,246 $13,558 $14,698 $15,552 $12,814 4/30/2005 $15,084 $13,300 $14,369 $15,762 $12,841 5/31/2005 $15,308 $13,724 $14,391 $15,933 $12,870 6/30/2005 $15,445 $13,743 $14,588 $16,020 $12,899 7/31/2005 $15,682 $14,254 $15,036 $15,874 $12,927 8/31/2005 $15,744 $14,124 $15,421 $16,078 $12,963 9/30/2005 $15,860 $14,239 $16,111 $15,912 $13,000 10/31/2005 $15,622 $14,001 $15,641 $15,786 $13,030 11/30/2005 $15,947 $14,531 $16,028 $15,856 $13,073 12/31/2005 $16,131 $14,536 $16,775 $16,007 $13,114 1/31/2006 $16,638 $14,921 $17,806 $16,007 $13,151 2/28/2006 $16,638 $14,961 $17,769 $16,061 $13,193 3/31/2006 $16,821 $15,147 $18,364 $15,903 $13,245 4/30/2006 $16,999 $15,351 $19,254 $15,874 $13,293 5/31/2006 $16,655 $14,909 $18,530 $15,857 $13,344 6/30/2006 $16,678 $14,929 $18,537 $15,891 $13,395 7/31/2006 $16,678 $15,021 $18,722 $16,106 $13,449 8/31/2006 $16,910 $15,379 $19,242 $16,352 $13,509 9/30/2006 $16,985 $15,775 $19,276 $16,496 $13,568 10/31/2006 $17,349 $16,289 $20,027 $16,605 $13,621 11/30/2006 $17,701 $16,599 $20,631 $16,798 $13,679 12/31/2006 $17,789 $16,832 $21,280 $16,700 $13,738 1/31/2007 $17,949 $17,086 $21,426 $16,693 $13,793 2/28/2007 $17,989 $16,752 $21,602 $16,951 $13,847 3/31/2007 $18,175 $16,939 $22,163 $16,951 $13,910 4/30/2007 $18,524 $17,690 $23,167 $17,043 $13,970 5/31/2007 $18,806 $18,307 $23,604 $16,914 $14,033 6/30/2007 $18,752 $18,003 $23,641 $16,863 $14,086 7/31/2007 $18,614 $17,445 $23,295 $17,004 $14,140 8/31/2007 $18,669 $17,706 $22,937 $17,213 $14,220 9/30/2007 $19,273 $18,368 $24,168 $17,343 $14,272 10/31/2007 $19,716 $18,661 $25,120 $17,499 $14,315 11/30/2007 $19,315 $17,880 $24,301 $17,814 $14,380 12/31/2007 $19,297 $17,756 $23,755 $17,864 $14,413
ENDNOTES BECAUSE THE FUND INVESTS IN VARIOUS UNDERLYING FUNDS THAT 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. If the manager had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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 +20.44% and +9.34%. 7. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 ------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,028.40 $2.51 ------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.74 $2.50 ------------------------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,023.90 $6.33 ------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.31 ------------------------------------------------------------------------------------------------------------------------- CLASS C ------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,024.60 $6.28 ------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.26 ------------------------------------------------------------------------------------------------------------------------- CLASS R ------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,026.50 $3.78 ------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.48 $3.77 ------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS ------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,029.10 $1.23 ------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.00 $1.22 -------------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.49%; B: 1.24%; C: 1.23%; R: 0.74%; and Advisor: 0.24%), 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 -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton Moderate Target Fund Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity .......................................... 37.4% Domestic Fixed Income .................................... 23.9% Foreign Equity ........................................... 17.1% Foreign Fixed Income ..................................... 11.3% Short-Term Investments & Other Net Assets ................ 10.3% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 Moderate Target Fund's annual report for the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton Moderate Target Fund - Class A posted a +9.40% cumulative total return for the 12 months 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) 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, WHICH BEGINS ON PAGE 46. Annual Report | 15 TOP 10 FUND HOLDINGS Franklin Templeton Moderate Target Fund 12/31/07 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Mutual Shares Fund - Class Z 11.7% -------------------------------------------------------------------------------- Templeton Global Bond Fund - Advisor Class 11.3% -------------------------------------------------------------------------------- Franklin U.S. Government Securities Fund - Advisor Class 11.1% -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund - Advisor Class 10.2% -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II - Advisor Class 8.7% -------------------------------------------------------------------------------- Franklin Total Return Fund - Advisor Class 8.5% -------------------------------------------------------------------------------- Mutual European Fund - Class Z 6.1% -------------------------------------------------------------------------------- Franklin Strategic Mortgage Portfolio 4.2% -------------------------------------------------------------------------------- Templeton Foreign Fund - Advisor Class 3.3% -------------------------------------------------------------------------------- Franklin Growth Opportunities Fund - Advisor Class 3.2% -------------------------------------------------------------------------------- period, the hybrid benchmark returned +7.06%. 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 68.6% 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, 2007, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Mutual Shares Fund - Class Z representing 11.7% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 67.9% of the Fund's total income weighting, with the 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 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 balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class was our largest fixed income fund weighting at 11.3% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, outperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, underperformed 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 and Franklin U.S. Government Securities 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, 2007, 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 12/31/07 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 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.32 $14.35 $14.03 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.4310 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0133 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.5345 --------------------------------------------------------------------------------------- TOTAL $0.9788 --------------------------------------------------------------------------------------- CLASS B (SYMBOL: FBMTX) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.32 $14.31 $13.99 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.3219 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0133 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.5345 --------------------------------------------------------------------------------------- TOTAL $0.8697 --------------------------------------------------------------------------------------- CLASS C (SYMBOL: FTMTX) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.30 $14.11 $13.81 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.3258 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0133 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.5345 --------------------------------------------------------------------------------------- TOTAL $0.8736 --------------------------------------------------------------------------------------- CLASS R (SYMBOL: FTMRX) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.32 $14.32 $14.00 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.3963 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0133 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.5345 --------------------------------------------------------------------------------------- TOTAL $0.9441 --------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.32 $14.35 $14.03 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.4666 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0133 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.5345 --------------------------------------------------------------------------------------- TOTAL $1.0144 ---------------------------------------------------------------------------------------
18 | 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 +9.40% +73.50% +93.77% -------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +3.08% +10.35% +6.21% -------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,308 $16,360 $18,268 -------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------------------- Without Waiver 1.47% -------------------------------------------------------------------------------------------------------- With Waiver 1.25% -------------------------------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (12/1/03) -------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +8.61% +26.46% +40.35% -------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +4.61% +7.28% +8.28% -------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,461 $12,346 $13,835 -------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------------------- Without Waiver 2.22% -------------------------------------------------------------------------------------------------------- With Waiver 2.00% -------------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +8.61% +67.22% +79.53% -------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +7.61% +10.83% +6.03% -------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,761 $16,722 $17,953 -------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------------------- Without Waiver 2.22% -------------------------------------------------------------------------------------------------------- With Waiver 2.00% -------------------------------------------------------------------------------------------------------- CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) -------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +9.16% +71.50% +57.99% -------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +9.16% +11.39% +7.93% -------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,916 $17,150 $15,799 -------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------------------- Without Waiver 1.72% -------------------------------------------------------------------------------------------------------- With Waiver 1.50% -------------------------------------------------------------------------------------------------------- ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +9.66% +74.49% +94.88% -------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +9.66% +11.78% +6.90% -------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,966 $17,449 $19,488 -------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------------------- Without Waiver 1.22% -------------------------------------------------------------------------------------------------------- With Waiver 1.00% --------------------------------------------------------------------------------------------------------
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. THE MANAGER HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 12/31/07 ------------------------------------------------------------ 1-Year +3.08% ------------------------------------------------------------ 5-Year +10.35% ------------------------------------------------------------ 10-Year +6.21% ------------------------------------------------------------ CLASS A (1/1/98-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
LB U.S. Aggregate P&R 90 Day U.S. DATE FT Moderate Target Fund S&P 500 7 MSCI EAFE Index 7 Index 7 T-Bill Index 7 --------------------------------------------------------------------------------------------------------------- 1/1/1998 $ 9,428 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,383 $10,111 $10,460 $10,128 $10,050 2/28/1998 $ 9,732 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,023 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,076 $11,510 $11,572 $10,209 $10,185 5/31/1998 $ 9,906 $11,312 $11,518 $10,305 $10,229 6/30/1998 $ 9,906 $11,771 $11,608 $10,393 $10,271 7/31/1998 $ 9,672 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 8,702 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 8,896 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 9,086 $11,463 $11,007 $10,775 $10,459 11/30/1998 $ 9,294 $12,157 $11,574 $10,836 $10,493 12/31/1998 $ 9,442 $12,858 $12,033 $10,869 $10,536 1/31/1999 $ 9,526 $13,396 $12,001 $10,946 $10,577 2/28/1999 $ 9,339 $12,979 $11,717 $10,755 $10,611 3/31/1999 $ 9,548 $13,498 $12,209 $10,815 $10,656 4/30/1999 $ 9,839 $14,021 $12,707 $10,849 $10,696 5/31/1999 $ 9,745 $13,690 $12,055 $10,754 $10,736 6/30/1999 $ 9,935 $14,450 $12,528 $10,720 $10,776 7/31/1999 $ 9,841 $13,999 $12,903 $10,674 $10,821 8/31/1999 $ 9,860 $13,929 $12,953 $10,669 $10,862 9/30/1999 $ 9,841 $13,548 $13,086 $10,793 $10,910 10/31/1999 $10,212 $14,405 $13,579 $10,832 $10,953 11/30/1999 $10,924 $14,698 $14,054 $10,832 $10,997 12/31/1999 $12,014 $15,563 $15,318 $10,779 $11,047 1/31/2000 $11,869 $14,781 $14,348 $10,744 $11,090 2/29/2000 $13,188 $14,502 $14,737 $10,874 $11,140 3/31/2000 $12,925 $15,920 $15,311 $11,017 $11,196 4/30/2000 $12,301 $15,441 $14,508 $10,986 $11,253 5/31/2000 $11,960 $15,124 $14,156 $10,981 $11,314 6/30/2000 $12,703 $15,497 $14,713 $11,209 $11,362 7/31/2000 $12,576 $15,255 $14,099 $11,311 $11,415 8/31/2000 $13,271 $16,203 $14,224 $11,475 $11,474 9/30/2000 $12,978 $15,347 $13,535 $11,547 $11,537 10/31/2000 $12,504 $15,282 $13,218 $11,623 $11,595 11/30/2000 $11,487 $14,078 $12,725 $11,813 $11,659 12/31/2000 $11,883 $14,146 $13,180 $12,033 $11,726 1/31/2001 $12,308 $14,648 $13,174 $12,229 $11,803 2/28/2001 $11,650 $13,313 $12,187 $12,336 $11,850 3/31/2001 $11,199 $12,469 $11,380 $12,398 $11,910 4/30/2001 $11,758 $13,438 $12,178 $12,346 $11,959 5/31/2001 $11,819 $13,528 $11,758 $12,421 $12,005 6/30/2001 $11,707 $13,199 $11,282 $12,468 $12,040 7/31/2001 $11,563 $13,069 $11,077 $12,746 $12,080 8/31/2001 $11,298 $12,251 $10,799 $12,892 $12,120 9/30/2001 $10,464 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $10,835 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $11,206 $12,357 $10,324 $13,132 $12,231 12/31/2001 $11,386 $12,465 $10,385 $13,049 $12,250 1/31/2002 $11,344 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $11,270 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $11,606 $12,499 $10,444 $13,061 $12,302 4/30/2002 $11,574 $11,741 $10,520 $13,314 $12,320 5/31/2002 $11,500 $11,655 $10,663 $13,427 $12,340 6/30/2002 $11,071 $10,825 $10,242 $13,543 $12,358 7/31/2002 $10,443 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $10,518 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $10,024 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $10,323 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $10,686 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $10,529 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $10,453 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $10,388 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $10,355 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $10,842 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $11,372 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $11,461 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $11,537 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $11,884 $11,259 $10,096 $14,545 $12,562 9/30/2003 $11,922 $11,139 $10,409 $14,930 $12,573 10/31/2003 $12,335 $11,769 $11,059 $14,791 $12,583 11/30/2003 $12,585 $11,873 $11,306 $14,826 $12,593 12/31/2003 $12,886 $12,495 $12,190 $14,977 $12,603 1/31/2004 $13,006 $12,725 $12,363 $15,098 $12,613 2/29/2004 $13,149 $12,902 $12,651 $15,261 $12,622 3/31/2004 $13,181 $12,707 $12,727 $15,375 $12,632 4/30/2004 $12,774 $12,508 $12,450 $14,975 $12,641 5/31/2004 $12,906 $12,679 $12,503 $14,915 $12,650 6/30/2004 $13,092 $12,926 $12,783 $15,000 $12,656 7/31/2004 $12,827 $12,498 $12,369 $15,148 $12,668 8/31/2004 $12,926 $12,549 $12,427 $15,437 $12,680 9/30/2004 $13,206 $12,684 $12,753 $15,479 $12,694 10/31/2004 $13,416 $12,878 $13,189 $15,609 $12,709 11/30/2004 $13,847 $13,399 $14,094 $15,485 $12,722 12/31/2004 $14,128 $13,855 $14,713 $15,627 $12,746 1/31/2005 $13,872 $13,518 $14,444 $15,725 $12,764 2/28/2005 $14,161 $13,802 $15,071 $15,632 $12,784 3/31/2005 $13,926 $13,558 $14,698 $15,552 $12,814 4/30/2005 $13,703 $13,300 $14,369 $15,762 $12,841 5/31/2005 $13,971 $13,724 $14,391 $15,933 $12,870 6/30/2005 $14,147 $13,743 $14,588 $16,020 $12,899 7/31/2005 $14,460 $14,254 $15,036 $15,874 $12,927 8/31/2005 $14,516 $14,124 $15,421 $16,078 $12,963 9/30/2005 $14,662 $14,239 $16,111 $15,912 $13,000 10/31/2005 $14,381 $14,001 $15,641 $15,786 $13,030 11/30/2005 $14,763 $14,531 $16,028 $15,856 $13,073 12/31/2005 $14,968 $14,536 $16,775 $16,007 $13,114 1/31/2006 $15,549 $14,921 $17,806 $16,007 $13,151 2/28/2006 $15,537 $14,961 $17,769 $16,061 $13,193 3/31/2006 $15,776 $15,147 $18,364 $15,903 $13,245 4/30/2006 $15,947 $15,351 $19,254 $15,874 $13,293 5/31/2006 $15,513 $14,909 $18,530 $15,857 $13,344 6/30/2006 $15,541 $14,929 $18,537 $15,891 $13,395 7/31/2006 $15,483 $15,021 $18,722 $16,106 $13,449 8/31/2006 $15,737 $15,379 $19,242 $16,352 $13,509 9/30/2006 $15,798 $15,775 $19,276 $16,496 $13,568 10/31/2006 $16,203 $16,289 $20,027 $16,605 $13,621 11/30/2006 $16,609 $16,599 $20,631 $16,798 $13,679 12/31/2006 $16,699 $16,832 $21,280 $16,700 $13,738 1/31/2007 $16,889 $17,086 $21,426 $16,693 $13,793 2/28/2007 $16,901 $16,752 $21,602 $16,951 $13,847 3/31/2007 $17,111 $16,939 $22,163 $16,951 $13,910 4/30/2007 $17,528 $17,690 $23,167 $17,043 $13,970 5/31/2007 $17,875 $18,307 $23,604 $16,914 $14,033 6/30/2007 $17,808 $18,003 $23,641 $16,863 $14,086 7/31/2007 $17,600 $17,445 $23,295 $17,004 $14,140 8/31/2007 $17,673 $17,706 $22,937 $17,213 $14,220 9/30/2007 $18,363 $18,368 $24,168 $17,343 $14,272 10/31/2007 $18,881 $18,661 $25,120 $17,499 $14,315 11/30/2007 $18,314 $17,880 $24,301 $17,814 $14,380 12/31/2007 $18,268 $17,756 $23,755 $17,864 $14,413
AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------------------ CLASS B 12/31/07 ------------------------------------------------------------ 1-Year +4.61% ------------------------------------------------------------ 3-Year +7.28% ------------------------------------------------------------ Since Inception (12/1/03) +8.28% ------------------------------------------------------------ CLASS B (12/1/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
LB U.S. Aggregate P&R 90 Day U.S. DATE FT Moderate Target Fund S&P 500 7 MSCI EAFE Index 7 Index 7 T-Bill Index 7 --------------------------------------------------------------------------------------------------------------- 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 $10,718 $10,935 $10,183 $10,016 2/29/2004 $10,389 $10,867 $11,189 $10,293 $10,023 3/31/2004 $10,410 $10,703 $11,257 $10,370 $10,031 4/30/2004 $10,088 $10,535 $11,012 $10,101 $10,038 5/31/2004 $10,184 $10,679 $11,059 $10,060 $10,045 6/30/2004 $10,327 $10,887 $11,306 $10,117 $10,050 7/31/2004 $10,110 $10,527 $10,941 $10,217 $10,059 8/31/2004 $10,188 $10,569 $10,991 $10,412 $10,069 9/30/2004 $10,393 $10,684 $11,280 $10,440 $10,080 10/31/2004 $10,550 $10,847 $11,666 $10,528 $10,092 11/30/2004 $10,890 $11,286 $12,466 $10,444 $10,102 12/31/2004 $11,098 $11,670 $13,013 $10,540 $10,122 1/31/2005 $10,896 $11,385 $12,775 $10,606 $10,136 2/28/2005 $11,115 $11,625 $13,330 $10,544 $10,151 3/31/2005 $10,917 $11,419 $13,001 $10,489 $10,175 4/30/2005 $10,742 $11,202 $12,710 $10,631 $10,196 5/31/2005 $10,944 $11,559 $12,729 $10,746 $10,220 6/30/2005 $11,079 $11,575 $12,903 $10,805 $10,243 7/31/2005 $11,317 $12,006 $13,299 $10,707 $10,265 8/31/2005 $11,352 $11,896 $13,639 $10,844 $10,293 9/30/2005 $11,454 $11,993 $14,250 $10,732 $10,323 10/31/2005 $11,225 $11,793 $13,834 $10,647 $10,347 11/30/2005 $11,516 $12,239 $14,177 $10,694 $10,381 12/31/2005 $11,672 $12,243 $14,837 $10,796 $10,414 1/31/2006 $12,118 $12,567 $15,749 $10,797 $10,443 2/28/2006 $12,100 $12,601 $15,717 $10,833 $10,477 3/31/2006 $12,274 $12,758 $16,243 $10,726 $10,518 4/30/2006 $12,408 $12,929 $17,030 $10,707 $10,555 5/31/2006 $12,060 $12,557 $16,389 $10,695 $10,597 6/30/2006 $12,075 $12,574 $16,395 $10,718 $10,637 7/31/2006 $12,021 $12,652 $16,560 $10,863 $10,680 8/31/2006 $12,209 $12,953 $17,019 $11,029 $10,727 9/30/2006 $12,252 $13,287 $17,049 $11,126 $10,774 10/31/2006 $12,559 $13,720 $17,714 $11,200 $10,816 11/30/2006 $12,856 $13,981 $18,248 $11,330 $10,862 12/31/2006 $12,922 $14,177 $18,822 $11,264 $10,909 1/31/2007 $13,060 $14,391 $18,951 $11,259 $10,953 2/28/2007 $13,070 $14,110 $19,106 $11,433 $10,996 3/31/2007 $13,216 $14,267 $19,603 $11,433 $11,046 4/30/2007 $13,530 $14,899 $20,491 $11,495 $11,094 5/31/2007 $13,789 $15,419 $20,878 $11,408 $11,143 6/30/2007 $13,729 $15,163 $20,910 $11,374 $11,185 7/31/2007 $13,559 $14,693 $20,604 $11,469 $11,228 8/31/2007 $13,606 $14,913 $20,287 $11,609 $11,292 9/30/2007 $14,133 $15,471 $21,376 $11,698 $11,333 10/31/2007 $14,523 $15,717 $22,219 $11,803 $11,367 11/30/2007 $14,076 $15,060 $21,494 $12,015 $11,419 12/31/2007 $13,835 $14,955 $21,011 $12,049 $11,445
20 | Annual Report Performance Summary (CONTINUED) CLASS C (1/1/98-12/31/07)
FT Moderate MSCI LB U.S. P&R 90-Day U.S. DATE Target Fund S&P 500 7 EAFE Index 7 Aggregate Index 7 T-Bill Index 7 ----------------------------------------------------------------------------------------------------------------------- 1/1/1998 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,933 $10,111 $10,460 $10,128 $10,050 2/28/1998 $10,306 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,603 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,641 $11,510 $11,572 $10,209 $10,185 5/31/1998 $10,469 $11,312 $11,518 $10,305 $10,229 6/30/1998 $10,452 $11,771 $11,608 $10,393 $10,271 7/31/1998 $10,203 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 9,169 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 9,372 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 9,565 $11,463 $11,007 $10,775 $10,459 11/30/1998 $ 9,767 $12,157 $11,574 $10,836 $10,493 12/31/1998 $ 9,923 $12,858 $12,033 $10,869 $10,536 1/31/1999 $10,003 $13,396 $12,001 $10,946 $10,577 2/28/1999 $ 9,804 $12,979 $11,717 $10,755 $10,611 3/31/1999 $10,013 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,312 $14,021 $12,707 $10,849 $10,696 5/31/1999 $10,202 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,393 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,293 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,303 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,284 $13,548 $13,086 $10,793 $10,910 10/31/1999 $10,665 $14,405 $13,579 $10,832 $10,953 11/30/1999 $11,398 $14,698 $14,054 $10,832 $10,997 12/31/1999 $12,533 $15,563 $15,318 $10,779 $11,047 1/31/2000 $12,369 $14,781 $14,348 $10,744 $11,090 2/29/2000 $13,730 $14,502 $14,737 $10,874 $11,140 3/31/2000 $13,458 $15,920 $15,311 $11,017 $11,196 4/30/2000 $12,801 $15,441 $14,508 $10,986 $11,253 5/31/2000 $12,431 $15,124 $14,156 $10,981 $11,314 6/30/2000 $13,210 $15,497 $14,713 $11,209 $11,362 7/31/2000 $13,056 $15,255 $14,099 $11,311 $11,415 8/31/2000 $13,777 $16,203 $14,224 $11,475 $11,474 9/30/2000 $13,464 $15,347 $13,535 $11,547 $11,537 10/31/2000 $12,956 $15,282 $13,218 $11,623 $11,595 11/30/2000 $11,898 $14,078 $12,725 $11,813 $11,659 12/31/2000 $12,303 $14,146 $13,180 $12,033 $11,726 1/31/2001 $12,738 $14,648 $13,174 $12,229 $11,803 2/28/2001 $12,048 $13,313 $12,187 $12,336 $11,850 3/31/2001 $11,572 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,147 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,200 $13,528 $11,758 $12,421 $12,005 6/30/2001 $12,071 $13,199 $11,282 $12,468 $12,040 7/31/2001 $11,922 $13,069 $11,077 $12,746 $12,080 8/31/2001 $11,644 $12,251 $10,799 $12,892 $12,120 9/30/2001 $10,774 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $11,150 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $11,515 $12,357 $10,324 $13,132 $12,231 12/31/2001 $11,695 $12,465 $10,385 $13,049 $12,250 1/31/2002 $11,640 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $11,563 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $11,911 $12,499 $10,444 $13,061 $12,302 4/30/2002 $11,867 $11,741 $10,520 $13,314 $12,320 5/31/2002 $11,779 $11,655 $10,663 $13,427 $12,340 6/30/2002 $11,333 $10,825 $10,242 $13,543 $12,358 7/31/2002 $10,693 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $10,748 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $10,248 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $10,536 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $10,912 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $10,736 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $10,647 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $10,580 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $10,542 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $11,022 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $11,558 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $11,641 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $11,708 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $12,055 $11,259 $10,096 $14,545 $12,562 9/30/2003 $12,095 $11,139 $10,409 $14,930 $12,573 10/31/2003 $12,498 $11,769 $11,059 $14,791 $12,583 11/30/2003 $12,744 $11,873 $11,306 $14,826 $12,593 12/31/2003 $13,046 $12,495 $12,190 $14,977 $12,603 1/31/2004 $13,159 $12,725 $12,363 $15,098 $12,613 2/29/2004 $13,294 $12,902 $12,651 $15,261 $12,622 3/31/2004 $13,311 $12,707 $12,727 $15,375 $12,632 4/30/2004 $12,905 $12,508 $12,450 $14,975 $12,641 5/31/2004 $13,018 $12,679 $12,503 $14,915 $12,650 6/30/2004 $13,207 $12,926 $12,783 $15,000 $12,656 7/31/2004 $12,925 $12,498 $12,369 $15,148 $12,668 8/31/2004 $13,015 $12,549 $12,427 $15,437 $12,680 9/30/2004 $13,288 $12,684 $12,753 $15,479 $12,694 10/31/2004 $13,491 $12,878 $13,189 $15,609 $12,709 11/30/2004 $13,921 $13,399 $14,094 $15,485 $12,722 12/31/2004 $14,186 $13,855 $14,713 $15,627 $12,746 1/31/2005 $13,925 $13,518 $14,444 $15,725 $12,764 2/28/2005 $14,208 $13,802 $15,071 $15,632 $12,784 3/31/2005 $13,963 $13,558 $14,698 $15,552 $12,814 4/30/2005 $13,735 $13,300 $14,369 $15,762 $12,841 5/31/2005 $13,997 $13,724 $14,391 $15,933 $12,870 6/30/2005 $14,161 $13,743 $14,588 $16,020 $12,899 7/31/2005 $14,469 $14,254 $15,036 $15,874 $12,927 8/31/2005 $14,514 $14,124 $15,421 $16,078 $12,963 9/30/2005 $14,647 $14,239 $16,111 $15,912 $13,000 10/31/2005 $14,350 $14,001 $15,641 $15,786 $13,030 11/30/2005 $14,727 $14,531 $16,028 $15,856 $13,073 12/31/2005 $14,930 $14,536 $16,775 $16,007 $13,114 1/31/2006 $15,496 $14,921 $17,806 $16,007 $13,151 2/28/2006 $15,473 $14,961 $17,769 $16,061 $13,193 3/31/2006 $15,699 $15,147 $18,364 $15,903 $13,245 4/30/2006 $15,872 $15,351 $19,254 $15,874 $13,293 5/31/2006 $15,421 $14,909 $18,530 $15,857 $13,344 6/30/2006 $15,443 $14,929 $18,537 $15,891 $13,395 7/31/2006 $15,373 $15,021 $18,722 $16,106 $13,449 8/31/2006 $15,618 $15,379 $19,242 $16,352 $13,509 9/30/2006 $15,662 $15,775 $19,276 $16,496 $13,568 10/31/2006 $16,059 $16,289 $20,027 $16,605 $13,621 11/30/2006 $16,445 $16,599 $20,631 $16,798 $13,679 12/31/2006 $16,530 $16,832 $21,280 $16,700 $13,738 1/31/2007 $16,710 $17,086 $21,426 $16,693 $13,793 2/28/2007 $16,710 $16,752 $21,602 $16,951 $13,847 3/31/2007 $16,900 $16,939 $22,163 $16,951 $13,910 4/30/2007 $17,308 $17,690 $23,167 $17,043 $13,970 5/31/2007 $17,632 $18,307 $23,604 $16,914 $14,033 6/30/2007 $17,568 $18,003 $23,641 $16,863 $14,086 7/31/2007 $17,346 $17,445 $23,295 $17,004 $14,140 8/31/2007 $17,395 $17,706 $22,937 $17,213 $14,220 9/30/2007 $18,067 $18,368 $24,168 $17,343 $14,272 10/31/2007 $18,573 $18,661 $25,120 $17,499 $14,315 11/30/2007 $18,005 $17,880 $24,301 $17,814 $14,380 12/31/2007 $17,953 $17,756 $23,755 $17,864 $14,413
AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------------------------------------- CLASS C 12/31/07 -------------------------------------------------------------------------------- 1-Year +7.61% -------------------------------------------------------------------------------- 5-Year +10.83% -------------------------------------------------------------------------------- 10-Year +6.03% -------------------------------------------------------------------------------- CLASS R (1/1/02-12/31/07)
FT Moderate MSCI LB U.S. P&R 90-Day U.S. DATE Target Fund S&P 500 7 EAFE Index 7 Aggregate Index 7 T-Bill Index 7 ----------------------------------------------------------------------------------------------------------------------- 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 $10,027 $10,057 $10,009 $10,042 4/30/2002 $10,154 $ 9,420 $10,130 $10,203 $10,057 5/31/2002 $10,089 $ 9,350 $10,267 $10,290 $10,073 6/30/2002 $ 9,703 $ 8,684 $ 9,862 $10,379 $10,088 7/31/2002 $ 9,162 $ 8,007 $ 8,889 $10,504 $10,102 8/31/2002 $ 9,218 $ 8,060 $ 8,871 $10,682 $10,117 9/30/2002 $ 8,787 $ 7,184 $ 7,921 $10,855 $10,133 10/31/2002 $ 9,040 $ 7,816 $ 8,347 $10,805 $10,149 11/30/2002 $ 9,360 $ 8,276 $ 8,727 $10,802 $10,165 12/31/2002 $ 9,212 $ 7,790 $ 8,434 $11,025 $10,175 1/31/2003 $ 9,146 $ 7,586 $ 8,083 $11,035 $10,186 2/28/2003 $ 9,089 $ 7,472 $ 7,898 $11,188 $10,195 3/31/2003 $ 9,066 $ 7,545 $ 7,749 $11,179 $10,207 4/30/2003 $ 9,483 $ 8,166 $ 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 $ 8,859 $ 9,491 $11,073 $10,247 8/31/2003 $10,383 $ 9,032 $ 9,721 $11,147 $10,255 9/30/2003 $10,420 $ 8,936 $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 $10,172 $12,040 $11,431 $10,326 6/30/2004 $11,424 $10,370 $12,308 $11,495 $10,331 7/31/2004 $11,193 $10,026 $11,911 $11,609 $10,341 8/31/2004 $11,270 $10,067 $11,966 $11,831 $10,351 9/30/2004 $11,507 $10,176 $12,280 $11,863 $10,363 10/31/2004 $11,690 $10,332 $12,700 $11,962 $10,375 11/30/2004 $12,067 $10,750 $13,571 $11,867 $10,385 12/31/2004 $12,303 $11,115 $14,167 $11,976 $10,405 1/31/2005 $12,079 $10,844 $13,908 $12,051 $10,420 2/28/2005 $12,332 $11,073 $14,512 $11,980 $10,436 3/31/2005 $12,122 $10,877 $14,153 $11,919 $10,460 4/30/2005 $11,927 $10,670 $13,837 $12,080 $10,482 5/31/2005 $12,161 $11,010 $13,858 $12,211 $10,506 6/30/2005 $12,317 $11,025 $14,047 $12,277 $10,530 7/31/2005 $12,581 $11,435 $14,479 $12,165 $10,553 8/31/2005 $12,630 $11,331 $14,849 $12,321 $10,582 9/30/2005 $12,748 $11,423 $15,513 $12,194 $10,612 10/31/2005 $12,504 $11,232 $15,061 $12,098 $10,636 11/30/2005 $12,836 $11,657 $15,433 $12,151 $10,672 12/31/2005 $13,007 $11,661 $16,153 $12,267 $10,705 1/31/2006 $13,513 $11,970 $17,145 $12,268 $10,736 2/28/2006 $13,503 $12,003 $17,110 $12,308 $10,770 3/31/2006 $13,700 $12,152 $17,683 $12,188 $10,812 4/30/2006 $13,849 $12,315 $18,540 $12,165 $10,851 5/31/2006 $13,472 $11,961 $17,843 $12,152 $10,893 6/30/2006 $13,496 $11,977 $17,849 $12,178 $10,934 7/31/2006 $13,436 $12,051 $18,028 $12,343 $10,979 8/31/2006 $13,657 $12,338 $18,528 $12,532 $11,028 9/30/2006 $13,702 $12,655 $18,561 $12,642 $11,076 10/31/2006 $14,053 $13,068 $19,284 $12,726 $11,119 11/30/2006 $14,396 $13,316 $19,866 $12,873 $11,166 12/31/2006 $14,473 $13,503 $20,491 $12,798 $11,215 1/31/2007 $14,639 $13,707 $20,631 $12,793 $11,260 2/28/2007 $14,649 $13,439 $20,800 $12,990 $11,304 3/31/2007 $14,826 $13,590 $21,341 $12,991 $11,355 4/30/2007 $15,178 $14,192 $22,308 $13,061 $11,404 5/31/2007 $15,478 $14,687 $22,729 $12,962 $11,455 6/30/2007 $15,421 $14,443 $22,764 $12,924 $11,499 7/31/2007 $15,240 $13,995 $22,431 $13,031 $11,542 8/31/2007 $15,293 $14,205 $22,086 $13,191 $11,608 9/30/2007 $15,894 $14,736 $23,272 $13,291 $11,650 10/31/2007 $16,343 $14,970 $24,189 $13,411 $11,686 11/30/2007 $15,840 $14,344 $23,399 $13,652 $11,738 12/31/2007 $15,799 $14,245 $22,874 $13,690 $11,766
AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------------------------------------- CLASS R 12/31/07 -------------------------------------------------------------------------------- 1-Year +9.16% -------------------------------------------------------------------------------- 5-Year +11.39% -------------------------------------------------------------------------------- Since Inception (1/1/02) +7.93% -------------------------------------------------------------------------------- Annual Report | 21 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------------------------------------- ADVISOR CLASS 6 12/31/07 -------------------------------------------------------------------------------- 1-Year +9.66% -------------------------------------------------------------------------------- 5-Year +11.78% -------------------------------------------------------------------------------- 10-Year +6.90% -------------------------------------------------------------------------------- ADVISOR CLASS (1/1/98-12/31/07) 6
FT Moderate MSCI LB U.S. P&R 90-Day U.S. DATE Target Fund S&P 500 7 EAFE Index 7 Aggregate Index 7 T-Bill Index 7 ----------------------------------------------------------------------------------------------------------------------- 1/1/1998 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,953 $10,111 $10,460 $10,128 $10,050 2/28/1998 $10,323 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,631 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,688 $11,510 $11,572 $10,209 $10,185 5/31/1998 $10,508 $11,312 $11,518 $10,305 $10,229 6/30/1998 $10,507 $11,771 $11,608 $10,393 $10,271 7/31/1998 $10,259 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 9,231 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 9,437 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 9,638 $11,463 $11,007 $10,775 $10,459 11/30/1998 $ 9,858 $12,157 $11,574 $10,836 $10,493 12/31/1998 $10,015 $12,858 $12,033 $10,869 $10,536 1/31/1999 $10,104 $13,396 $12,001 $10,946 $10,577 2/28/1999 $ 9,906 $12,979 $11,717 $10,755 $10,611 3/31/1999 $10,128 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,436 $14,021 $12,707 $10,849 $10,696 5/31/1999 $10,337 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,538 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,438 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,458 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,439 $13,548 $13,086 $10,793 $10,910 10/31/1999 $10,832 $14,405 $13,579 $10,832 $10,953 11/30/1999 $11,587 $14,698 $14,054 $10,832 $10,997 12/31/1999 $12,744 $15,563 $15,318 $10,779 $11,047 1/31/2000 $12,590 $14,781 $14,348 $10,744 $11,090 2/29/2000 $13,988 $14,502 $14,737 $10,874 $11,140 3/31/2000 $13,709 $15,920 $15,311 $11,017 $11,196 4/30/2000 $13,048 $15,441 $14,508 $10,986 $11,253 5/31/2000 $12,687 $15,124 $14,156 $10,981 $11,314 6/30/2000 $13,475 $15,497 $14,713 $11,209 $11,362 7/31/2000 $13,340 $15,255 $14,099 $11,311 $11,415 8/31/2000 $14,077 $16,203 $14,224 $11,475 $11,474 9/30/2000 $13,766 $15,347 $13,535 $11,547 $11,537 10/31/2000 $13,263 $15,282 $13,218 $11,623 $11,595 11/30/2000 $12,184 $14,078 $12,725 $11,813 $11,659 12/31/2000 $12,605 $14,146 $13,180 $12,033 $11,726 1/31/2001 $13,056 $14,648 $13,174 $12,229 $11,803 2/28/2001 $12,357 $13,313 $12,187 $12,336 $11,850 3/31/2001 $11,879 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,472 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,537 $13,528 $11,758 $12,421 $12,005 6/30/2001 $12,417 $13,199 $11,282 $12,468 $12,040 7/31/2001 $12,266 $13,069 $11,077 $12,746 $12,080 8/31/2001 $11,984 $12,251 $10,799 $12,892 $12,120 9/30/2001 $11,100 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $11,493 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $11,886 $12,357 $10,324 $13,132 $12,231 12/31/2001 $12,077 $12,465 $10,385 $13,049 $12,250 1/31/2002 $12,032 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $11,954 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $12,311 $12,499 $10,444 $13,061 $12,302 4/30/2002 $12,277 $11,741 $10,520 $13,314 $12,320 5/31/2002 $12,198 $11,655 $10,663 $13,427 $12,340 6/30/2002 $11,743 $10,825 $10,242 $13,543 $12,358 7/31/2002 $11,077 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $11,156 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $10,633 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $10,950 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $11,335 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $11,168 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $11,088 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $11,019 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $10,984 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $11,500 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $12,063 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $12,157 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $12,238 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $12,606 $11,259 $10,096 $14,545 $12,562 9/30/2003 $12,646 $11,139 $10,409 $14,930 $12,573 10/31/2003 $13,084 $11,769 $11,059 $14,791 $12,583 11/30/2003 $13,349 $11,873 $11,306 $14,826 $12,593 12/31/2003 $13,668 $12,495 $12,190 $14,977 $12,603 1/31/2004 $13,796 $12,725 $12,363 $15,098 $12,613 2/29/2004 $13,947 $12,902 $12,651 $15,261 $12,622 3/31/2004 $13,981 $12,707 $12,727 $15,375 $12,632 4/30/2004 $13,549 $12,508 $12,450 $14,975 $12,641 5/31/2004 $13,689 $12,679 $12,503 $14,915 $12,650 6/30/2004 $13,887 $12,926 $12,783 $15,000 $12,656 7/31/2004 $13,606 $12,498 $12,369 $15,148 $12,668 8/31/2004 $13,711 $12,549 $12,427 $15,437 $12,680 9/30/2004 $14,007 $12,684 $12,753 $15,479 $12,694 10/31/2004 $14,230 $12,878 $13,189 $15,609 $12,709 11/30/2004 $14,688 $13,399 $14,094 $15,485 $12,722 12/31/2004 $14,986 $13,855 $14,713 $15,627 $12,746 1/31/2005 $14,714 $13,518 $14,444 $15,725 $12,764 2/28/2005 $15,021 $13,802 $15,071 $15,632 $12,784 3/31/2005 $14,772 $13,558 $14,698 $15,552 $12,814 4/30/2005 $14,535 $13,300 $14,369 $15,762 $12,841 5/31/2005 $14,819 $13,724 $14,391 $15,933 $12,870 6/30/2005 $15,006 $13,743 $14,588 $16,020 $12,899 7/31/2005 $15,338 $14,254 $15,036 $15,874 $12,927 8/31/2005 $15,398 $14,124 $15,421 $16,078 $12,963 9/30/2005 $15,552 $14,239 $16,111 $15,912 $13,000 10/31/2005 $15,254 $14,001 $15,641 $15,786 $13,030 11/30/2005 $15,660 $14,531 $16,028 $15,856 $13,073 12/31/2005 $15,886 $14,536 $16,775 $16,007 $13,114 1/31/2006 $16,514 $14,921 $17,806 $16,007 $13,151 2/28/2006 $16,502 $14,961 $17,769 $16,061 $13,193 3/31/2006 $16,754 $15,147 $18,364 $15,903 $13,245 4/30/2006 $16,948 $15,351 $19,254 $15,874 $13,293 5/31/2006 $16,487 $14,909 $18,530 $15,857 $13,344 6/30/2006 $16,527 $14,929 $18,537 $15,891 $13,395 7/31/2006 $16,466 $15,021 $18,722 $16,106 $13,449 8/31/2006 $16,735 $15,379 $19,242 $16,352 $13,509 9/30/2006 $16,798 $15,775 $19,276 $16,496 $13,568 10/31/2006 $17,242 $16,289 $20,027 $16,605 $13,621 11/30/2006 $17,673 $16,599 $20,631 $16,798 $13,679 12/31/2006 $17,771 $16,832 $21,280 $16,700 $13,738 1/31/2007 $17,986 $17,086 $21,426 $16,693 $13,793 2/28/2007 $17,999 $16,752 $21,602 $16,951 $13,847 3/31/2007 $18,216 $16,939 $22,163 $16,951 $13,910 4/30/2007 $18,661 $17,690 $23,167 $17,043 $13,970 5/31/2007 $19,043 $18,307 $23,604 $16,914 $14,033 6/30/2007 $18,984 $18,003 $23,641 $16,863 $14,086 7/31/2007 $18,761 $17,445 $23,295 $17,004 $14,140 8/31/2007 $18,827 $17,706 $22,937 $17,213 $14,220 9/30/2007 $19,574 $18,368 $24,168 $17,343 $14,272 10/31/2007 $20,139 $18,661 $25,120 $17,499 $14,315 11/30/2007 $19,534 $17,880 $24,301 $17,814 $14,380 12/31/2007 $19,488 $17,756 $23,755 $17,864 $14,413
ENDNOTES BECAUSE THE FUND INVESTS IN VARIOUS UNDERLYING FUNDS THAT 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. If the manager had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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 +23.51% and +10.67%. 7. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,025.80 $2.55 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.68 $2.55 --------------------------------------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,022.20 $6.37 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 --------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,021.90 $6.37 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 --------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,024.50 $3.83 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.42 $3.82 --------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,026.60 $1.28 --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,023.95 $1.28 ---------------------------------------------------------------------------------------------------------------
*Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized 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 GOALS 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 -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton Growth Target Fund Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity .................................... 55.2% Foreign Equity ..................................... 24.4% Domestic Fixed Income .............................. 10.7% Foreign Fixed Income ............................... 5.0% Short-Term Investments & Other Net Assets .......... 4.7% *The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 Growth Target Fund's annual report for the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton Growth Target Fund - Class A posted a +10.58% cumulative total return for the 12 months 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) 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, WHICH BEGINS ON PAGE 52. Annual Report | 25 TOP 10 FUND HOLDINGS Franklin Templeton Growth Target Fund 12/31/07 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Mutual Shares Fund - Class Z 17.3% -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund - Advisor Class 14.9% -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II - Advisor Class 13.1% -------------------------------------------------------------------------------- Mutual European Fund - Class Z 8.6% -------------------------------------------------------------------------------- Franklin U.S. Government Securities Fund - Advisor Class 5.0% -------------------------------------------------------------------------------- Templeton Global Bond Fund - Advisor Class 5.0% -------------------------------------------------------------------------------- Templeton Foreign Fund - Advisor Class 4.8% -------------------------------------------------------------------------------- Franklin Growth Opportunities Fund - Advisor Class 4.4% -------------------------------------------------------------------------------- Templeton China World Fund - Advisor Class 4.4% -------------------------------------------------------------------------------- Franklin Natural Resources Fund - Advisor Class 3.9% -------------------------------------------------------------------------------- period, the hybrid benchmark returned +7.25%. 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 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, 2007, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Mutual Shares Fund - Class Z, representing 17.3% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 68.2% of the Fund's total income weighting, with the 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 balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class and Franklin U.S. Government Securities Fund - Advisor Class were our largest fixed income fund weightings at 5.0% of total net assets each. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, outperformed the S&P 500 during the 12-month reporting period, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, underperformed 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 and Franklin U.S. Government Securities 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 OMITTED] /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, 2007, 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 12/31/07 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 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.54 $16.17 $15.63 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.3228 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.7739 -------------------------------------------------------------------------------- TOTAL $1.0967 -------------------------------------------------------------------------------- CLASS B (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.46 $15.91 $15.45 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.2494 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.7739 -------------------------------------------------------------------------------- TOTAL $1.0233 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FTGTX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.46 $15.90 $15.44 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.2530 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.7739 -------------------------------------------------------------------------------- TOTAL $1.0269 -------------------------------------------------------------------------------- CLASS R (SYMBOL: FGTRX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.50 $16.02 $15.52 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.3004 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.7739 -------------------------------------------------------------------------------- TOTAL $1.0743 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.55 $16.19 $15.64 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.3467 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.7739 -------------------------------------------------------------------------------- TOTAL $1.1206 -------------------------------------------------------------------------------- 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 +10.58% +97.82% +100.26% ------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +4.25% +13.28% +6.56% ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,425 $18,650 $18,878 ------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------- Without Waiver 1.58% ------------------------------------------------------------------------------------------------------- With Waiver 1.32% ------------------------------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (12/1/03) ------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +9.76% +33.57% +50.11% ------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +5.76% +9.30% +10.10% ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,576 $13,057 $14,811 ------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------- Without Waiver 2.33% ------------------------------------------------------------------------------------------------------- With Waiver 2.07% ------------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +9.72% +90.25% +85.89% ------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +8.72% +13.73% +6.40% ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,872 $19,025 $18,589 ------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------- Without Waiver 2.33% ------------------------------------------------------------------------------------------------------- With Waiver 2.07% ------------------------------------------------------------------------------------------------------- CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) ------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +10.31% +95.40% +66.09% ------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +10.31% +14.34% +8.83% ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,031 $19,540 $16,609 ------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------- Without Waiver 1.83% ------------------------------------------------------------------------------------------------------- With Waiver 1.57% ------------------------------------------------------------------------------------------------------- ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +10.80% +98.84% +101.30% ------------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +10.80% +14.74% +7.25% ------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,080 $19,884 $20,130 ------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------- Without Waiver 1.33% ------------------------------------------------------------------------------------------------------- With Waiver 1.07% 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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. THE MANAGER HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 12/31/07 ------------------------------------ 1-Year +4.25% ------------------------------------ 5-Year +13.28% ------------------------------------ 10-Year +6.56% ------------------------------------ CLASS A (1/1/98-12/31/07)
DATE FT Growth Target Fund S&P 500 7 MSCI EAFE Index 7 LB U.S. Aggregate Index 7 P&R 90 Day U.S. T-Bill Index 7 -------------------------------------------------------------------------------------------------------------------------------- 1/1/1998 $ 9,427 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,392 $10,111 $10,460 $10,128 $10,050 2/28/1998 $ 9,826 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,165 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,226 $11,510 $11,572 $10,209 $10,185 5/31/1998 $ 9,991 $11,312 $11,518 $10,305 $10,229 6/30/1998 $ 9,965 $11,771 $11,608 $10,393 $10,271 7/31/1998 $ 9,696 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 8,506 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 8,712 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 8,966 $11,463 $11,007 $10,775 $10,459 11/30/1998 $ 9,219 $12,157 $11,574 $10,836 $10,493 12/31/1998 $ 9,416 $12,858 $12,033 $10,869 $10,536 1/31/1999 $ 9,562 $13,396 $12,001 $10,946 $10,577 2/28/1999 $ 9,361 $12,979 $11,717 $10,755 $10,611 3/31/1999 $ 9,636 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,020 $14,021 $12,707 $10,849 $10,696 5/31/1999 $ 9,901 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,194 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,075 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,130 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,124 $13,548 $13,086 $10,793 $10,910 10/31/1999 $10,659 $14,405 $13,579 $10,832 $10,953 11/30/1999 $11,618 $14,698 $14,054 $10,832 $10,997 12/31/1999 $13,292 $15,563 $15,318 $10,779 $11,047 1/31/2000 $13,072 $14,781 $14,348 $10,744 $11,090 2/29/2000 $15,125 $14,502 $14,737 $10,874 $11,140 3/31/2000 $14,691 $15,920 $15,311 $11,017 $11,196 4/30/2000 $13,702 $15,441 $14,508 $10,986 $11,253 5/31/2000 $13,154 $15,124 $14,156 $10,981 $11,314 6/30/2000 $14,237 $15,497 $14,713 $11,209 $11,362 7/31/2000 $13,958 $15,255 $14,099 $11,311 $11,415 8/31/2000 $15,056 $16,203 $14,224 $11,475 $11,474 9/30/2000 $14,572 $15,347 $13,535 $11,547 $11,537 10/31/2000 $13,808 $15,282 $13,218 $11,623 $11,595 11/30/2000 $12,142 $14,078 $12,725 $11,813 $11,659 12/31/2000 $12,610 $14,146 $13,180 $12,033 $11,726 1/31/2001 $13,186 $14,648 $13,174 $12,229 $11,803 2/28/2001 $11,994 $13,313 $12,187 $12,336 $11,850 3/31/2001 $11,280 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,064 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,104 $13,528 $11,758 $12,421 $12,005 6/30/2001 $11,883 $13,199 $11,282 $12,468 $12,040 7/31/2001 $11,594 $13,069 $11,077 $12,746 $12,080 8/31/2001 $11,126 $12,251 $10,799 $12,892 $12,120 9/30/2001 $9,920 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $10,400 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $10,919 $12,357 $10,324 $13,132 $12,231 12/31/2001 $11,181 $12,465 $10,385 $13,049 $12,250 1/31/2002 $11,079 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $10,926 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $11,437 $12,499 $10,444 $13,061 $12,302 4/30/2002 $11,273 $11,741 $10,520 $13,314 $12,320 5/31/2002 $11,151 $11,655 $10,663 $13,427 $12,340 6/30/2002 $10,557 $10,825 $10,242 $13,543 $12,358 7/31/2002 $ 9,688 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $ 9,718 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $ 9,023 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $ 9,401 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $ 9,862 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $ 9,543 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $ 9,409 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $ 9,285 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $ 9,254 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $ 9,843 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $10,474 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $10,587 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $10,815 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $11,260 $11,259 $10,096 $14,545 $12,562 9/30/2003 $11,198 $11,139 $10,409 $14,930 $12,573 10/31/2003 $11,787 $11,769 $11,059 $14,791 $12,583 11/30/2003 $12,107 $11,873 $11,306 $14,826 $12,593 12/31/2003 $12,417 $12,495 $12,190 $14,977 $12,603 1/31/2004 $12,573 $12,725 $12,363 $15,098 $12,613 2/29/2004 $12,730 $12,902 $12,651 $15,261 $12,622 3/31/2004 $12,751 $12,707 $12,727 $15,375 $12,632 4/30/2004 $12,302 $12,508 $12,450 $14,975 $12,641 5/31/2004 $12,469 $12,679 $12,503 $14,915 $12,650 6/30/2004 $12,730 $12,926 $12,783 $15,000 $12,656 7/31/2004 $12,334 $12,498 $12,369 $15,148 $12,668 8/31/2004 $12,375 $12,549 $12,427 $15,437 $12,680 9/30/2004 $12,709 $12,684 $12,753 $15,479 $12,694 10/31/2004 $12,938 $12,878 $13,189 $15,609 $12,709 11/30/2004 $13,491 $13,399 $14,094 $15,485 $12,722 12/31/2004 $13,818 $13,855 $14,713 $15,627 $12,746 1/31/2005 $13,472 $13,518 $14,444 $15,725 $12,764 2/28/2005 $13,860 $13,802 $15,071 $15,632 $12,784 3/31/2005 $13,567 $13,558 $14,698 $15,552 $12,814 4/30/2005 $13,241 $13,300 $14,369 $15,762 $12,841 5/31/2005 $13,609 $13,724 $14,391 $15,933 $12,870 6/30/2005 $13,851 $13,743 $14,588 $16,020 $12,899 7/31/2005 $14,302 $14,254 $15,036 $15,874 $12,927 8/31/2005 $14,334 $14,124 $15,421 $16,078 $12,963 9/30/2005 $14,593 $14,239 $16,111 $15,912 $13,000 10/31/2005 $14,215 $14,001 $15,641 $15,786 $13,030 11/30/2005 $14,741 $14,531 $16,028 $15,856 $13,073 12/31/2005 $14,988 $14,536 $16,775 $16,007 $13,114 1/31/2006 $15,753 $14,921 $17,806 $16,007 $13,151 2/28/2006 $15,721 $14,961 $17,769 $16,061 $13,193 3/31/2006 $16,103 $15,147 $18,364 $15,903 $13,245 4/30/2006 $16,295 $15,351 $19,254 $15,874 $13,293 5/31/2006 $15,656 $14,909 $18,530 $15,857 $13,344 6/30/2006 $15,720 $14,929 $18,537 $15,891 $13,395 7/31/2006 $15,549 $15,021 $18,722 $16,106 $13,449 8/31/2006 $15,858 $15,379 $19,242 $16,352 $13,509 9/30/2006 $15,910 $15,775 $19,276 $16,496 $13,568 10/31/2006 $16,444 $16,289 $20,027 $16,605 $13,621 11/30/2006 $16,936 $16,599 $20,631 $16,798 $13,679 12/31/2006 $17,071 $16,832 $21,280 $16,700 $13,738 1/31/2007 $17,366 $17,086 $21,426 $16,693 $13,793 2/28/2007 $17,312 $16,752 $21,602 $16,951 $13,847 3/31/2007 $17,567 $16,939 $22,163 $16,951 $13,910 4/30/2007 $18,092 $17,690 $23,167 $17,043 $13,970 5/31/2007 $18,594 $18,307 $23,604 $16,914 $14,033 6/30/2007 $18,525 $18,003 $23,641 $16,863 $14,086 7/31/2007 $18,164 $17,445 $23,295 $17,004 $14,140 8/31/2007 $18,266 $17,706 $22,937 $17,213 $14,220 9/30/2007 $19,151 $18,368 $24,168 $17,343 $14,272 10/31/2007 $19,841 $18,661 $25,120 $17,499 $14,315 11/30/2007 $18,959 $17,880 $24,301 $17,814 $14,380 12/31/2007 $18,878 $17,756 $23,755 $17,864 $14,413
AVERAGE ANNUAL TOTAL RETURN ------------------------------------ CLASS B 12/31/07 ------------------------------------ 1-Year +5.76% ------------------------------------ 3-Year +9.30% ------------------------------------ Since Inception (12/1/03) +10.10% ------------------------------------ CLASS B (12/1/03-12/31/07)
DATE FT Growth Target Fund S&P 500 7 MSCI EAFE Index 7 LB U.S. Aggregate Index 7 P&R 90 Day U.S. T-Bill Index 7 -------------------------------------------------------------------------------------------------------------------------------- 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 $10,718 $10,935 $10,183 $10,016 2/29/2004 $10,415 $10,867 $11,189 $10,293 $10,023 3/31/2004 $10,424 $10,703 $11,257 $10,370 $10,031 4/30/2004 $10,047 $10,535 $11,012 $10,101 $10,038 5/31/2004 $10,184 $10,679 $11,059 $10,060 $10,045 6/30/2004 $10,389 $10,887 $11,306 $10,117 $10,050 7/31/2004 $10,056 $10,527 $10,941 $10,217 $10,059 8/31/2004 $10,090 $10,569 $10,991 $10,412 $10,069 9/30/2004 $10,355 $10,684 $11,280 $10,440 $10,080 10/31/2004 $10,535 $10,847 $11,666 $10,528 $10,092 11/30/2004 $10,971 $11,286 $12,466 $10,444 $10,102 12/31/2004 $11,238 $11,670 $13,013 $10,540 $10,122 1/31/2005 $10,946 $11,385 $12,775 $10,606 $10,136 2/28/2005 $11,255 $11,625 $13,330 $10,544 $10,151 3/31/2005 $11,012 $11,419 $13,001 $10,489 $10,175 4/30/2005 $10,737 $11,202 $12,710 $10,631 $10,196 5/31/2005 $11,029 $11,559 $12,729 $10,746 $10,220 6/30/2005 $11,218 $11,575 $12,903 $10,805 $10,243 7/31/2005 $11,578 $12,006 $13,299 $10,707 $10,265 8/31/2005 $11,596 $11,896 $13,639 $10,844 $10,293 9/30/2005 $11,793 $11,993 $14,250 $10,732 $10,323 10/31/2005 $11,484 $11,793 $13,834 $10,647 $10,347 11/30/2005 $11,913 $12,239 $14,177 $10,694 $10,381 12/31/2005 $12,096 $12,243 $14,837 $10,796 $10,414 1/31/2006 $12,711 $12,567 $15,749 $10,797 $10,443 2/28/2006 $12,676 $12,601 $15,717 $10,833 $10,477 3/31/2006 $12,973 $12,758 $16,243 $10,726 $10,518 4/30/2006 $13,129 $12,929 $17,030 $10,707 $10,555 5/31/2006 $12,608 $12,557 $16,389 $10,695 $10,597 6/30/2006 $12,643 $12,574 $16,395 $10,718 $10,637 7/31/2006 $12,495 $12,652 $16,560 $10,863 $10,680 8/31/2006 $12,738 $12,953 $17,019 $11,029 $10,727 9/30/2006 $12,765 $13,287 $17,049 $11,126 $10,774 10/31/2006 $13,191 $13,720 $17,714 $11,200 $10,816 11/30/2006 $13,574 $13,981 $18,248 $11,330 $10,862 12/31/2006 $13,676 $14,177 $18,822 $11,264 $10,909 1/31/2007 $13,906 $14,391 $18,951 $11,259 $10,953 2/28/2007 $13,853 $14,110 $19,106 $11,433 $10,996 3/31/2007 $14,052 $14,267 $19,603 $11,433 $11,046 4/30/2007 $14,459 $14,899 $20,491 $11,495 $11,094 5/31/2007 $14,849 $15,419 $20,878 $11,408 $11,143 6/30/2007 $14,793 $15,163 $20,910 $11,374 $11,185 7/31/2007 $14,491 $14,693 $20,604 $11,469 $11,228 8/31/2007 $14,564 $14,913 $20,287 $11,609 $11,292 9/30/2007 $15,262 $15,471 $21,376 $11,698 $11,333 10/31/2007 $15,802 $15,717 $22,219 $11,803 $11,367 11/30/2007 $15,088 $15,060 $21,494 $12,015 $11,419 12/31/2007 $14,811 $14,955 $21,011 $12,049 $11,445
30 | Annual Report Performance Summary (CONTINUED) CLASS C (1/1/98-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. DATE Target Fund S&P 500 7 Index 7 Aggregate Index 7 T-Bill Index 7 -------------------------------------------------------------------------------------------------- 1/1/1998 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,963 $10,111 $10,460 $10,128 $10,050 2/28/1998 $10,416 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,767 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,823 $11,510 $11,572 $10,209 $10,185 5/31/1998 $10,564 $11,312 $11,518 $10,305 $10,229 6/30/1998 $10,536 $11,771 $11,608 $10,393 $10,271 7/31/1998 $10,240 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 8,974 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 9,200 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 9,458 $11,463 $11,007 $10,775 $10,459 11/30/1998 $ 9,717 $12,157 $11,574 $10,836 $10,493 12/31/1998 $ 9,922 $12,858 $12,033 $10,869 $10,536 1/31/1999 $10,067 $13,396 $12,001 $10,946 $10,577 2/28/1999 $ 9,854 $12,979 $11,717 $10,755 $10,611 3/31/1999 $10,125 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,531 $14,021 $12,707 $10,849 $10,696 5/31/1999 $10,396 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,695 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,560 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,618 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,605 $13,548 $13,086 $10,793 $10,910 10/31/1999 $11,157 $14,405 $13,579 $10,832 $10,953 11/30/1999 $12,156 $14,698 $14,054 $10,832 $10,997 12/31/1999 $13,897 $15,563 $15,318 $10,779 $11,047 1/31/2000 $13,665 $14,781 $14,348 $10,744 $11,090 2/29/2000 $15,800 $14,502 $14,737 $10,874 $11,140 3/31/2000 $15,329 $15,920 $15,311 $11,017 $11,196 4/30/2000 $14,291 $15,441 $14,508 $10,986 $11,253 5/31/2000 $13,707 $15,124 $14,156 $10,981 $11,314 6/30/2000 $14,837 $15,497 $14,713 $11,209 $11,362 7/31/2000 $14,534 $15,255 $14,099 $11,311 $11,415 8/31/2000 $15,673 $16,203 $14,224 $11,475 $11,474 9/30/2000 $15,162 $15,347 $13,535 $11,547 $11,537 10/31/2000 $14,352 $15,282 $13,218 $11,623 $11,595 11/30/2000 $12,613 $14,078 $12,725 $11,813 $11,659 12/31/2000 $13,087 $14,146 $13,180 $12,033 $11,726 1/31/2001 $13,687 $14,648 $13,174 $12,229 $11,803 2/28/2001 $12,435 $13,313 $12,187 $12,336 $11,850 3/31/2001 $11,680 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,497 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,528 $13,528 $11,758 $12,421 $12,005 6/30/2001 $12,291 $13,199 $11,282 $12,468 $12,040 7/31/2001 $11,981 $13,069 $11,077 $12,746 $12,080 8/31/2001 $11,494 $12,251 $10,799 $12,892 $12,120 9/30/2001 $10,251 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $10,727 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $11,255 $12,357 $10,324 $13,132 $12,231 12/31/2001 $11,520 $12,465 $10,385 $13,049 $12,250 1/31/2002 $11,404 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $11,245 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $11,763 $12,499 $10,444 $13,061 $12,302 4/30/2002 $11,594 $11,741 $10,520 $13,314 $12,320 5/31/2002 $11,456 $11,655 $10,663 $13,427 $12,340 6/30/2002 $10,843 $10,825 $10,242 $13,543 $12,358 7/31/2002 $ 9,944 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $ 9,965 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $ 9,246 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $ 9,626 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $10,092 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $ 9,771 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $ 9,622 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $ 9,495 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $ 9,442 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $10,036 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $10,673 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $10,789 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $11,012 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $11,458 $11,259 $10,096 $14,545 $12,562 9/30/2003 $11,394 $11,139 $10,409 $14,930 $12,573 10/31/2003 $11,977 $11,769 $11,059 $14,791 $12,583 11/30/2003 $12,296 $11,873 $11,306 $14,826 $12,593 12/31/2003 $12,602 $12,495 $12,190 $14,977 $12,603 1/31/2004 $12,751 $12,725 $12,363 $15,098 $12,613 2/29/2004 $12,910 $12,902 $12,651 $15,261 $12,622 3/31/2004 $12,910 $12,707 $12,727 $15,375 $12,632 4/30/2004 $12,453 $12,508 $12,450 $14,975 $12,641 5/31/2004 $12,623 $12,679 $12,503 $14,915 $12,650 6/30/2004 $12,868 $12,926 $12,783 $15,000 $12,656 7/31/2004 $12,464 $12,498 $12,369 $15,148 $12,668 8/31/2004 $12,506 $12,549 $12,427 $15,437 $12,680 9/30/2004 $12,825 $12,684 $12,753 $15,479 $12,694 10/31/2004 $13,049 $12,878 $13,189 $15,609 $12,709 11/30/2004 $13,591 $13,399 $14,094 $15,485 $12,722 12/31/2004 $13,921 $13,855 $14,713 $15,627 $12,746 1/31/2005 $13,559 $13,518 $14,444 $15,725 $12,764 2/28/2005 $13,942 $13,802 $15,071 $15,632 $12,784 3/31/2005 $13,640 $13,558 $14,698 $15,552 $12,814 4/30/2005 $13,299 $13,300 $14,369 $15,762 $12,841 5/31/2005 $13,661 $13,724 $14,391 $15,933 $12,870 6/30/2005 $13,895 $13,743 $14,588 $16,020 $12,899 7/31/2005 $14,342 $14,254 $15,036 $15,874 $12,927 8/31/2005 $14,374 $14,124 $15,421 $16,078 $12,963 9/30/2005 $14,608 $14,239 $16,111 $15,912 $13,000 10/31/2005 $14,225 $14,001 $15,641 $15,786 $13,030 11/30/2005 $14,746 $14,531 $16,028 $15,856 $13,073 12/31/2005 $14,982 $14,536 $16,775 $16,007 $13,114 1/31/2006 $15,733 $14,921 $17,806 $16,007 $13,151 2/28/2006 $15,701 $14,961 $17,769 $16,061 $13,193 3/31/2006 $16,068 $15,147 $18,364 $15,903 $13,245 4/30/2006 $16,251 $15,351 $19,254 $15,874 $13,293 5/31/2006 $15,606 $14,909 $18,530 $15,857 $13,344 6/30/2006 $15,660 $14,929 $18,537 $15,891 $13,395 7/31/2006 $15,477 $15,021 $18,722 $16,106 $13,449 8/31/2006 $15,778 $15,379 $19,242 $16,352 $13,509 9/30/2006 $15,812 $15,775 $19,276 $16,496 $13,568 10/31/2006 $16,339 $16,289 $20,027 $16,605 $13,621 11/30/2006 $16,813 $16,599 $20,631 $16,798 $13,679 12/31/2006 $16,942 $16,832 $21,280 $16,700 $13,738 1/31/2007 $17,227 $17,086 $21,426 $16,693 $13,793 2/28/2007 $17,162 $16,752 $21,602 $16,951 $13,847 3/31/2007 $17,396 $16,939 $22,163 $16,951 $13,910 4/30/2007 $17,912 $17,690 $23,167 $17,043 $13,970 5/31/2007 $18,395 $18,307 $23,604 $16,914 $14,033 6/30/2007 $18,314 $18,003 $23,641 $16,863 $14,086 7/31/2007 $17,952 $17,445 $23,295 $17,004 $14,140 8/31/2007 $18,042 $17,706 $22,937 $17,213 $14,220 9/30/2007 $18,896 $18,368 $24,168 $17,343 $14,272 10/31/2007 $19,566 $18,661 $25,120 $17,499 $14,315 11/30/2007 $18,681 $17,880 $24,301 $17,814 $14,380 12/31/2007 $18,589 $17,756 $23,755 $17,864 $14,413
AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------------------ CLASS C 12/31/07 ------------------------------------------------------------ 1-Year +8.72% ------------------------------------------------------------ 5-Year +13.73% ------------------------------------------------------------ 10-Year +6.40% ------------------------------------------------------------ CLASS R (1/1/02-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. DATE Target Fund S&P 500 7 Index 7 Aggregate Index 7 T-Bill Index 7 -------------------------------------------------------------------------------------------------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/2002 $ 9,908 $ 9,854 $ 9,469 $10,081 $10,014 2/28/2002 $ 9,771 $ 9,664 $ 9,536 $10,179 $10,027 3/31/2002 $10,219 $10,027 $10,057 $10,009 $10,042 4/30/2002 $10,082 $ 9,420 $10,130 $10,203 $10,057 5/31/2002 $ 9,963 $ 9,350 $10,267 $10,290 $10,073 6/30/2002 $ 9,442 $ 8,684 $ 9,862 $10,379 $10,088 7/31/2002 $ 8,664 $ 8,007 $ 8,889 $10,504 $10,102 8/31/2002 $ 8,682 $ 8,060 $ 8,871 $10,682 $10,117 9/30/2002 $ 8,051 $ 7,184 $ 7,921 $10,855 $10,133 10/31/2002 $ 8,390 $ 7,816 $ 8,347 $10,805 $10,149 11/30/2002 $ 8,792 $ 8,276 $ 8,727 $10,802 $10,165 12/31/2002 $ 8,516 $ 7,790 $ 8,434 $11,025 $10,175 1/31/2003 $ 8,395 $ 7,586 $ 8,083 $11,035 $10,186 2/28/2003 $ 8,284 $ 7,472 $ 7,898 $11,188 $10,195 3/31/2003 $ 8,247 $ 7,545 $ 7,749 $11,179 $10,207 4/30/2003 $ 8,775 $ 8,166 $ 8,517 $11,271 $10,217 5/31/2003 $ 9,330 $ 8,596 $ 9,041 $11,481 $10,227 6/30/2003 $ 9,432 $ 8,706 $ 9,265 $11,459 $10,240 7/31/2003 $ 9,626 $ 8,859 $ 9,491 $11,073 $10,247 8/31/2003 $10,034 $ 9,032 $ 9,721 $11,147 $10,255 9/30/2003 $ 9,969 $ 8,936 $10,023 $11,442 $10,263 10/31/2003 $10,487 $ 9,442 $10,648 $11,335 $10,272 11/30/2003 $10,774 $ 9,525 $10,887 $11,362 $10,280 12/31/2003 $11,057 $10,024 $11,738 $11,478 $10,288 1/31/2004 $11,187 $10,208 $11,904 $11,570 $10,297 2/29/2004 $11,327 $10,350 $12,181 $11,696 $10,303 3/31/2004 $11,336 $10,194 $12,255 $11,783 $10,312 4/30/2004 $10,935 $10,034 $11,988 $11,477 $10,319 5/31/2004 $11,094 $10,172 $12,040 $11,431 $10,326 6/30/2004 $11,318 $10,370 $12,308 $11,495 $10,331 7/31/2004 $10,963 $10,026 $11,911 $11,609 $10,341 8/31/2004 $11,001 $10,067 $11,966 $11,831 $10,351 9/30/2004 $11,299 $10,176 $12,280 $11,863 $10,363 10/31/2004 $11,495 $10,332 $12,700 $11,962 $10,375 11/30/2004 $11,979 $10,750 $13,571 $11,867 $10,385 12/31/2004 $12,278 $11,115 $14,167 $11,976 $10,405 1/31/2005 $11,960 $10,844 $13,908 $12,051 $10,420 2/28/2005 $12,297 $11,073 $14,512 $11,980 $10,436 3/31/2005 $12,040 $10,877 $14,153 $11,919 $10,460 4/30/2005 $11,740 $10,670 $13,837 $12,080 $10,482 5/31/2005 $12,068 $11,010 $13,858 $12,211 $10,506 6/30/2005 $12,284 $11,025 $14,047 $12,277 $10,530 7/31/2005 $12,678 $11,435 $14,479 $12,165 $10,553 8/31/2005 $12,706 $11,331 $14,849 $12,321 $10,582 9/30/2005 $12,931 $11,423 $15,513 $12,194 $10,612 10/31/2005 $12,594 $11,232 $15,061 $12,098 $10,636 11/30/2005 $13,062 $11,657 $15,433 $12,151 $10,672 12/31/2005 $13,273 $11,661 $16,153 $12,267 $10,705 1/31/2006 $13,945 $11,970 $17,145 $12,268 $10,736 2/28/2006 $13,916 $12,003 $17,110 $12,308 $10,770 3/31/2006 $14,252 $12,152 $17,683 $12,188 $10,812 4/30/2006 $14,422 $12,315 $18,540 $12,165 $10,851 5/31/2006 $13,862 $11,961 $17,843 $12,152 $10,893 6/30/2006 $13,910 $11,977 $17,849 $12,178 $10,934 7/31/2006 $13,748 $12,051 $18,028 $12,343 $10,979 8/31/2006 $14,024 $12,338 $18,528 $12,532 $11,028 9/30/2006 $14,061 $12,655 $18,561 $12,642 $11,076 10/31/2006 $14,537 $13,068 $19,284 $12,726 $11,119 11/30/2006 $14,966 $13,316 $19,866 $12,873 $11,166 12/31/2006 $15,084 $13,503 $20,491 $12,798 $11,215 1/31/2007 $15,337 $13,707 $20,631 $12,793 $11,260 2/28/2007 $15,288 $13,439 $20,800 $12,990 $11,304 3/31/2007 $15,515 $13,590 $21,341 $12,991 $11,355 4/30/2007 $15,972 $14,192 $22,308 $13,061 $11,404 5/31/2007 $16,410 $14,687 $22,729 $12,962 $11,455 6/30/2007 $16,348 $14,443 $22,764 $12,924 $11,499 7/31/2007 $16,027 $13,995 $22,431 $13,031 $11,542 8/31/2007 $16,117 $14,205 $22,086 $13,191 $11,608 9/30/2007 $16,885 $14,736 $23,272 $13,291 $11,650 10/31/2007 $17,498 $14,970 $24,189 $13,411 $11,686 11/30/2007 $16,714 $14,344 $23,399 $13,652 $11,738 12/31/2007 $16,609 $14,245 $22,874 $13,690 $11,766
AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------------------ CLASS R 12/31/07 ------------------------------------------------------------ 1-Year +10.31% ------------------------------------------------------------ 5-Year +14.34% ------------------------------------------------------------ Since Inception (1/1/02) +8.83% ------------------------------------------------------------ Annual Report | 31 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------------------ ADVISOR CLASS 6 12/31/07 ------------------------------------------------------------ 1-Year +10.80% ------------------------------------------------------------ 5-Year +14.74% ------------------------------------------------------------ 10-Year +7.25% ------------------------------------------------------------ ADVISOR CLASS (1/1/98-12/31/07) 6 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT Growth MSCI EAFE LB U.S. P&R 90 Day U.S. DATE Target Fund S&P 500 7 Index 7 Aggregate Index 7 T-Bill Index 7 -------------------------------------------------------------------------------------------------- 1/1/1998 $10,000 $10,000 $10,000 $10,000 $10,000 1/31/1998 $ 9,963 $10,111 $10,460 $10,128 $10,050 2/28/1998 $10,424 $10,840 $11,133 $10,121 $10,089 3/31/1998 $10,783 $11,395 $11,479 $10,156 $10,139 4/30/1998 $10,848 $11,510 $11,572 $10,209 $10,185 5/31/1998 $10,599 $11,312 $11,518 $10,305 $10,229 6/30/1998 $10,571 $11,771 $11,608 $10,393 $10,271 7/31/1998 $10,286 $11,646 $11,729 $10,415 $10,316 8/31/1998 $ 9,023 $ 9,962 $10,278 $10,584 $10,365 9/30/1998 $ 9,242 $10,600 $ 9,966 $10,832 $10,419 10/31/1998 $ 9,511 $11,463 $11,007 $10,775 $10,459 11/30/1998 $ 9,780 $12,157 $11,574 $10,836 $10,493 12/31/1998 $ 9,989 $12,858 $12,033 $10,869 $10,536 1/31/1999 $10,144 $13,396 $12,001 $10,946 $10,577 2/28/1999 $ 9,931 $12,979 $11,717 $10,755 $10,611 3/31/1999 $10,222 $13,498 $12,209 $10,815 $10,656 4/30/1999 $10,629 $14,021 $12,707 $10,849 $10,696 5/31/1999 $10,503 $13,690 $12,055 $10,754 $10,736 6/30/1999 $10,814 $14,450 $12,528 $10,720 $10,776 7/31/1999 $10,688 $13,999 $12,903 $10,674 $10,821 8/31/1999 $10,746 $13,929 $12,953 $10,669 $10,862 9/30/1999 $10,740 $13,548 $13,086 $10,793 $10,910 10/31/1999 $11,308 $14,405 $13,579 $10,832 $10,953 11/30/1999 $12,325 $14,698 $14,054 $10,832 $10,997 12/31/1999 $14,101 $15,563 $15,318 $10,779 $11,047 1/31/2000 $13,867 $14,781 $14,348 $10,744 $11,090 2/29/2000 $16,046 $14,502 $14,737 $10,874 $11,140 3/31/2000 $15,585 $15,920 $15,311 $11,017 $11,196 4/30/2000 $14,535 $15,441 $14,508 $10,986 $11,253 5/31/2000 $13,954 $15,124 $14,156 $10,981 $11,314 6/30/2000 $15,103 $15,497 $14,713 $11,209 $11,362 7/31/2000 $14,807 $15,255 $14,099 $11,311 $11,415 8/31/2000 $15,971 $16,203 $14,224 $11,475 $11,474 9/30/2000 $15,459 $15,347 $13,535 $11,547 $11,537 10/31/2000 $14,647 $15,282 $13,218 $11,623 $11,595 11/30/2000 $12,881 $14,078 $12,725 $11,813 $11,659 12/31/2000 $13,377 $14,146 $13,180 $12,033 $11,726 1/31/2001 $13,988 $14,648 $13,174 $12,229 $11,803 2/28/2001 $12,724 $13,313 $12,187 $12,336 $11,850 3/31/2001 $11,966 $12,469 $11,380 $12,398 $11,910 4/30/2001 $12,798 $13,438 $12,178 $12,346 $11,959 5/31/2001 $12,840 $13,528 $11,758 $12,421 $12,005 6/30/2001 $12,606 $13,199 $11,282 $12,468 $12,040 7/31/2001 $12,299 $13,069 $11,077 $12,746 $12,080 8/31/2001 $11,803 $12,251 $10,799 $12,892 $12,120 9/30/2001 $10,524 $11,262 $ 9,708 $13,043 $12,173 10/31/2001 $11,033 $11,476 $ 9,956 $13,316 $12,205 11/30/2001 $11,584 $12,357 $10,324 $13,132 $12,231 12/31/2001 $11,861 $12,465 $10,385 $13,049 $12,250 1/31/2002 $11,753 $12,283 $ 9,834 $13,154 $12,267 2/28/2002 $11,590 $12,046 $ 9,904 $13,282 $12,283 3/31/2002 $12,133 $12,499 $10,444 $13,061 $12,302 4/30/2002 $11,959 $11,741 $10,520 $13,314 $12,320 5/31/2002 $11,829 $11,655 $10,663 $13,427 $12,340 6/30/2002 $11,199 $10,825 $10,242 $13,543 $12,358 7/31/2002 $10,277 $ 9,981 $ 9,232 $13,707 $12,375 8/31/2002 $10,310 $10,046 $ 9,213 $13,938 $12,394 9/30/2002 $ 9,572 $ 8,955 $ 8,226 $14,164 $12,413 10/31/2002 $ 9,973 $ 9,743 $ 8,669 $14,099 $12,432 11/30/2002 $10,461 $10,316 $ 9,063 $14,096 $12,452 12/31/2002 $10,124 $ 9,710 $ 8,759 $14,387 $12,465 1/31/2003 $ 9,981 $ 9,456 $ 8,394 $14,399 $12,478 2/28/2003 $ 9,850 $ 9,314 $ 8,202 $14,598 $12,489 3/31/2003 $ 9,817 $ 9,404 $ 8,047 $14,587 $12,503 4/30/2003 $10,442 $10,179 $ 8,845 $14,707 $12,516 5/31/2003 $11,111 $10,715 $ 9,389 $14,982 $12,528 6/30/2003 $11,232 $10,852 $ 9,622 $14,952 $12,544 7/31/2003 $11,473 $11,043 $ 9,856 $14,449 $12,552 8/31/2003 $11,944 $11,259 $10,096 $14,545 $12,562 9/30/2003 $11,879 $11,139 $10,409 $14,930 $12,573 10/31/2003 $12,504 $11,769 $11,059 $14,791 $12,583 11/30/2003 $12,844 $11,873 $11,306 $14,826 $12,593 12/31/2003 $13,172 $12,495 $12,190 $14,977 $12,603 1/31/2004 $13,338 $12,725 $12,363 $15,098 $12,613 2/29/2004 $13,504 $12,902 $12,651 $15,261 $12,622 3/31/2004 $13,526 $12,707 $12,727 $15,375 $12,632 4/30/2004 $13,051 $12,508 $12,450 $14,975 $12,641 5/31/2004 $13,228 $12,679 $12,503 $14,915 $12,650 6/30/2004 $13,504 $12,926 $12,783 $15,000 $12,656 7/31/2004 $13,084 $12,498 $12,369 $15,148 $12,668 8/31/2004 $13,128 $12,549 $12,427 $15,437 $12,680 9/30/2004 $13,482 $12,684 $12,753 $15,479 $12,694 10/31/2004 $13,725 $12,878 $13,189 $15,609 $12,709 11/30/2004 $14,312 $13,399 $14,094 $15,485 $12,722 12/31/2004 $14,659 $13,855 $14,713 $15,627 $12,746 1/31/2005 $14,291 $13,518 $14,444 $15,725 $12,764 2/28/2005 $14,703 $13,802 $15,071 $15,632 $12,784 3/31/2005 $14,392 $13,558 $14,698 $15,552 $12,814 4/30/2005 $14,047 $13,300 $14,369 $15,762 $12,841 5/31/2005 $14,437 $13,724 $14,391 $15,933 $12,870 6/30/2005 $14,693 $13,743 $14,588 $16,020 $12,899 7/31/2005 $15,172 $14,254 $15,036 $15,874 $12,927 8/31/2005 $15,206 $14,124 $15,421 $16,078 $12,963 9/30/2005 $15,481 $14,239 $16,111 $15,912 $13,000 10/31/2005 $15,080 $14,001 $15,641 $15,786 $13,030 11/30/2005 $15,637 $14,531 $16,028 $15,856 $13,073 12/31/2005 $15,901 $14,536 $16,775 $16,007 $13,114 1/31/2006 $16,713 $14,921 $17,806 $16,007 $13,151 2/28/2006 $16,691 $14,961 $17,769 $16,061 $13,193 3/31/2006 $17,092 $15,147 $18,364 $15,903 $13,245 4/30/2006 $17,307 $15,351 $19,254 $15,874 $13,293 5/31/2006 $16,639 $14,909 $18,530 $15,857 $13,344 6/30/2006 $16,707 $14,929 $18,537 $15,891 $13,395 7/31/2006 $16,515 $15,021 $18,722 $16,106 $13,449 8/31/2006 $16,854 $15,379 $19,242 $16,352 $13,509 9/30/2006 $16,908 $15,775 $19,276 $16,496 $13,568 10/31/2006 $17,488 $16,289 $20,027 $16,605 $13,621 11/30/2006 $18,010 $16,599 $20,631 $16,798 $13,679 12/31/2006 $18,169 $16,832 $21,280 $16,700 $13,738 1/31/2007 $18,482 $17,086 $21,426 $16,693 $13,793 2/28/2007 $18,424 $16,752 $21,602 $16,951 $13,847 3/31/2007 $18,696 $16,939 $22,163 $16,951 $13,910 4/30/2007 $19,265 $17,690 $23,167 $17,043 $13,970 5/31/2007 $19,800 $18,307 $23,604 $16,914 $14,033 6/30/2007 $19,738 $18,003 $23,641 $16,863 $14,086 7/31/2007 $19,354 $17,445 $23,295 $17,004 $14,140 8/31/2007 $19,462 $17,706 $22,937 $17,213 $14,220 9/30/2007 $20,404 $18,368 $24,168 $17,343 $14,272 10/31/2007 $21,151 $18,661 $25,120 $17,499 $14,315 11/30/2007 $20,212 $17,880 $24,301 $17,814 $14,380 12/31/2007 $20,130 $17,756 $23,755 $17,864 $14,413
ENDNOTES BECAUSE THE FUND INVESTS IN VARIOUS UNDERLYING FUNDS THAT 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. If the manager had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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 +27.28% and +12.28%. 7. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,019.10 $2.49 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.74 $2.50 ------------------------------------------------------------------------------------------------------------------ CLASS B ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,014.80 $6.30 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.31 ------------------------------------------------------------------------------------------------------------------ CLASS C ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,015.00 $6.30 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.31 ------------------------------------------------------------------------------------------------------------------ CLASS R ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,017.80 $3.76 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.48 $3.77 ------------------------------------------------------------------------------------------------------------------ ADVISOR CLASS ------------------------------------------------------------------------------------------------------------------ Actual $1,000 $1,019.90 $1.22 ------------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,024.00 $1.22 ------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.49%; B: 1.24%; C: 1.24%; R: 0.74%; and Advisor: 0.24%), 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS A 2007 2006 2005 2004 h 2004 2003 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................... $ 13.33 $ 12.74 $ 12.48 $ 11.66 $ 10.91 $ 10.23 ------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c .......................... 0.48 0.41 0.29 0.12 0.23 0.23 Net realized and unrealized gains (losses) ......... 0.60 0.84 0.29 0.84 0.74 0.69 ------------------------------------------------------------------------- Total from investment operations ...................... 1.08 1.25 0.58 0.96 0.97 0.92 ------------------------------------------------------------------------- Less distributions from: Net investment income .............................. (0.47) (0.42) (0.32) (0.14) (0.22) (0.24) Net realized gains ................................. (0.35) (0.24) -- -- -- -- ------------------------------------------------------------------------- Total distributions ................................... (0.82) (0.66) (0.32) (0.14) (0.22) (0.24) ------------------------------------------------------------------------- Redemption fees ....................................... -- g -- g -- g -- g -- g -- ------------------------------------------------------------------------- Net asset value, end of year .......................... $ 13.59 $ 13.33 $ 12.74 $ 12.48 $ 11.66 $ 10.91 ========================================================================= Total return d ........................................ 8.29% 9.92% 4.70% 8.30% 8.89% 8.99% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ... 0.68% 0.69% 0.73% 0.82% 0.85% 0.91% Expenses net of waiver and payments by affiliates f ... 0.49% 0.50% 0.69% 0.82% 0.85% 0.91% Net investment income c ............................... 3.52% 3.09% 2.31% 2.40% 2.00% 2.21% SUPPLEMENTAL DATA Net assets, end of year (000's) ....................... $251,570 $194,477 $162,079 $139,153 $117,013 $64,409 Portfolio turnover rate ............................... 8.11% 11.08% 8.16% 2.63% 3.71% 18.03%
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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 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 CONSERVATIVE TARGET FUND
-------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS B 2007 2006 2005 2004 h 2004 i -------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 13.29 $ 12.71 $ 12.46 $ 11.63 $ 11.67 Income from investment operations a: Net investment income b,c ........................... 0.36 0.30 0.19 0.09 0.07 Net realized and unrealized gains (losses) .......... 0.61 0.84 0.29 0.84 0.04 -------------------------------------------------------------- Total from investment operations ....................... 0.97 1.14 0.48 0.93 0.11 -------------------------------------------------------------- Less distributions from: Net investment income ............................... (0.36) (0.32) (0.23) (0.10) (0.15) Net realized gains .................................. (0.35) (0.24) -- -- -- -------------------------------------------------------------- Total distributions .................................... (0.71) (0.56) (0.23) (0.10) (0.15) -------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g -------------------------------------------------------------- Net asset value, end of year ........................... $ 13.55 $ 13.29 $ 12.71 $ 12.46 $ 11.63 ============================================================== Total return d ......................................... 7.42% 9.05% 3.87% 8.02% 0.98% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 1.43% 1.44% 1.48% 1.57% 1.60% Expenses net of waiver and payments by affiliates f .... 1.24% 1.25% 1.44% 1.57% 1.60% Net investment income c 2.77% 2.34% 1.56% 1.65% 1.25% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 6,497 $ 6,422 $ 6,202 $ 5,223 $ 3,567 Portfolio turnover rate ................................ 8.11% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS C 2007 2006 2005 2004 h 2004 2003 ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 13.18 $ 12.60 $ 12.36 $ 11.53 $ 10.80 $ 10.14 ---------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ........................... 0.38 0.30 0.19 0.08 0.14 0.15 Net realized and unrealized gains (losses) .......... 0.58 0.85 0.28 0.84 0.73 0.67 ---------------------------------------------------------------------- Total from investment operations ....................... 0.96 1.15 0.47 0.92 0.87 0.82 ---------------------------------------------------------------------- Less distributions from: Net investment income ............................... (0.37) (0.33) (0.23) (0.09) (0.14) (0.16) Net realized gains .................................. (0.35) (0.24) -- -- -- -- ---------------------------------------------------------------------- Total distributions .................................... (0.72) (0.57) (0.23) (0.09) (0.14) (0.16) ---------------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g -- ---------------------------------------------------------------------- Net asset value, end of year ........................... $ 13.42 $ 13.18 $ 12.60 $ 12.36 $ 11.53 $ 10.80 ====================================================================== Total return d ......................................... 7.48% 9.16% 3.83% 8.03% 8.04% 8.20% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 1.43% 1.43% 1.47% 1.57% 1.60% 1.66% Expenses net of waiver and payments by affiliates f .... 1.24% 1.24% 1.43% 1.57% 1.60% 1.66% Net investment income c ................................ 2.77% 2.35% 1.57% 1.65% 1.25% 1.46% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 110,914 $ 76,018 $ 63,298 $ 59,803 $ 52,881 $ 32,344 Portfolio turnover rate ................................ 8.11% 11.08% 8.16% 2.63% 3.71% 18.03%
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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS R 2007 2006 2005 2004 h 2004 2003 ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 13.30 $ 12.71 $ 12.46 $ 11.63 $ 10.89 $ 10.23 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ........................... 0.47 0.37 0.26 0.11 0.21 0.19 Net realized and unrealized gains (losses) .......... 0.57 0.85 0.28 0.85 0.72 0.69 ------------------------------------------------------------------- Total from investment operations ....................... 1.04 1.22 0.54 0.96 0.93 0.88 ------------------------------------------------------------------- Less distributions from: Net investment income ............................... (0.44) (0.39) (0.29) (0.13) (0.19) (0.22) Net realized gains .................................. (0.35) (0.24) -- -- -- -- ------------------------------------------------------------------- Total distributions .................................... (0.79) (0.63) (0.29) (0.13) (0.19) (0.22) ------------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g -- ------------------------------------------------------------------- Net asset value, end of year ........................... $ 13.55 $ 13.30 $ 12.71 $ 12.46 $ 11.63 $ 10.89 =================================================================== Total return d ......................................... 7.91% 9.73% 4.37% 8.27% 8.56% 8.79% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 0.93% 0.94% 0.98% 1.07% 1.10% 1.16% Expenses net of waiver and payments by affiliates f .... 0.74% 0.75% 0.94% 1.07% 1.10% 1.16% Net investment income c ................................ 3.27% 2.84% 2.06% 2.15% 1.75% 1.96% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 25,476 $ 14,490 $ 14,112 $ 12,199 $ 8,370 $ 5,718 Portfolio turnover rate ................................ 8.11% 11.08% 8.16% 2.63% 3.71% 18.03%
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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 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 CONSERVATIVE TARGET FUND
------------------------------------- YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, 2007 2006 2005 h ------------------------------------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................................... $ 13.31 $ 12.72 $ 12.81 ------------------------------------- Income from investment operations a: Net investment income b,c ............................................ 0.53 0.45 0.07 Net realized and unrealized gains (losses) ........................... 0.58 0.83 0.02 ------------------------------------- Total from investment operations ........................................ 1.11 1.28 0.09 ------------------------------------- Less distributions from: Net investment income ................................................ (0.50) (0.45) (0.18) Net realized gains ................................................... (0.35) (0.24) -- ------------------------------------- Total distributions ..................................................... (0.85) (0.69) (0.18) ------------------------------------- Redemption fees ......................................................... -- g -- g -- g ------------------------------------- Net asset value, end of year ............................................ $ 13.57 $ 13.31 $ 12.72 ===================================== Total return d .......................................................... 8.48% 10.28% 0.68% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ..................... 0.43% 0.44% 0.48% Expenses net of waiver and payments by affiliates f ..................... 0.24% 0.25% 0.44% Net investment income c ................................................. 3.77% 3.34% 2.56% SUPPLEMENTAL DATA Net assets, end of year (000's) ......................................... $ 3,536 $ 1,726 $ 753 Portfolio turnover rate ................................................. 8.11% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period December 1, 2005 (effective date) to December 31, 2005. Annual Report | The accompanying notes are an integral part of these financial statements. | 39 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
----------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND SHARES VALUE ----------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 79.6% DOMESTIC EQUITY 27.8% Franklin Flex Cap Growth Fund, Advisor Class ............................ 622,639 $ 30,409,676 b Franklin Growth Opportunities Fund, Advisor Class ....................... 377,038 8,272,207 Franklin MicroCap Value Fund, Advisor Class ............................. 86,572 2,951,241 Franklin Natural Resources Fund, Advisor Class .......................... 169,017 7,634,510 b Franklin Small Cap Growth Fund II, Advisor Class ........................ 2,442,447 25,938,790 Mutual Shares Fund, Class Z ............................................. 1,397,240 35,406,064 -------------- 110,612,488 -------------- DOMESTIC FIXED INCOME 26.5% Franklin Strategic Mortgage Portfolio ................................... 2,045,071 18,670,896 Franklin Total Return Fund, Advisor Class ............................... 3,934,671 37,671,193 Franklin U.S. Government Securities Fund, Advisor Class ................. 7,565,765 49,253,139 -------------- 105,595,228 -------------- FOREIGN EQUITY 12.6% Franklin Global Real Estate Fund, Advisor Class ......................... 682,477 6,783,826 Franklin Gold and Precious Metals Fund, Advisor Class ................... 192,341 7,207,001 Mutual European Fund, Class Z ........................................... 659,914 17,368,933 Templeton China World Fund, Advisor Class ............................... 203,073 8,953,469 Templeton Foreign Fund, Advisor Class ................................... 769,573 9,588,882 -------------- 49,902,111 -------------- FOREIGN FIXED INCOME 12.7% Templeton Global Bond Fund, Advisor Class ............................... 4,428,668 50,486,812 -------------- TOTAL LONG TERM INVESTMENTS (COST $281,931,805) ......................... 316,596,639 -------------- SHORT TERM INVESTMENT (COST $80,430,045) 20.2% MONEY MARKET FUND 20.2% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% .... 80,430,045 80,430,045 -------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $362,361,850) 99.8% ......... 397,026,684 OTHER ASSETS, LESS LIABILITIES 0.2% ..................................... 966,169 -------------- NET ASSETS 100.0% ....................................................... $ 397,992,853 ==============
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2007. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS A 2007 2006 2005 2004 h 2004 2003 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 14.03 $ 13.14 $ 12.69 $ 11.65 $ 10.64 $ 9.83 --------------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ......................... 0.43 0.35 0.25 0.12 0.20 0.19 Net realized and unrealized gains (losses) ........ 0.87 1.15 0.50 1.05 1.00 0.81 --------------------------------------------------------------------------- Total from investment operations ..................... 1.30 1.50 0.75 1.17 1.20 1.00 --------------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.43) (0.38) (0.30) (0.13) (0.19) (0.19) Net realized gains ................................ (0.55) (0.23) -- -- -- -- --------------------------------------------------------------------------- Total distributions .................................. (0.98) (0.61) (0.30) (0.13) (0.19) (0.19) --------------------------------------------------------------------------- Redemption fees ...................................... -- g -- g -- g -- g -- g -- --------------------------------------------------------------------------- Net asset value, end of year ......................... $ 14.35 $ 14.03 $ 13.14 $ 12.69 $ 11.65 $ 10.64 =========================================================================== Total return d ....................................... 9.40% 11.57% 5.94% 10.14% 11.18% 10.47% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .. 0.68% 0.70% 0.74% 0.81% 0.89% 0.98% Expenses net of waiver and payments by affiliates f .. 0.50% 0.50% 0.69% 0.81% 0.89% 0.98% Net investment income c .............................. 2.92% 2.56% 1.93% 2.32% 1.75% 1.89% SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $ 491,451 $ 401,392 $ 316,754 $ 281,033 $ 219,273 $ 121,617 Portfolio turnover rate .............................. 10.29% 9.40% 10.59% 2.78% 4.13% 15.90%
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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 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 MODERATE TARGET FUND
------------------------------------------------------------ PERIOD ENDED YEAR ENDED DECEMBER 31, JULY 31, CLASS B 2007 2006 2005 2004 h 2004 i ------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................ $ 13.99 $ 13.10 $ 12.66 $ 11.62 $ 11.62 ------------------------------------------------------------ Income from investment operations a: Net investment income b,c .................................. 0.31 0.24 0.15 0.09 0.05 Net realized and unrealized gains (losses) ................. 0.88 1.15 0.50 1.03 0.09 ------------------------------------------------------------ Total from investment operations .............................. 1.19 1.39 0.65 1.12 0.14 ------------------------------------------------------------ Less distributions from: Net investment income ...................................... (0.32) (0.27) (0.21) (0.08) (0.14) Net realized gains ......................................... (0.55) (0.23) -- -- -- ------------------------------------------------------------ Total distributions ........................................... (0.87) (0.50) (0.21) (0.08) (0.14) Redemption fees ............................................... -- g -- g -- g -- g -- g ------------------------------------------------------------ Net asset value, end of year .................................. $ 14.31 $ 13.99 $ 13.10 $ 12.66 $ 11.62 ============================================================ Total return d ................................................ 8.61% 10.70% 5.18% 9.77% 1.18% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ........... 1.43% 1.45% 1.49% 1.56% 1.64% Expenses net of waiver and payments by affiliates f ........... 1.25% 1.25% 1.44% 1.56% 1.64% Net investment income c ....................................... 2.17% 1.81% 1.18% 1.57% 1.00% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................... $ 12,445 $ 11,533 $ 10,170 $ 8,700 $ 5,417 Portfolio turnover rate ....................................... 10.29% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS C 2007 2006 2005 2004 h 2004 2003 -------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 13.81 $ 12.94 $ 12.50 $ 11.47 $ 10.48 $ 9.69 -------------------------------------------------------------------- Income from investment operations a: Net investment income b,c .............................. 0.31 0.24 0.15 0.08 0.12 0.11 Net realized and unrealized gains (losses) ............. 0.87 1.13 0.50 1.03 0.98 0.80 -------------------------------------------------------------------- Total from investment operations .......................... 1.18 1.37 0.65 1.11 1.10 0.91 -------------------------------------------------------------------- Less distributions from: Net investment income .................................. (0.33) (0.27) (0.21) (0.08) (0.11) (0.12) Net realized gains ..................................... (0.55) (0.23) -- -- -- -- -------------------------------------------------------------------- Total distributions ....................................... (0.88) (0.50) (0.21) (0.08) (0.11) (0.12) -------------------------------------------------------------------- Redemption fees ........................................... -- g -- g -- g -- g -- g -- -------------------------------------------------------------------- Net asset value, end of year .............................. $ 14.11 $ 13.81 $ 12.94 $ 12.50 $ 11.47 $ 10.48 ==================================================================== Total return d ............................................ 8.61% 10.72% 5.25% 9.75% 10.39% 9.50% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ....... 1.43% 1.45% 1.48% 1.56% 1.64% 1.73% Expenses net of waiver and payments by affiliates f ....... 1.25% 1.25% 1.43% 1.56% 1.64% 1.73% Net investment income c ................................... 2.17% 1.81% 1.19% 1.57% 1.00% 1.14% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $ 160,563 $ 134,465 $ 112,294 $ 105,966 $ 90,988 $ 56,341 Portfolio turnover rate ................................... 10.29% 9.40% 10.59% 2.78% 4.13% 15.90%
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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS R 2007 2006 2005 2004 h 2004 2003 --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 14.00 $ 13.11 $ 12.66 $ 11.62 $ 10.62 $ 9.82 --------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ............................ 0.39 0.31 0.21 0.11 0.18 0.13 Net realized and unrealized gains (losses) ........... 0.88 1.15 0.51 1.04 0.98 0.85 --------------------------------------------------------------------- Total from investment operations ........................ 1.27 1.46 0.72 1.15 1.16 0.98 --------------------------------------------------------------------- Less distributions from: Net investment income ................................ (0.40) (0.34) (0.27) (0.11) (0.16) (0.18) Net realized gains ................................... (0.55) (0.23) -- -- -- -- --------------------------------------------------------------------- Total distributions ..................................... (0.95) (0.57) (0.27) (0.11) (0.16) (0.18) --------------------------------------------------------------------- Redemption fees ......................................... -- g -- g -- g -- g -- g -- --------------------------------------------------------------------- Net asset value, end of year ............................ $ 14.32 $ 14.00 $ 13.11 $ 12.66 $ 11.62 $ 10.62 ===================================================================== Total return d .......................................... 9.16% 11.27% 5.73% 9.92% 10.95% 10.10% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ..... 0.93% 0.95% 0.99% 1.06% 1.14% 1.23% Expenses net of waiver and payments by affiliates f ..... 0.75% 0.75% 0.94% 1.06% 1.14% 1.23% Net investment income c ................................. 2.67% 2.31% 1.68% 2.07% 1.50% 1.64% SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $ 40,102 $ 31,719 $ 30,403 $ 25,162 $ 17,161 $ 10,989 Portfolio turnover rate ................................. 10.29% 9.40% 10.59% 2.78% 4.13% 15.90%
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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 h ----------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 14.03 $ 13.15 $ 13.23 ----------------------------------- Income from investment operations a: Net investment income b,c ............................ 0.46 0.40 0.08 Net realized and unrealized gains (losses) ........... 0.88 1.13 0.02 ----------------------------------- Total from investment operations ........................ 1.34 1.53 0.10 ----------------------------------- Less distributions from: Net investment income ................................ (0.47) (0.42) (0.18) Net realized gains ................................... (0.55) (0.23) -- ----------------------------------- Total distributions ..................................... (1.02) (0.65) (0.18) ----------------------------------- Redemption fees ......................................... -- g -- g -- g ----------------------------------- Net asset value, end of year ............................ $ 14.35 $ 14.03 $ 13.15 =================================== Total return d .......................................... 9.66% 11.87% 0.68% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ..... 0.43% 0.45% 0.49% Expenses net of waiver and payments by affiliates f ..... 0.25% 0.25% 0.44% Net investment income c ................................. 3.17% 2.81% 2.18% SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $ 9,699 $ 7,071 $ 3,890 Portfolio turnover rate ................................. 10.29% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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, 2007. g Amount rounds to less than $0.01 per share. h For the period December 1, 2005 (effective date) to December 31, 2005. Annual Report | The accompanying notes are an integral part of these financial statements. | 45 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
-------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON MODERATE TARGET FUND SHARES VALUE -------------------------------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 89.7% DOMESTIC EQUITY 37.4% Franklin Flex Cap Growth Fund, Advisor Class ................................................ 1,488,359 $ 72,691,433 b Franklin Growth Opportunities Fund, Advisor Class ........................................... 1,036,014 22,730,159 Franklin MicroCap Value Fund, Advisor Class ................................................. 208,053 7,092,525 Franklin Natural Resources Fund, Advisor Class .............................................. 400,354 18,083,972 b Franklin Small Cap Growth Fund II, Advisor Class ............................................ 5,879,464 62,439,911 Mutual Shares Fund, Class Z ................................................................. 3,308,206 83,829,932 ------------- 266,867,932 ------------- DOMESTIC FIXED INCOME 23.9% Franklin Strategic Mortgage Portfolio ....................................................... 3,169,682 30,016,887 Franklin Total Return Fund, Advisor Class ................................................... 6,135,118 60,921,725 Franklin U.S. Government Securities Fund, Advisor Class ..................................... 12,192,915 79,375,877 ------------- 170,314,489 ------------- FOREIGN EQUITY 17.1% Franklin Global Real Estate Fund, Advisor Class ............................................. 1,576,353 15,668,950 Franklin Gold and Precious Metals Fund, Advisor Class ....................................... 477,567 17,894,441 Mutual European Fund, Class Z ............................................................... 1,649,041 43,402,774 Templeton China World Fund, Advisor Class ................................................... 491,170 21,655,690 Templeton Foreign Fund, Advisor Class ....................................................... 1,899,703 23,670,298 ------------- 122,292,153 ------------- FOREIGN FIXED INCOME 11.3% Templeton Global Bond Fund, Advisor Class ................................................... 7,107,970 81,030,853 ------------- TOTAL LONG TERM INVESTMENTS (COST $552,490,572) ............................................. 640,505,427 ------------- SHORT TERM INVESTMENT (COST $72,494,942) 10.1% MONEY MARKET FUND 10.1% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ........................ 72,494,942 72,494,942 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $624,985,514) 99.8% ............................. 713,000,369 OTHER ASSETS, LESS LIABILITIES 0.2% ......................................................... 1,258,682 ------------- NET ASSETS 100.0% ........................................................................... $ 714,259,051 =============
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2007. c The rate shown is the annualized seven-day yield at period end. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS A 2007 2006 2005 2004 h 2004 2003 ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 15.63 $ 14.10 $ 13.17 $ 11.83 $ 10.46 $ 9.47 ---------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ............................ 0.32 0.24 0.14 0.09 0.11 0.08 Net realized and unrealized gains (losses) ........... 1.31 1.73 0.96 1.33 1.36 1.01 ---------------------------------------------------------------------- Total from investment operations ........................ 1.63 1.97 1.10 1.42 1.47 1.09 ---------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ....................... (0.32) (0.32) (0.17) (0.08) (0.10) (0.10) Net realized gains ................................... (0.77) (0.12) -- -- -- -- ---------------------------------------------------------------------- Total distributions ..................................... (1.09) (0.44) (0.17) (0.08) (0.10) (0.10) ---------------------------------------------------------------------- Redemption fees ......................................... -- g -- g -- g -- g -- g -- ---------------------------------------------------------------------- Net asset value, end of year ............................ $ 16.17 $ 15.63 $ 14.10 $ 13.17 $ 11.83 $ 10.46 ====================================================================== Total return d .......................................... 10.58% 13.90% 8.47% 12.04% 14.04% 11.64% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ..... 0.74% 0.75% 0.79% 0.85% 0.83% 0.92% Expenses net of waiver and payments by affiliates f ..... 0.50% 0.50% 0.72% 0.85% 0.83% 0.92% Net investment income c ................................. 1.93% 1.59% 1.07% 1.72% 0.91% 0.84% SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $394,689 $319,521 $230,686 $202,560 $165,500 $99,432 Portfolio turnover rate ................................. 10.36% 9.31% 10.50% 3.98% 3.46% 21.87%
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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.83% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i --------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $ 15.45 $ 13.97 $ 13.09 $ 11.75 $ 11.80 --------------------------------------------------------- Income from investment operations a: Net investment income (loss) b,c .............................. 0.17 0.12 0.04 0.06 (0.02) Net realized and unrealized gains (losses) .................... 1.31 1.72 0.96 1.32 0.09 --------------------------------------------------------- Total from investment operations ................................. 1.48 1.84 1.00 1.38 0.07 --------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................................ (0.25) (0.24) (0.12) (0.04) (0.12) Net realized gains ............................................ (0.77) (0.12) -- -- -- --------------------------------------------------------- Total distributions .............................................. (1.02) (0.36) (0.12) (0.04) (0.12) --------------------------------------------------------- Redemption fees .................................................. -- g -- g -- g -- g -- g --------------------------------------------------------- Net asset value, end of year ..................................... $ 15.91 $ 15.45 $ 13.97 $ 13.09 $ 11.75 ========================================================= Total return d ................................................... 9.76% 13.06% 7.63% 11.76% 0.56% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .............. 1.49% 1.50% 1.54% 1.60% 1.58% Expenses net of waiver and payments by affiliates f .............. 1.25% 1.25% 1.47% 1.60% 1.58% Net investment income c .......................................... 1.18% 0.84% 0.32% 0.97% 0.16% SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $ 8,292 $ 8,195 $ 6,468 $ 5,343 $ 3,178 Portfolio turnover rate .......................................... 10.36% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.83% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS C 2007 2006 2005 2004 h 2004 2003 ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................ $ 15.44 $ 13.97 $ 13.09 $ 11.72 $ 10.38 $ 9.40 ---------------------------------------------------------------------- Income from investment operations a: Net investment income b,c .............................. 0.19 0.13 0.04 0.05 0.02 0.01 Net realized and unrealized gains (losses) ............. 1.29 1.70 0.96 1.32 1.35 1.00 ---------------------------------------------------------------------- Total from investment operations .......................... 1.48 1.83 1.00 1.37 1.37 1.01 ---------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................................ (0.25) (0.24) (0.12) -- (0.03) (0.03) Net realized gains ..................................... (0.77) (0.12) -- -- -- -- ---------------------------------------------------------------------- Total distributions ....................................... (1.02) (0.36) (0.12) -- (0.03) (0.03) ---------------------------------------------------------------------- Redemption fees ........................................... -- g -- g -- g -- g -- g -- ---------------------------------------------------------------------- Net asset value, end of year .............................. $ 15.90 $ 15.44 $ 13.97 $ 13.09 $ 11.72 $ 10.38 ====================================================================== Total return d ............................................ 9.72% 13.08% 7.63% 11.69% 13.18% 10.74% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ....... 1.49% 1.50% 1.54% 1.60% 1.58% 1.67% Expenses net of waiver and payments by affiliates f ....... 1.25% 1.25% 1.47% 1.60% 1.58% 1.67% Net investment income c ................................... 1.18% 0.84% 0.32% 0.97% 0.16% 0.09% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................... $ 145,218 $ 122,156 $ 88,986 $ 73,816 $ 61,179 $ 40,829 Portfolio turnover rate ................................... 10.36% 9.31% 10.50% 3.98% 3.46% 21.87%
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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.83% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 YEAR ENDED DECEMBER 31, JULY 31, CLASS R 2007 2006 2005 2004 h 2004 2003 ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 15.52 $ 14.02 $ 13.11 $ 11.76 $ 10.40 $ 9.46 ---------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ............................ 0.29 0.20 0.11 0.08 0.08 0.05 Net realized and unrealized gains (losses) ........... 1.28 1.71 0.95 1.33 1.36 1.00 ---------------------------------------------------------------------- Total from investment operations ........................ 1.57 1.91 1.06 1.41 1.44 1.05 ---------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds .............................. (0.30) (0.29) (0.15) (0.06) (0.08) (0.11) Net realized gains ................................... (0.77) (0.12) -- -- -- -- ---------------------------------------------------------------------- Total distributions ..................................... (1.07) (0.41) (0.15) (0.06) (0.08) (0.11) ---------------------------------------------------------------------- Redemption fees ......................................... -- g -- g -- g -- g -- g -- ---------------------------------------------------------------------- Net asset value, end of year ............................ $ 16.02 $ 15.52 $ 14.02 $ 13.11 $ 11.76 $ 10.40 ====================================================================== Total return d .......................................... 10.31% 13.65% 8.10% 12.00% 13.89% 11.11% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ..... 0.99% 1.00% 1.04% 1.10% 1.08% 1.17% Expenses net of waiver and payments by affiliates f ..... 0.75% 0.75% 0.97% 1.10% 1.08% 1.17% Net investment income c ................................. 1.68% 1.34% 0.82% 1.47% 0.66% 0.59% SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $ 36,757 $ 26,215 $ 19,461 $ 15,206 $ 11,714 $ 5,567 Portfolio turnover rate ................................. 10.36% 9.31% 10.50% 3.98% 3.46% 21.87%
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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.83% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 h ------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................................ $ 15.64 $ 14.10 $ 14.18 ------------------------------------ Income from investment operations a: Net investment income b,c ...................................................... 0.38 0.29 0.11 Net realized and unrealized gains (losses) ..................................... 1.29 1.72 (0.03) ------------------------------------ Total from investment operations .................................................. 1.67 2.01 0.08 ------------------------------------ Less distributions from: Net investment income and short term gains received from Underlying Funds ...... (0.35) (0.35) (0.16) Net realized gains ............................................................. (0.77) (0.12) -- ------------------------------------ Total distributions ............................................................... (1.12) (0.47) (0.16) ------------------------------------ Redemption fees ................................................................... -- g -- g -- g ------------------------------------ Net asset value, end of year ...................................................... $ 16.19 $ 15.64 $ 14.10 ==================================== Total return d .................................................................... 10.80% 14.26% 0.54% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................... 0.49% 0.50% 0.54% Expenses net of waiver and payments by affiliates f ............................... 0.25% 0.25% 0.47% Net investment income c ........................................................... 2.18% 1.84% 1.32% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................... $ 9,917 $ 5,593 $ 3,320 Portfolio turnover rate ........................................................... 10.36% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.83% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period December 1, 2005 (effective date) to December 31, 2005. Annual Report | The accompanying notes are an integral part of these financial statements. | 51 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
----------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND SHARES VALUE ----------------------------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 95.3% DOMESTIC EQUITY 55.2% Franklin Flex Cap Growth Fund, Advisor Class ................................................. 1,818,274 $ 88,804,513 b Franklin Growth Opportunities Fund, Advisor Class ............................................ 1,193,225 26,179,348 Franklin MicroCap Value Fund, Advisor Class .................................................. 254,883 8,688,951 Franklin Natural Resources Fund, Advisor Class ............................................... 515,560 23,287,836 b Franklin Small Cap Growth Fund II, Advisor Class ............................................. 7,362,051 78,184,980 Mutual Shares Fund, Class Z .................................................................. 4,071,721 103,177,402 ------------- 328,323,030 ------------- DOMESTIC FIXED INCOME 10.7% Franklin Strategic Mortgage Portfolio ........................................................ 1,192,710 11,294,966 Franklin Total Return Fund, Advisor Class .................................................... 2,243,926 22,282,190 Franklin U.S. Government Securities Fund, Advisor Class ...................................... 4,603,454 29,968,483 ------------- 63,545,639 ------------- FOREIGN EQUITY 24.4% Franklin Global Real Estate Fund, Advisor Class .............................................. 1,903,708 18,922,856 Franklin Gold and Precious Metals Fund, Advisor Class ........................................ 550,072 20,611,207 Mutual European Fund, Class Z ................................................................ 1,953,937 51,427,635 Templeton China World Fund, Advisor Class .................................................... 587,303 25,894,198 Templeton Foreign Fund, Advisor Class ........................................................ 2,278,374 28,388,539 ------------- 145,244,435 ------------- FOREIGN FIXED INCOME 5.0% Templeton Global Bond Fund, Advisor Class .................................................... 2,625,284 29,928,238 ------------- TOTAL LONG TERM INVESTMENTS (COST $477,412,345) .............................................. 567,041,342 ------------- SHORT TERM INVESTMENT (COST $30,738,945) 5.2% MONEY MARKET FUND 5.2% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ......................... 30,738,945 30,738,945 ------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $508,151,290) 100.5% ............................. 597,780,287 OTHER ASSETS, LESS LIABILITIES (0.5)% ........................................................ (2,906,685) ------------- NET ASSETS 100.0% ............................................................................ $ 594,873,602 =============
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2007. c 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, 2007
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------ Assets: Investments in Underlying Funds (Note 6): Cost ................................................................. $362,361,850 $624,985,514 $508,151,290 ================================================ Value ................................................................ $397,026,684 $713,000,369 $597,780,287 Receivables on capital shares sold ......................................... 2,613,686 4,142,470 1,533,826 ------------------------------------------------ Total assets ...................................................... 399,640,370 717,142,839 599,314,113 ------------------------------------------------ Liabilities: Payables: Capital shares redeemed .............................................. 1,224,536 2,101,136 3,844,071 Affiliates ........................................................... 270,455 528,919 359,829 Unaffiliated transfer agent fees ..................................... 120,605 209,469 192,288 Accrued expenses and other liabilities .................................. 31,921 44,264 44,323 ------------------------------------------------ Total liabilities ................................................. 1,647,517 2,883,788 4,440,511 ------------------------------------------------ Net assets, at value .......................................... $397,992,853 $714,259,051 $594,873,602 ================================================ Net assets consist of: Paid-in capital ......................................................... $354,683,062 $605,553,109 $479,940,480 Undistributed net investment income ..................................... 221,449 431,170 348,055 Net unrealized appreciation (depreciation) .............................. 34,664,834 88,014,855 89,628,997 Accumulated net realized gain (loss) .................................... 8,423,508 20,259,917 24,956,070 ------------------------------------------------ Net assets, at value .......................................... $397,992,853 $714,259,051 $594,873,602 ================================================
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, 2007
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------ CLASS A: Net assets, at value .................................................... $251,570,256 $491,450,854 $394,689,060 ================================================ Shares outstanding ...................................................... 18,516,432 34,236,463 24,415,615 ================================================ Net asset value per share a ............................................. $ 13.59 $ 14.35 $ 16.17 ================================================ Maximum offering price per share (net asset value per share / 94.25%) ... $ 14.42 $ 15.23 $ 17.16 ================================================ CLASS B: Net assets, at value .................................................... $ 6,496,757 $ 12,444,515 $ 8,292,020 ================================================ Shares outstanding ...................................................... 479,631 869,651 521,292 ================================================ Net asset value and maximum offering price per share a .................. $ 13.55 $ 14.31 $ 15.91 ================================================ CLASS C: Net assets, at value .................................................... $110,913,830 $160,563,190 $145,218,123 ================================================ Shares outstanding ...................................................... 8,266,316 11,382,000 9,133,785 ================================================ Net asset value and maximum offering price per share a .................. $ 13.42 $ 14.11 $ 15.90 ================================================ CLASS R: Net assets, at value .................................................... $ 25,475,664 $ 40,101,680 $ 36,757,079 ================================================ Shares outstanding ...................................................... 1,879,630 2,799,972 2,293,785 ================================================ Net asset value and maximum offering price per share a .................. $ 13.55 $ 14.32 $ 16.02 ================================================ ADVISOR CLASS: Net assets, at value .................................................... $ 3,536,346 $ 9,698,812 $ 9,917,320 ================================================ Shares outstanding ...................................................... 260,555 675,647 612,689 ================================================ Net asset value and maximum offering price per share .................... $ 13.57 $ 14.35 $ 16.19 ================================================
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, 2007
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------ Investment income: Dividends from Underlying Funds (Note 6) ................................ $ 13,489,713 $ 22,044,564 $ 13,176,249 ------------------------------------------------ Expenses: Asset allocation fees (Note 3a) ......................................... 670,528 1,452,092 1,287,415 Distribution fees: (Note 3c) Class A .............................................................. 545,250 1,105,821 901,577 Class B .............................................................. 64,063 117,919 83,563 Class C .............................................................. 902,315 1,474,745 1,351,870 Class R .............................................................. 90,753 179,995 157,712 Transfer agent fees (Note 3e) ........................................... 584,252 1,124,498 1,170,654 Reports to shareholders ................................................. 29,385 51,294 67,698 Registration and filing fees ............................................ 105,750 114,796 112,196 Professional fees ....................................................... 25,981 29,692 28,395 Trustees' fees and expenses ............................................. 1,505 2,925 2,459 Other ................................................................... 10,680 16,058 14,564 ------------------------------------------------ Total expenses .................................................... 3,030,462 5,669,835 5,178,103 Expenses waived/paid by affiliates (Note 3f) ...................... (607,423) (1,186,267) (1,344,539) ------------------------------------------------ Net expenses .................................................. 2,423,039 4,483,568 3,833,564 ------------------------------------------------ Net investment income ...................................... 11,066,674 17,560,996 9,342,685 ------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Sale of investments in Underlying Funds .............................. 2,250,342 6,510,400 4,373,363 Realized gain distributions by Underlying Funds ...................... 10,429,405 25,730,557 31,624,623 ------------------------------------------------ Net realized gain (loss) ................................... 12,679,747 32,240,957 35,997,986 ------------------------------------------------ Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ..................................................... 1,298,295 5,441,929 5,370,351 ------------------------------------------------ Net realized and unrealized gain (loss) .................................... 13,978,042 37,682,886 41,368,337 ------------------------------------------------ Net increase (decrease) in net assets resulting from operations ............ $ 25,044,716 $ 55,243,882 $ 50,711,022 ================================================
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, 2007 2006 2007 2006 -------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................................... $ 11,066,674 $ 7,686,994 $ 17,560,996 $ 12,463,219 Net realized gain (loss) from Underlying Funds ............. 12,679,747 9,122,650 32,240,957 23,092,394 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ....................... 1,298,295 8,514,289 5,441,929 21,975,614 -------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ..................................... 25,044,716 25,323,933 55,243,882 57,531,227 -------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ................................................. (7,827,189) (5,841,842) (13,678,690) (10,307,386) Class B ................................................. (169,537) (157,308) (266,922) (214,821) Class C ................................................. (2,738,556) (1,799,408) (3,504,431) (2,582,448) Class R ................................................. (691,739) (392,941) (1,047,371) (728,940) Advisor Class ........................................... (114,381) (50,554) (289,700) (186,986) Net realized gains: Class A ................................................. (5,708,542) (3,318,674) (16,900,630) (6,318,031) Class B ................................................. (165,679) (117,917) (444,317) (183,094) Class C ................................................. (2,453,393) (1,314,610) (5,720,106) (2,177,152) Class R ................................................. (501,465) (239,128) (1,395,923) (494,272) Advisor Class ........................................... (82,400) (27,311) (335,235) (106,561) -------------------------------------------------------------- Total distributions to shareholders ........................... (20,452,881) (13,259,693) (43,583,325) (23,299,691) -------------------------------------------------------------- Capital share transactions: (Note 2) Class A ................................................. 53,837,470 24,368,768 81,959,202 61,461,304 Class B ................................................. (45,467) (57,283) 661,569 655,366 Class C ................................................. 33,874,823 9,679,370 23,513,166 14,184,310 Class R ................................................. 10,789,707 (299,909) 7,788,466 (742,059) Advisor Class ........................................... 1,808,846 932,606 2,488,553 2,870,008 -------------------------------------------------------------- Total capital share transactions .............................. 100,265,379 34,623,552 116,410,956 78,428,929 -------------------------------------------------------------- Redemption fees ............................................... 2,308 1,280 7,689 9,418 -------------------------------------------------------------- Net increase (decrease) in net assets ................ 104,859,522 46,689,072 128,079,202 112,669,883 Net assets: Beginning of year ............................................. 293,133,331 246,444,259 586,179,849 473,509,966 -------------------------------------------------------------- End of year ................................................... $ 397,992,853 $ 293,133,331 $ 714,259,051 $ 586,179,849 ============================================================== Undistributed net investment income included in net assets: End of year ................................................... $ 221,449 $ 116,913 $ 431,170 $ 247,487 ==============================================================
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, 2007 2006 ------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................................................................... $ 9,342,685 $ 5,784,210 Net realized gain (loss) from Underlying Funds ............................................. 35,997,986 26,401,184 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .... 5,370,351 21,414,539 ------------------------------- Net increase (decrease) in net assets resulting from operations ...................... 50,711,022 53,599,933 ------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ................................................................................. (7,570,294) (6,239,874) Class B ................................................................................. (126,683) (121,718) Class C ................................................................................. (2,228,923) (1,804,826) Class R ................................................................................. (666,373) (471,530) Advisor Class ........................................................................... (199,883) (111,697) Net realized gains: Class A ................................................................................. (17,221,275) (2,313,310) Class B ................................................................................. (393,145) (59,985) Class C ................................................................................. (6,480,615) (893,913) Class R ................................................................................. (1,546,719) (190,290) Advisor Class ........................................................................... (383,485) (40,304) ------------------------------- Total distributions to shareholders ........................................................... (36,817,395) (12,247,447) ------------------------------- Capital share transactions: (Note 2) Class A ................................................................................. 65,581,672 61,095,501 Class B ................................................................................. (137,062) 1,006,265 Class C ................................................................................. 19,702,856 22,990,099 Class R ................................................................................. 9,979,926 4,438,592 Advisor Class ........................................................................... 4,168,665 1,874,057 ------------------------------- Total capital share transactions .............................................................. 99,296,057 91,404,514 ------------------------------- Redemption fees ............................................................................... 3,636 2,778 ------------------------------- Net increase (decrease) in net assets ................................................ 113,193,320 132,759,778 Net assets: Beginning of year ............................................................................. 481,680,282 348,920,504 ------------------------------- End of year ................................................................................... $ 594,873,602 $ 481,680,282 =============================== Undistributed net investment income included in net assets: End of year ................................................................................... $ 348,055 $ 124,616 ===============================
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 (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of ten separate funds. All funds included in this report (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 (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 it is each fund's policy 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 of America. 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 per share distributions, by class, are generally due to differences in class specific expenses. 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, on behalf of the Funds, 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, 2007, 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, 2007 Shares sold .............................................. 7,078,140 $ 97,213,137 10,075,503 $ 146,783,957 Shares issued in reinvestment of distributions ........... 917,963 12,445,343 2,072,310 29,756,594 Shares redeemed .......................................... (4,074,316) (55,821,010) (6,516,873) (94,581,349) ---------------------------------------------------------------- Net increase (decrease) .................................. 3,921,787 $ 53,837,470 5,630,940 $ 81,959,202 ================================================================ 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 ================================================================ CLASS B SHARES: Year ended December 31, 2007 Shares sold .............................................. 75,828 $ 1,039,277 142,091 $ 2,071,530 Shares issued in reinvestment of distributions ........... 20,207 273,102 46,068 659,454 Shares redeemed .......................................... (99,759) (1,357,846) (142,774) (2,069,415) ---------------------------------------------------------------- Net increase (decrease) .................................. (3,724) $ (45,467) 45,385 $ 661,569 ================================================================ 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 ================================================================ CLASS C SHARES: Year ended December 31, 2007 Shares sold .............................................. 3,221,426 $ 43,702,669 2,656,444 $ 38,027,015 Shares issued in reinvestment of distributions ........... 334,604 4,481,670 590,251 8,334,505 Shares redeemed .......................................... (1,059,402) (14,309,516) (1,602,070) (22,848,354) ---------------------------------------------------------------- Net increase (decrease) .................................. 2,496,628 $ 33,874,823 1,644,625 $ 23,513,166 ================================================================ 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 ================================================================
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, 2007 Shares sold .............................................. 1,454,253 $ 19,847,027 1,210,627 $ 17,652,708 Shares issued in reinvestment of distributions ........... 84,244 1,140,279 168,596 2,415,935 Shares redeemed .......................................... (748,379) (10,197,599) (844,179) (12,280,177) ---------------------------------------------------------------- Net increase (decrease) .................................. 790,118 $ 10,789,707 535,044 $ 7,788,466 ================================================================ 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) ================================================================ ADVISOR CLASS SHARES: Year ended December 31, 2007 Shares sold .............................................. 199,132 $ 2,746,355 286,936 $ 4,165,520 Shares issued in reinvestment of distributions ........... 14,487 196,279 43,439 623,886 Shares redeemed .......................................... (82,760) (1,133,788) (158,634) (2,300,853) ---------------------------------------------------------------- Net increase (decrease) .................................. 130,859 $ 1,808,846 171,741 $ 2,488,553 ================================================================ 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 ================================================================ ------------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND ------------------------------- SHARES AMOUNT ------------------------------- CLASS A SHARES: Year ended December 31, 2007 Shares sold .............................................................................. 6,798,084 $ 111,758,870 Shares issued in reinvestment of distributions ........................................... 1,467,899 23,798,123 Shares redeemed .......................................................................... (4,286,644) (69,975,321) ------------------------------- Net increase (decrease) .................................................................. 3,979,339 $ 65,581,672 =============================== 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 ===============================
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, 2007 Shares sold .............................................................................. 42,490 $ 697,796 Shares issued in reinvestment of distributions ........................................... 31,417 501,388 Shares redeemed .......................................................................... (83,154) (1,336,246) ------------------------------- Net increase (decrease) .................................................................. (9,247) $ (137,062) =============================== 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 =============================== CLASS C SHARES: Year ended December 31, 2007 Shares sold .............................................................................. 2,165,566 $ 35,001,780 Shares issued in reinvestment of distributions ........................................... 496,954 7,928,135 Shares redeemed .......................................................................... (1,438,748) (23,227,059) ------------------------------- Net increase (decrease) .................................................................. 1,223,772 $ 19,702,856 =============================== 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 =============================== CLASS R SHARES: Year ended December 31, 2007 Shares sold .............................................................................. 1,107,656 $ 18,148,876 Shares issued in reinvestment of distributions ........................................... 136,113 2,188,209 Shares redeemed .......................................................................... (638,597) (10,357,159) ------------------------------- Net increase (decrease) .................................................................. 605,172 $ 9,979,926 =============================== 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 =============================== ADVISOR CLASS SHARES: Year ended December 31, 2007 Shares sold .............................................................................. 301,327 $ 4,948,640 Shares issued in reinvestment of distributions ........................................... 35,509 576,489 Shares redeemed .......................................................................... (81,819) (1,356,464) ------------------------------- Net increase (decrease) .................................................................. 255,017 $ 4,168,665 =============================== 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 ===============================
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 certain 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 ................................................... $ 191,946 $ 366,491 $ 225,006 Contingent deferred sales charges retained .......................... $ 22,729 $ 39,685 $ 30,278
E. TRANSFER AGENT FEES For the year ended December 31, 2007, 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 ................................................. $ 275,806 $ 559,563 $ 598,521
F. WAIVER AND EXPENSE REIMBURSEMENTS Advisers and Investor Services have agreed in advance to waive all or a portion of their fees and to assume payment of other expenses through April 30, 2009. Total expenses waived/paid are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. After April 30, 2009, Advisers may discontinue this waiver at any time upon notice to the Funds' Board of Trustees. 4. INCOME TAXES The Funds have reviewed the tax positions taken on federal income tax returns, for each of the three open tax years and as of December 31, 2007 and have determined that no provision for income tax is required in the Funds' financial statements. The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows: ---------------------------- FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND ---------------------------- 2007 2006 ---------------------------- Distributions paid from: Ordinary income .............................. $ 11,724,151 $ 8,475,271 Long-term capital gain ....................... 8,728,730 4,784,422 ---------------------------- $ 20,452,881 $ 13,259,693 ============================ 64 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) ---------------------------- FRANKLIN TEMPLETON MODERATE TARGET FUND ---------------------------- 2007 2006 ---------------------------- Distributions paid from: Ordinary income .............................. $ 19,429,120 $ 14,143,400 Long-term capital gain ....................... 24,154,205 9,156,291 ---------------------------- $ 43,583,325 $ 23,299,691 ============================ ---------------------------- FRANKLIN TEMPLETON GROWTH TARGET FUND ---------------------------- 2007 2006 ---------------------------- Distributions paid from: Ordinary income .............................. $ 10,792,156 $ 8,749,645 Long-term capital gain ....................... 26,025,239 3,497,802 ---------------------------- $ 36,817,395 $ 12,247,447 ============================ At December 31, 2007, 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 ............................. $362,625,839 $ 625,429,278 $ 508,607,556 ============================================= Unrealized appreciation ......................... $ 36,939,731 $ 92,831,092 $ 94,056,159 Unrealized depreciation ......................... (2,538,886) (5,260,001) (4,883,428) --------------------------------------------- Net unrealized appreciation (depreciation) ...... $ 34,400,845 $ 87,571,091 $ 89,172,731 ============================================= Undistributed ordinary income ................... $ 221,449 $ 431,170 $ 348,055 Undistributed long term capital gains ........... 8,687,496 20,703,680 25,412,336 --------------------------------------------- Distributable earnings .......................... $ 8,908,945 $ 21,134,850 $ 25,760,391 =============================================
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of short term capital gains distributions from Underlying Funds. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of short term capital gains 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, 2007, were as follows: --------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND --------------------------------------------- Purchases ...................... $ 97,915,566 $ 157,391,931 $ 154,525,504 Sales .......................... $ 21,831,218 $ 59,915,514 $ 53,524,596 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, 2007, 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 ..................... 8.69% Franklin Global Real Estate Fund .......................... 5.94% FRANKLIN TEMPLETON MODERATE TARGET FUND Franklin Global Real Estate Fund .......................... 13.73% Franklin Strategic Mortgage Portfolio ..................... 13.47% Franklin Small Cap Growth Fund II ......................... 7.30% Franklin Growth Opportunities Fund ........................ 7.11% Franklin Total Return Fund ................................ 5.03% FRANKLIN TEMPLETON GROWTH TARGET FUND Franklin Global Real Estate Fund .......................... 16.58% Franklin Small Cap Growth Fund II ......................... 9.14% Franklin Growth Opportunities Fund ........................ 8.19% Franklin Strategic Mortgage Portfolio ..................... 5.07% The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (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 AND LITIGATION 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 66 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. REGULATORY AND LITIGATION MATTERS (CONTINUED) 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 and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, 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. 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 PRONOUNCEMENT In September 2006, the Financial Accounting Standards Board (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, 2007, 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, 2007 by correspondence with the transfer agent of the Underlying Funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2008 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, 2007: ----------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ----------------------------------------- $ 11,970,935 $30,307,863 $34,517,020 Under Section 871(k)(2)(C) of the Code, the funds designate the maximum amount allowable but no less than the following amounts as short term capital gain dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2007: --------------------------- FRANKLIN FRANKLIN TEMPLETON TEMPLETON CONSERVATIVE MODERATE TARGET FUND TARGET FUND --------------------------- $ 180,595 $ 641,469 Under Section 854(b)(2) of the 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, 2007: ----------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ----------------------------------------- 6.12% 8.95% 20.08% 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, 2007: ----------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON CONSERVATIVE MODERATE GROWTH TARGET FUND TARGET FUND TARGET FUND ----------------------------------------- $ 1,755,068 $ 4,331,874 $ 5,296,016 In January 2008, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2007. 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 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 serves 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 141 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 121 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. ------------------------------------------------------------------------------------------------------------------------------------ SAM GINN (1937) Trustee Since April 2007 121 Chevron Corporation (global One Franklin Parkway energy company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Trustee Since 1998 141 Hess Corporation (exploration One Franklin Parkway and refining of oil and gas), San Mateo, CA 94403-1906 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). ------------------------------------------------------------------------------------------------------------------------------------
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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 ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (1929) Trustee Since 1995 121 Center for Creative Land One Franklin Parkway Recycling (brownfield 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). ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Trustee Since April 2007 141 Hess Corporation (exploration One Franklin Parkway and refining of oil and gas) and San Mateo, CA 94403-1906 Sentient Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Trustee Since April 2007 141 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). ------------------------------------------------------------------------------------------------------------------------------------ JOHN B. WILSON (1959) Lead Trustee since 121 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since January 2008 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 (consulting firm) (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 141 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 42 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 ------------------------------------------------------------------------------------------------------------------------------------ **GREGORY E. JOHNSON (1961) Trustee Since April 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 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 President Vice President - AML Compliance - AML since 2006 Compliance 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). ------------------------------------------------------------------------------------------------------------------------------------ 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 28 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 Suite 2100 and 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. ------------------------------------------------------------------------------------------------------------------------------------
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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 ------------------------------------------------------------------------------------------------------------------------------------ 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. ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) President President and Not Applicable Not Applicable One Franklin Parkway and Chief Chief Executive San Mateo, CA 94403-1906 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. ------------------------------------------------------------------------------------------------------------------------------------ KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ 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). ------------------------------------------------------------------------------------------------------------------------------------
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 ------------------------------------------------------------------------------------------------------------------------------------ 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 some of the other subsidiaries of Franklin Resources, Inc. and 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 is considered to be an interested person of the Trust under the federal securities laws due to his position as officer, director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Trust's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Trust under the federal securities laws due to his position as officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. Note 3: Prior to December 31, 2007, Rupert H. Johnson, Jr. 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 HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON 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. WILSON IS AN INDEPENDENT BOARD MEMBER 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 FUNDS 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 1 GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund 1 Templeton Growth Fund Templeton World Fund GROWTH Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Growth Opportunities Fund 2 Franklin Small Cap Growth Fund II 3 Franklin Small-Mid Cap Growth Fund VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund 1 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 1 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 4 Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Focused Core Equity Fund Franklin Growth Fund Franklin Rising Dividends 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 (R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund 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 5 Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 5 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 5 Templeton Global Bond Fund Templeton Income Fund Templeton International Bond 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 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 and select retirement plans can continue adding to their accounts. 2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to Franklin Growth Opportunities Fund. The fund's investment goal and strategy remained the same. 3. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 4. 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. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 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. The fund invests primarily in 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. 12/07 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 A2007 02/08 [GRAPHIC OMITTED] -------------------------------------------------------------------------------- DECEMBER 31, 2007 -------------------------------------------------------------------------------- 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] Not part of the annual report Contents SHAREHOLDER LETTER ........................................................ 1 ANNUAL REPORT Economic and Market Overview .............................................. 3 Franklin Templeton Corefolio Allocation Fund .............................. 5 Franklin Templeton Founding Funds Allocation Fund ......................... 14 Franklin Templeton Perspectives Allocation Fund ........................... 23 Financial Highlights and Statements of Investments ........................ 32 Financial Statements ...................................................... 49 Notes to Financial Statements ............................................. 55 Report of Independent Registered Public Accounting Firm ................... 65 Tax Designation ........................................................... 66 Board Members and Officers ................................................ 67 Shareholder Information ................................................... 72 Annual Report Economic and Market Overview During the 12 months ended December 31, 2007, the U.S. economy advanced at a moderate but uneven pace. After slow first quarter growth, gross domestic product (GDP) advanced solidly in the second quarter, supported by federal defense spending, accelerating exports and declining imports, and greater business spending. In the third quarter, growth accelerated despite a struggling housing market and the abrupt unraveling of the subprime mortgage market. The housing downturn affected the overall economy by fourth quarter 2007 when GDP growth decelerated as credit conditions worsened and consumer spending slowed. Consumer confidence declined through period-end largely due to rising mortgage and fuel costs, falling home prices and a weaker job market. Oil prices were volatile and established a new record high in November, nearing $99 per barrel. For the 12 months ended December 31, 2007, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher than its 10-year average rate. 1 Facing the prospect of slower economic growth, the Federal Reserve Board lowered the federal funds target rate to 4.25% from 5.25% during the period. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year Treasury note yield fell from 4.71% at the beginning of the period to 4.04% on December 31, 2007. The global economy remained resilient despite elevated energy prices and widespread fears of contagion from the deteriorating U.S. housing situation. Consumer and corporate demand strength (particularly in China and other developing economies), generally favorable employment and accommodative monetary policies continued to underpin the current global expansionary period that began in 2002. These factors also contributed to the strength of global equity markets during 2007. However, concerns about slower growth and declining asset quality surfaced in the first quarter. Initially centered on the U.S. subprime mortgage 1. Source: Bureau of Labor Statistics. Annual Report | 3 market, they spread in August to global capital markets. Difficulties in assessing risk and the value of collateral in the structured finance industry contributed to declining risk appetite among lenders and investors. The private equity industry, which relies on the availability of cheap credit, played a pivotal role in several large and high-profile acquisitions, helped boost merger and acquisition activity in the first half of 2007, and was an important driver of equity performance. A second-half tightening of liquidity led to slower deal activity and weighed on market performance. However, in 2007, global merger and acquisition activity still reached record levels. To alleviate the credit crunch and restore investor confidence, the world's major central banks infused capital into the system. However, credit and equity markets continued to face headwinds as write-downs and losses from subprime mortgage financing affected many large financial institutions toward the end of the year, and equity prices remained volatile. For the year, however, global and non-U.S. equity markets registered the fifth consecutive year of double-digit total returns. Broad-based stock performance by European and Asian shares at least doubled that of U.S. stocks, while emerging market equity returns more than tripled those in developed markets. In addition, U.S. dollar weakness versus the currencies of many major trading partners enhanced equity returns for U.S.-based investors holding stocks denominated in these currencies. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. 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, 2007. PERFORMANCE OVERVIEW Franklin Templeton Corefolio Allocation Fund - Class A posted a +5.20% cumulative total return for the 12 months under review. The Fund underper-formed 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 +6.51%. 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 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Domestic Equity 75.3% Foreign Equity 24.6% 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 fiscal year under review, the Fund's performance benefited most from Franklin Capital Growth Fund - Advisor Class and Franklin Growth Fund - Advisor Class. Mutual Shares Fund - Class Z and Templeton Growth Fund - Advisor Class produced positive results but underperformed the Fund's hybrid benchmark index. 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 Franklin Advisers Inc. Franklin Templeton Corefolio Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2007, 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 12/31/07 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 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 0.13 $ 14.22 $ 14.09 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $ 0.1717 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0107 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4084 -------------------------------------------------------------------------------- TOTAL $ 0.5908 -------------------------------------------------------------------------------- CLASS B (SYMBOL: FBCOX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 0.13 $ 14.12 $ 13.99 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $ 0.0678 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0107 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4084 -------------------------------------------------------------------------------- TOTAL $ 0.4869 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FTCLX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 0.12 $ 14.08 $ 13.96 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $ 0.0777 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0107 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4084 -------------------------------------------------------------------------------- TOTAL $ 0.4968 -------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 0.13 $ 14.20 $ 14.07 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $ 0.1444 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0107 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4084 -------------------------------------------------------------------------------- TOTAL $ 0.5635 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 0.13 $ 14.25 $ 14.12 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $ 0.2194 -------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0107 -------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.4084 -------------------------------------------------------------------------------- TOTAL $ 0.6385 -------------------------------------------------------------------------------- Annual Report | 7 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 3-YEAR INCEPTION (8/15/03) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +5.20% +29.29% +60.18% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 -0.85% +6.82% +9.87% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $ 9,915 $12,189 $15,097 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 1.40% ------------------------------------------------------------------------------------------------ With Waiver 1.25% ------------------------------------------------------------------------------------------------ CLASS B 1-YEAR 3-YEAR INCEPTION (8/15/03) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +4.49% +26.74% +55.48% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +0.49% +7.36% +10.28% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,049 $12,374 $15,348 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 2.05% ------------------------------------------------------------------------------------------------ With Waiver 1.90% ------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 3-YEAR INCEPTION (8/15/03) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +4.50% +26.83% +55.45% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +3.50% +8.25% +10.60% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,350 $12,683 $15,545 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 2.04% ------------------------------------------------------------------------------------------------ With Waiver 1.89% ------------------------------------------------------------------------------------------------ CLASS R 1-YEAR 3-YEAR INCEPTION (8/15/03) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +5.02% +28.64% +59.05% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +5.02% +8.76% +11.18% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,502 $12,864 $15,905 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 1.55% ------------------------------------------------------------------------------------------------ With Waiver 1.40% ------------------------------------------------------------------------------------------------ ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (8/15/03) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +5.53% +30.52% +62.26% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +5.53% +9.28% +11.69% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,553 $13,052 $16,226 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 1.05% ------------------------------------------------------------------------------------------------ With Waiver 0.90% ------------------------------------------------------------------------------------------------
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. THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Corefolio DATE Allocation Fund S&P 500 6 MSCI World Index 6 8/15/2003 $ 9,425 $ 10,000 $ 10,000 8/31/2003 $ 9,491 $ 10,101 $ 10,113 9/30/2003 $ 9,369 $ 9,993 $ 10,177 10/31/2003 $ 9,783 $ 10,559 $ 10,783 11/30/2003 $ 9,962 $ 10,652 $ 10,950 12/31/2003 $ 10,457 $ 11,210 $ 11,639 1/31/2004 $ 10,600 $ 11,416 $ 11,829 2/29/2004 $ 10,770 $ 11,575 $ 12,031 3/31/2004 $ 10,637 $ 11,400 $ 11,956 4/30/2004 $ 10,533 $ 11,221 $ 11,718 5/31/2004 $ 10,618 $ 11,375 $ 11,832 6/30/2004 $ 10,884 $ 11,596 $ 12,080 7/31/2004 $ 10,448 $ 11,212 $ 11,689 8/31/2004 $ 10,429 $ 11,258 $ 11,745 9/30/2004 $ 10,600 $ 11,380 $ 11,971 10/31/2004 $ 10,770 $ 11,554 $ 12,267 11/30/2004 $ 11,292 $ 12,021 $ 12,917 12/31/2004 $ 11,677 $ 12,430 $ 13,414 1/31/2005 $ 11,333 $ 12,127 $ 13,114 2/28/2005 $ 11,591 $ 12,382 $ 13,536 3/31/2005 $ 11,439 $ 12,163 $ 13,280 4/30/2005 $ 11,237 $ 11,932 $ 12,999 5/31/2005 $ 11,526 $ 12,312 $ 13,239 6/30/2005 $ 11,546 $ 12,330 $ 13,360 7/31/2005 $ 11,951 $ 12,788 $ 13,830 8/31/2005 $ 11,951 $ 12,671 $ 13,940 9/30/2005 $ 12,067 $ 12,774 $ 14,306 10/31/2005 $ 11,845 $ 12,561 $ 13,962 11/30/2005 $ 12,260 $ 13,036 $ 14,435 12/31/2005 $ 12,452 $ 13,041 $ 14,758 1/31/2006 $ 12,756 $ 13,386 $ 15,420 2/28/2006 $ 12,824 $ 13,422 $ 15,404 3/31/2006 $ 13,089 $ 13,589 $ 15,749 4/30/2006 $ 13,268 $ 13,772 $ 16,236 5/31/2006 $ 12,920 $ 13,375 $ 15,696 6/30/2006 $ 12,901 $ 13,394 $ 15,698 7/31/2006 $ 12,851 $ 13,476 $ 15,799 8/31/2006 $ 13,169 $ 13,797 $ 16,217 9/30/2006 $ 13,427 $ 14,152 $ 16,415 10/31/2006 $ 13,875 $ 14,614 $ 17,021 11/30/2006 $ 14,183 $ 14,891 $ 17,447 12/31/2006 $ 14,350 $ 15,100 $ 17,806 1/31/2007 $ 14,625 $ 15,329 $ 18,020 2/28/2007 $ 14,412 $ 15,029 $ 17,934 3/31/2007 $ 14,549 $ 15,197 $ 18,270 4/30/2007 $ 15,130 $ 15,870 $ 19,086 5/31/2007 $ 15,648 $ 16,424 $ 19,640 6/30/2007 $ 15,534 $ 16,151 $ 19,495 7/31/2007 $ 15,078 $ 15,650 $ 19,067 8/31/2007 $ 15,109 $ 15,885 $ 19,061 9/30/2007 $ 15,565 $ 16,479 $ 19,974 10/31/2007 $ 15,969 $ 16,741 $ 20,591 11/30/2007 $ 15,379 $ 16,041 $ 19,759 12/31/2007 $ 15,097 $ 15,930 $ 19,510 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS A 12/31/07 ---------------------------------------------- 1-Year -0.85% ---------------------------------------------- 3-Year +6.82% ---------------------------------------------- Since Inception (8/15/03) +9.87% ---------------------------------------------- CLASS B (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Corefolio DATE Allocation Fund S&P 500 6 MSCI World Index 6 8/15/2003 $ 10,000 $ 10,000 $ 10,000 8/31/2003 $ 10,070 $ 10,101 $ 10,113 9/30/2003 $ 9,930 $ 9,993 $ 10,177 10/31/2003 $ 10,360 $ 10,559 $ 10,783 11/30/2003 $ 10,550 $ 10,652 $ 10,950 12/31/2003 $ 11,062 $ 11,210 $ 11,639 1/31/2004 $ 11,203 $ 11,416 $ 11,829 2/29/2004 $ 11,374 $ 11,575 $ 12,031 3/31/2004 $ 11,223 $ 11,400 $ 11,956 4/30/2004 $ 11,113 $ 11,221 $ 11,718 5/31/2004 $ 11,193 $ 11,375 $ 11,832 6/30/2004 $ 11,474 $ 11,596 $ 12,080 7/31/2004 $ 11,002 $ 11,212 $ 11,689 8/31/2004 $ 10,982 $ 11,258 $ 11,745 9/30/2004 $ 11,143 $ 11,380 $ 11,971 10/31/2004 $ 11,324 $ 11,554 $ 12,267 11/30/2004 $ 11,866 $ 12,021 $ 12,917 12/31/2004 $ 12,268 $ 12,430 $ 13,414 1/31/2005 $ 11,893 $ 12,127 $ 13,114 2/28/2005 $ 12,156 $ 12,382 $ 13,536 3/31/2005 $ 11,996 $ 12,163 $ 13,280 4/30/2005 $ 11,781 $ 11,932 $ 12,999 5/31/2005 $ 12,077 $ 12,312 $ 13,239 6/30/2005 $ 12,087 $ 12,330 $ 13,360 7/31/2005 $ 12,506 $ 12,788 $ 13,830 8/31/2005 $ 12,496 $ 12,671 $ 13,940 9/30/2005 $ 12,608 $ 12,774 $ 14,306 10/31/2005 $ 12,373 $ 12,561 $ 13,962 11/30/2005 $ 12,802 $ 13,036 $ 14,435 12/31/2005 $ 12,990 $ 13,041 $ 14,758 1/31/2006 $ 13,309 $ 13,386 $ 15,420 2/28/2006 $ 13,360 $ 13,422 $ 15,404 3/31/2006 $ 13,639 $ 13,589 $ 15,749 4/30/2006 $ 13,817 $ 13,772 $ 16,236 5/31/2006 $ 13,441 $ 13,375 $ 15,696 6/30/2006 $ 13,420 $ 13,394 $ 15,698 7/31/2006 $ 13,357 $ 13,476 $ 15,799 8/31/2006 $ 13,681 $ 13,797 $ 16,217 9/30/2006 $ 13,942 $ 14,152 $ 16,415 10/31/2006 $ 14,401 $ 14,614 $ 17,021 11/30/2006 $ 14,715 $ 14,891 $ 17,447 12/31/2006 $ 14,879 $ 15,100 $ 17,806 1/31/2007 $ 15,156 $ 15,329 $ 18,020 2/28/2007 $ 14,922 $ 15,029 $ 17,934 3/31/2007 $ 15,055 $ 15,197 $ 18,270 4/30/2007 $ 15,650 $ 15,870 $ 19,086 5/31/2007 $ 16,181 $ 16,424 $ 19,640 6/30/2007 $ 16,051 $ 16,151 $ 19,495 7/31/2007 $ 15,564 $ 15,650 $ 19,067 8/31/2007 $ 15,596 $ 15,885 $ 19,061 9/30/2007 $ 16,062 $ 16,479 $ 19,974 10/31/2007 $ 16,462 $ 16,741 $ 20,591 11/30/2007 $ 15,845 $ 16,041 $ 19,759 12/31/2007 $ 15,348 $ 15,930 $ 19,510 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS B 12/31/07 ---------------------------------------------- 1-Year +0.49% ---------------------------------------------- 3-Year +7.36% ---------------------------------------------- Since Inception (8/15/03) +10.28% ---------------------------------------------- Annual Report | 9 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS C 12/31/07 ---------------------------------------------- 1-Year +3.50% ---------------------------------------------- 3-Year +8.25% ---------------------------------------------- Since Inception (8/15/03) +10.60% ---------------------------------------------- CLASS C (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Corefolio DATE Allocation Fund S&P 500 6 MSCI World Index 6 8/15/2003 $ 10,000 $ 10,000 $ 10,000 8/31/2003 $ 10,070 $ 10,101 $ 10,113 9/30/2003 $ 9,930 $ 9,993 $ 10,177 10/31/2003 $ 10,360 $ 10,559 $ 10,783 11/30/2003 $ 10,540 $ 10,652 $ 10,950 12/31/2003 $ 11,054 $ 11,210 $ 11,639 1/31/2004 $ 11,194 $ 11,416 $ 11,829 2/29/2004 $ 11,365 $ 11,575 $ 12,031 3/31/2004 $ 11,215 $ 11,400 $ 11,956 4/30/2004 $ 11,104 $ 11,221 $ 11,718 5/31/2004 $ 11,194 $ 11,375 $ 11,832 6/30/2004 $ 11,466 $ 11,596 $ 12,080 7/31/2004 $ 10,993 $ 11,212 $ 11,689 8/31/2004 $ 10,973 $ 11,258 $ 11,745 9/30/2004 $ 11,144 $ 11,380 $ 11,971 10/31/2004 $ 11,315 $ 11,554 $ 12,267 11/30/2004 $ 11,858 $ 12,021 $ 12,917 12/31/2004 $ 12,256 $ 12,430 $ 13,414 1/31/2005 $ 11,892 $ 12,127 $ 13,114 2/28/2005 $ 12,155 $ 12,382 $ 13,536 3/31/2005 $ 11,995 $ 12,163 $ 13,280 4/30/2005 $ 11,770 $ 11,932 $ 12,999 5/31/2005 $ 12,066 $ 12,312 $ 13,239 6/30/2005 $ 12,087 $ 12,330 $ 13,360 7/31/2005 $ 12,495 $ 12,788 $ 13,830 8/31/2005 $ 12,495 $ 12,671 $ 13,940 9/30/2005 $ 12,597 $ 12,774 $ 14,306 10/31/2005 $ 12,362 $ 12,561 $ 13,962 11/30/2005 $ 12,801 $ 13,036 $ 14,435 12/31/2005 $ 12,994 $ 13,041 $ 14,758 1/31/2006 $ 13,303 $ 13,386 $ 15,420 2/28/2006 $ 13,365 $ 13,422 $ 15,404 3/31/2006 $ 13,634 $ 13,589 $ 15,749 4/30/2006 $ 13,811 $ 13,772 $ 16,236 5/31/2006 $ 13,435 $ 13,375 $ 15,696 6/30/2006 $ 13,414 $ 13,394 $ 15,698 7/31/2006 $ 13,351 $ 13,476 $ 15,799 8/31/2006 $ 13,675 $ 13,797 $ 16,217 9/30/2006 $ 13,937 $ 14,152 $ 16,415 10/31/2006 $ 14,397 $ 14,614 $ 17,021 11/30/2006 $ 14,710 $ 14,891 $ 17,447 12/31/2006 $ 14,875 $ 15,100 $ 17,806 1/31/2007 $ 15,152 $ 15,329 $ 18,020 2/28/2007 $ 14,918 $ 15,029 $ 17,934 3/31/2007 $ 15,051 $ 15,197 $ 18,270 4/30/2007 $ 15,648 $ 15,870 $ 19,086 5/31/2007 $ 16,179 $ 16,424 $ 19,640 6/30/2007 $ 16,038 $ 16,151 $ 19,495 7/31/2007 $ 15,561 $ 15,650 $ 19,067 8/31/2007 $ 15,593 $ 15,885 $ 19,061 9/30/2007 $ 16,060 $ 16,479 $ 19,974 10/31/2007 $ 16,461 $ 16,741 $ 20,591 11/30/2007 $ 15,843 $ 16,041 $ 19,759 12/31/2007 $ 15,545 $ 15,930 $ 19,510 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS R 12/31/07 ---------------------------------------------- 1-Year +5.02% ---------------------------------------------- 3-Year +8.76% ---------------------------------------------- Since Inception (8/15/03) +11.18% ---------------------------------------------- CLASS R (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Corefolio DATE Allocation Fund S&P 500 6 MSCI World Index 6 8/15/2003 $ 10,000 $ 10,000 $ 10,000 8/31/2003 $ 10,070 $ 10,101 $ 10,113 9/30/2003 $ 9,940 $ 9,993 $ 10,177 10/31/2003 $ 10,380 $ 10,559 $ 10,783 11/30/2003 $ 10,570 $ 10,652 $ 10,950 12/31/2003 $ 11,096 $ 11,210 $ 11,639 1/31/2004 $ 11,236 $ 11,416 $ 11,829 2/29/2004 $ 11,417 $ 11,575 $ 12,031 3/31/2004 $ 11,267 $ 11,400 $ 11,956 4/30/2004 $ 11,156 $ 11,221 $ 11,718 5/31/2004 $ 11,246 $ 11,375 $ 11,832 6/30/2004 $ 11,528 $ 11,596 $ 12,080 7/31/2004 $ 11,065 $ 11,212 $ 11,689 8/31/2004 $ 11,045 $ 11,258 $ 11,745 9/30/2004 $ 11,216 $ 11,380 $ 11,971 10/31/2004 $ 11,397 $ 11,554 $ 12,267 11/30/2004 $ 11,951 $ 12,021 $ 12,917 12/31/2004 $ 12,363 $ 12,430 $ 13,414 1/31/2005 $ 11,998 $ 12,127 $ 13,114 2/28/2005 $ 12,262 $ 12,382 $ 13,536 3/31/2005 $ 12,111 $ 12,163 $ 13,280 4/30/2005 $ 11,886 $ 11,932 $ 12,999 5/31/2005 $ 12,193 $ 12,312 $ 13,239 6/30/2005 $ 12,213 $ 12,330 $ 13,360 7/31/2005 $ 12,633 $ 12,788 $ 13,830 8/31/2005 $ 12,633 $ 12,671 $ 13,940 9/30/2005 $ 12,756 $ 12,774 $ 14,306 10/31/2005 $ 12,520 $ 12,561 $ 13,962 11/30/2005 $ 12,971 $ 13,036 $ 14,435 12/31/2005 $ 13,158 $ 13,041 $ 14,758 1/31/2006 $ 13,479 $ 13,386 $ 15,420 2/28/2006 $ 13,552 $ 13,422 $ 15,404 3/31/2006 $ 13,832 $ 13,589 $ 15,749 4/30/2006 $ 14,022 $ 13,772 $ 16,236 5/31/2006 $ 13,643 $ 13,375 $ 15,696 6/30/2006 $ 13,622 $ 13,394 $ 15,698 7/31/2006 $ 13,569 $ 13,476 $ 15,799 8/31/2006 $ 13,906 $ 13,797 $ 16,217 9/30/2006 $ 14,169 $ 14,152 $ 16,415 10/31/2006 $ 14,642 $ 14,614 $ 17,021 11/30/2006 $ 14,969 $ 14,891 $ 17,447 12/31/2006 $ 15,145 $ 15,100 $ 17,806 1/31/2007 $ 15,435 $ 15,329 $ 18,020 2/28/2007 $ 15,199 $ 15,029 $ 17,934 3/31/2007 $ 15,344 $ 15,197 $ 18,270 4/30/2007 $ 15,958 $ 15,870 $ 19,086 5/31/2007 $ 16,505 $ 16,424 $ 19,640 6/30/2007 $ 16,374 $ 16,151 $ 19,495 7/31/2007 $ 15,892 $ 15,650 $ 19,067 8/31/2007 $ 15,925 $ 15,885 $ 19,061 9/30/2007 $ 16,407 $ 16,479 $ 19,974 10/31/2007 $ 16,823 $ 16,741 $ 20,591 11/30/2007 $ 16,199 $ 16,041 $ 19,759 12/31/2007 $ 15,905 $ 15,930 $ 19,510 10 | Annual Report Performance Summary (CONTINUED) ADVISOR CLASS (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Corefolio DATE Allocation Fund S&P 500 6 MSCI World Index 6 8/15/2003 $ 10,000 $ 10,000 $ 10,000 8/31/2003 $ 10,070 $ 10,101 $ 10,113 9/30/2003 $ 9,940 $ 9,993 $ 10,177 10/31/2003 $ 10,380 $ 10,559 $ 10,783 11/30/2003 $ 10,580 $ 10,652 $ 10,950 12/31/2003 $ 11,102 $ 11,210 $ 11,639 1/31/2004 $ 11,253 $ 11,416 $ 11,829 2/29/2004 $ 11,434 $ 11,575 $ 12,031 3/31/2004 $ 11,293 $ 11,400 $ 11,956 4/30/2004 $ 11,193 $ 11,221 $ 11,718 5/31/2004 $ 11,273 $ 11,375 $ 11,832 6/30/2004 $ 11,565 $ 11,596 $ 12,080 7/31/2004 $ 11,092 $ 11,212 $ 11,689 8/31/2004 $ 11,082 $ 11,258 $ 11,745 9/30/2004 $ 11,263 $ 11,380 $ 11,971 10/31/2004 $ 11,444 $ 11,554 $ 12,267 11/30/2004 $ 12,008 $ 12,021 $ 12,917 12/31/2004 $ 12,432 $ 12,430 $ 13,414 1/31/2005 $ 12,066 $ 12,127 $ 13,114 2/28/2005 $ 12,341 $ 12,382 $ 13,536 3/31/2005 $ 12,190 $ 12,163 $ 13,280 4/30/2005 $ 11,974 $ 11,932 $ 12,999 5/31/2005 $ 12,282 $ 12,312 $ 13,239 6/30/2005 $ 12,313 $ 12,330 $ 13,360 7/31/2005 $ 12,734 $ 12,788 $ 13,830 8/31/2005 $ 12,744 $ 12,671 $ 13,940 9/30/2005 $ 12,867 $ 12,774 $ 14,306 10/31/2005 $ 12,631 $ 12,561 $ 13,962 11/30/2005 $ 13,083 $ 13,036 $ 14,435 12/31/2005 $ 13,294 $ 13,041 $ 14,758 1/31/2006 $ 13,618 $ 13,386 $ 15,420 2/28/2006 $ 13,691 $ 13,422 $ 15,404 3/31/2006 $ 13,995 $ 13,589 $ 15,749 4/30/2006 $ 14,186 $ 13,772 $ 16,236 5/31/2006 $ 13,804 $ 13,375 $ 15,696 6/30/2006 $ 13,794 $ 13,394 $ 15,698 7/31/2006 $ 13,741 $ 13,476 $ 15,799 8/31/2006 $ 14,090 $ 13,797 $ 16,217 9/30/2006 $ 14,366 $ 14,152 $ 16,415 10/31/2006 $ 14,853 $ 14,614 $ 17,021 11/30/2006 $ 15,192 $ 14,891 $ 17,447 12/31/2006 $ 15,376 $ 15,100 $ 17,806 1/31/2007 $ 15,680 $ 15,329 $ 18,020 2/28/2007 $ 15,452 $ 15,029 $ 17,934 3/31/2007 $ 15,599 $ 15,197 $ 18,270 4/30/2007 $ 16,220 $ 15,870 $ 19,086 5/31/2007 $ 16,796 $ 16,424 $ 19,640 6/30/2007 $ 16,663 $ 16,151 $ 19,495 7/31/2007 $ 16,186 $ 15,650 $ 19,067 8/31/2007 $ 16,220 $ 15,885 $ 19,061 9/30/2007 $ 16,718 $ 16,479 $ 19,974 10/31/2007 $ 17,150 $ 16,741 $ 20,591 11/30/2007 $ 16,519 $ 16,041 $ 19,759 12/31/2007 $ 16,226 $ 15,930 $ 19,510 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- ADVISOR CLASS 12/31/07 ---------------------------------------------- 1-Year +5.53% ---------------------------------------------- 3-Year +9.28% ---------------------------------------------- Since Inception (8/15/03) +11.69% ---------------------------------------------- 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. If the administrator had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 -------------------------------------------------------------------------------------------------------- Actual $1,000 $ 971.90 $2.44 -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.74 $2.50 -------------------------------------------------------------------------------------------------------- CLASS B -------------------------------------------------------------------------------------------------------- Actual $1,000 $ 968.70 $5.86 -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.26 $6.01 -------------------------------------------------------------------------------------------------------- CLASS C -------------------------------------------------------------------------------------------------------- Actual $1,000 $ 969.20 $5.81 -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.31 $5.96 -------------------------------------------------------------------------------------------------------- CLASS R -------------------------------------------------------------------------------------------------------- Actual $1,000 $ 971.30 $3.38 -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.78 $3.47 -------------------------------------------------------------------------------------------------------- ADVISOR CLASS -------------------------------------------------------------------------------------------------------- Actual $1,000 $ 973.80 $0.90 -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.30 $0.92 --------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.49%; B: 1.18%; C: 1.17%; R: 0.68%; and Advisor: 0.18%), 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. -------------------------------------------------------------------------------- This annual report for Franklin Templeton Founding Funds Allocation Fund covers the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton Founding Funds Allocation Fund - Class A posted a +3.12% 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) World Index. For the reporting period, the hybrid benchmark's total return was +6.83%. 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 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 43. 14 | Annual Report 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 fiscal year under review, Franklin Income Fund - Advisor Class, Mutual Shares Fund - Class Z and Templeton Growth Fund -Advisor Class produced positive results, but underperformed the Fund's hybrid benchmark index. 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 Franklin Advisers, Inc. Franklin Templeton Founding Funds Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2007, 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 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Domestic Hybrid 33.5% Foreign Equity 33.2% Domestic Equity 33.2% 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. Annual Report | 15 Performance Summary as of 12/31/07 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 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.48 $13.50 $13.98 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.4429 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0014 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.4664 -------------------------------------------------------------------------------- TOTAL $0.9107 -------------------------------------------------------------------------------- CLASS B (SYMBOL: FFABX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.48 $13.45 $13.93 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.3368 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0014 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.4664 -------------------------------------------------------------------------------- TOTAL $0.8046 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FFACX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.49 $13.29 $13.78 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.3581 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0014 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.4664 -------------------------------------------------------------------------------- TOTAL $0.8259 -------------------------------------------------------------------------------- CLASS R (SYMBOL: FFARX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.48 $13.50 $13.98 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.4158 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0014 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.4664 -------------------------------------------------------------------------------- TOTAL $0.8836 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FFAAX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.47 $13.58 $14.05 -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------- Dividend Income $0.4854 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0014 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.4664 -------------------------------------------------------------------------------- TOTAL $0.9532 -------------------------------------------------------------------------------- 16 | 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 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------------------- Cumulative Total Return 2 +3.12% +30.83% +65.81% -------------------------------------------------------------------------------------------- Average Annual Total Return 3 -2.79% +7.23% +10.74% -------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $9,721 $12,330 $15,628 -------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------- Without Waiver 1.27% -------------------------------------------------------------------------------------------- With Waiver 1.20% -------------------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------------------- Cumulative Total Return 2 +2.36% +28.09% +61.08% -------------------------------------------------------------------------------------------- Average Annual Total Return 3 -1.51% +7.75% +11.19% -------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $9,849 $12,509 $15,908 -------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------- Without Waiver 1.92% -------------------------------------------------------------------------------------------- With Waiver 1.85% -------------------------------------------------------------------------------------------- CLASS C 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------------------- Cumulative Total Return 2 +2.47% +28.26% +61.16% -------------------------------------------------------------------------------------------- Average Annual Total Return 3 +1.50% +8.65% +11.52% -------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,150 $12,826 $16,116 -------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------- Without Waiver 1.92% -------------------------------------------------------------------------------------------- With Waiver 1.85% -------------------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------------------- Cumulative Total Return 2 +2.92% +30.13% +64.85% -------------------------------------------------------------------------------------------- Average Annual Total Return 3 +2.92% +9.18% +12.10% -------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,292 $13,013 $16,485 -------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------- Without Waiver 1.42% -------------------------------------------------------------------------------------------- With Waiver 1.35% -------------------------------------------------------------------------------------------- ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (8/15/03) -------------------------------------------------------------------------------------------- Cumulative Total Return 2 +3.48% +32.11% +68.36% -------------------------------------------------------------------------------------------- Average Annual Total Return 3 +3.48% +9.73% +12.64% -------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,348 $13,211 $16,836 -------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 -------------------------------------------------------------------------------------------- Without Waiver 0.92% -------------------------------------------------------------------------------------------- With Waiver 0.85% --------------------------------------------------------------------------------------------
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. THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 12/31/07 ---------------------------------------------- 1-Year -2.79% ---------------------------------------------- 3-Year +7.23% ---------------------------------------------- Since Inception (8/15/03) +10.74% ---------------------------------------------- CLASS A (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Founding Funds DATE Allocation Fund S&P 500 6 MSCI World Index 6 -------------------------------------------------------------------------------- 8/15/2003 $ 9,425 $10,000 $10,000 8/31/2003 $ 9,463 $10,101 $10,113 9/30/2003 $ 9,519 $ 9,993 $10,177 10/31/2003 $ 9,811 $10,559 $10,783 11/30/2003 $10,019 $10,652 $10,950 12/31/2003 $10,517 $11,210 $11,639 1/31/2004 $10,650 $11,416 $11,829 2/29/2004 $10,850 $11,575 $12,031 3/31/2004 $10,774 $11,400 $11,956 4/30/2004 $10,631 $11,221 $11,718 5/31/2004 $10,641 $11,375 $11,832 6/30/2004 $10,802 $11,596 $12,080 7/31/2004 $10,650 $11,212 $11,689 8/31/2004 $10,783 $11,258 $11,745 9/30/2004 $10,954 $11,380 $11,971 10/31/2004 $11,135 $11,554 $12,267 11/30/2004 $11,610 $12,021 $12,917 12/31/2004 $11,945 $12,430 $13,414 1/31/2005 $11,693 $12,127 $13,114 2/28/2005 $12,082 $12,382 $13,536 3/31/2005 $11,903 $12,163 $13,280 4/30/2005 $11,727 $11,932 $12,999 5/31/2005 $11,903 $12,312 $13,239 6/30/2005 $12,119 $12,330 $13,360 7/31/2005 $12,404 $12,788 $13,830 8/31/2005 $12,473 $12,671 $13,940 9/30/2005 $12,601 $12,774 $14,306 10/31/2005 $12,237 $12,561 $13,962 11/30/2005 $12,404 $13,036 $14,435 12/31/2005 $12,700 $13,041 $14,758 1/31/2006 $13,086 $13,386 $15,420 2/28/2006 $13,157 $13,422 $15,404 3/31/2006 $13,379 $13,589 $15,749 4/30/2006 $13,627 $13,772 $16,236 5/31/2006 $13,400 $13,375 $15,696 6/30/2006 $13,431 $13,394 $15,698 7/31/2006 $13,627 $13,476 $15,799 8/31/2006 $13,937 $13,797 $16,217 9/30/2006 $14,103 $14,152 $16,415 10/31/2006 $14,526 $14,614 $17,021 11/30/2006 $14,857 $14,891 $17,447 12/31/2006 $15,156 $15,100 $17,806 1/31/2007 $15,351 $15,329 $18,020 2/28/2007 $15,275 $15,029 $17,934 3/31/2007 $15,502 $15,197 $18,270 4/30/2007 $16,021 $15,870 $19,086 5/31/2007 $16,407 $16,424 $19,640 6/30/2007 $16,241 $16,151 $19,495 7/31/2007 $15,668 $15,650 $19,067 8/31/2007 $15,613 $15,885 $19,061 9/30/2007 $16,021 $16,479 $19,974 10/31/2007 $16,296 $16,741 $20,591 11/30/2007 $15,811 $16,041 $19,759 12/31/2007 $15,628 $15,930 $19,510 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS B 12/31/07 ---------------------------------------------- 1-Year -1.51% ---------------------------------------------- 3-Year +7.75% ---------------------------------------------- Since Inception (8/15/03) +11.19% ---------------------------------------------- CLASS B (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Founding Funds DATE Allocation Fund S&P 500 6 MSCI World Index 6 -------------------------------------------------------------------------------- 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,101 $10,113 9/30/2003 $10,090 $ 9,993 $10,177 10/31/2003 $10,400 $10,559 $10,783 11/30/2003 $10,610 $10,652 $10,950 12/31/2003 $11,128 $11,210 $11,639 1/31/2004 $11,279 $11,416 $11,829 2/29/2004 $11,470 $11,575 $12,031 3/31/2004 $11,390 $11,400 $11,956 4/30/2004 $11,229 $11,221 $11,718 5/31/2004 $11,229 $11,375 $11,832 6/30/2004 $11,400 $11,596 $12,080 7/31/2004 $11,239 $11,212 $11,689 8/31/2004 $11,360 $11,258 $11,745 9/30/2004 $11,541 $11,380 $11,971 10/31/2004 $11,722 $11,554 $12,267 11/30/2004 $12,216 $12,021 $12,917 12/31/2004 $12,576 $12,430 $13,414 1/31/2005 $12,298 $12,127 $13,114 2/28/2005 $12,689 $12,382 $13,536 3/31/2005 $12,501 $12,163 $13,280 4/30/2005 $12,303 $11,932 $12,999 5/31/2005 $12,490 $12,312 $13,239 6/30/2005 $12,708 $12,330 $13,360 7/31/2005 $12,998 $12,788 $13,830 8/31/2005 $13,061 $12,671 $13,940 9/30/2005 $13,185 $12,774 $14,306 10/31/2005 $12,801 $12,561 $13,962 11/30/2005 $12,967 $13,036 $14,435 12/31/2005 $13,277 $13,041 $14,758 1/31/2006 $13,671 $13,386 $15,420 2/28/2006 $13,735 $13,422 $15,404 3/31/2006 $13,968 $13,589 $15,749 4/30/2006 $14,207 $13,772 $16,236 5/31/2006 $13,968 $13,375 $15,696 6/30/2006 $14,001 $13,394 $15,698 7/31/2006 $14,196 $13,476 $15,799 8/31/2006 $14,500 $13,797 $16,217 9/30/2006 $14,662 $14,152 $16,415 10/31/2006 $15,096 $14,614 $17,021 11/30/2006 $15,443 $14,891 $17,447 12/31/2006 $15,737 $15,100 $17,806 1/31/2007 $15,929 $15,329 $18,020 2/28/2007 $15,850 $15,029 $17,934 3/31/2007 $16,065 $15,197 $18,270 4/30/2007 $16,593 $15,870 $19,086 5/31/2007 $16,996 $16,424 $19,640 6/30/2007 $16,800 $16,151 $19,495 7/31/2007 $16,214 $15,650 $19,067 8/31/2007 $16,145 $15,885 $19,061 9/30/2007 $16,547 $16,479 $19,974 10/31/2007 $16,835 $16,741 $20,591 11/30/2007 $16,318 $16,041 $19,759 12/31/2007 $15,908 $15,930 $19,510 18 | Annual Report Performance Summary (CONTINUED) CLASS C (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Founding Funds DATE Allocation Fund S&P 500 6 MSCI World Index 6 -------------------------------------------------------------------------------- 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,101 $10,113 9/30/2003 $10,090 $ 9,993 $10,177 10/31/2003 $10,390 $10,559 $10,783 11/30/2003 $10,610 $10,652 $10,950 12/31/2003 $11,129 $11,210 $11,639 1/31/2004 $11,270 $11,416 $11,829 2/29/2004 $11,471 $11,575 $12,031 3/31/2004 $11,391 $11,400 $11,956 4/30/2004 $11,229 $11,221 $11,718 5/31/2004 $11,229 $11,375 $11,832 6/30/2004 $11,401 $11,596 $12,080 7/31/2004 $11,240 $11,212 $11,689 8/31/2004 $11,360 $11,258 $11,745 9/30/2004 $11,542 $11,380 $11,971 10/31/2004 $11,723 $11,554 $12,267 11/30/2004 $12,216 $12,021 $12,917 12/31/2004 $12,565 $12,430 $13,414 1/31/2005 $12,298 $12,127 $13,114 2/28/2005 $12,688 $12,382 $13,536 3/31/2005 $12,500 $12,163 $13,280 4/30/2005 $12,303 $11,932 $12,999 5/31/2005 $12,490 $12,312 $13,239 6/30/2005 $12,697 $12,330 $13,360 7/31/2005 $12,998 $12,788 $13,830 8/31/2005 $13,060 $12,671 $13,940 9/30/2005 $13,185 $12,774 $14,306 10/31/2005 $12,801 $12,561 $13,962 11/30/2005 $12,967 $13,036 $14,435 12/31/2005 $13,272 $13,041 $14,758 1/31/2006 $13,670 $13,386 $15,420 2/28/2006 $13,734 $13,422 $15,404 3/31/2006 $13,969 $13,589 $15,749 4/30/2006 $14,209 $13,772 $16,236 5/31/2006 $13,969 $13,375 $15,696 6/30/2006 $13,991 $13,394 $15,698 7/31/2006 $14,198 $13,476 $15,799 8/31/2006 $14,504 $13,797 $16,217 9/30/2006 $14,668 $14,152 $16,415 10/31/2006 $15,094 $14,614 $17,021 11/30/2006 $15,444 $14,891 $17,447 12/31/2006 $15,728 $15,100 $17,806 1/31/2007 $15,933 $15,329 $18,020 2/28/2007 $15,853 $15,029 $17,934 3/31/2007 $16,070 $15,197 $18,270 4/30/2007 $16,592 $15,870 $19,086 5/31/2007 $16,999 $16,424 $19,640 6/30/2007 $16,801 $16,151 $19,495 7/31/2007 $16,209 $15,650 $19,067 8/31/2007 $16,151 $15,885 $19,061 9/30/2007 $16,546 $16,479 $19,974 10/31/2007 $16,836 $16,741 $20,591 11/30/2007 $16,314 $16,041 $19,759 12/31/2007 $16,116 $15,930 $19,510 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS C 12/31/07 ---------------------------------------------- 1-Year +1.50% ---------------------------------------------- 3-Year +8.65% ---------------------------------------------- Since Inception (8/15/03) +11.52% ---------------------------------------------- CLASS R (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Founding Funds DATE Allocation Fund S&P 500 6 MSCI World Index 6 -------------------------------------------------------------------------------- 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,101 $10,113 9/30/2003 $10,100 $ 9,993 $10,177 10/31/2003 $10,410 $10,559 $10,783 11/30/2003 $10,630 $10,652 $10,950 12/31/2003 $11,168 $11,210 $11,639 1/31/2004 $11,319 $11,416 $11,829 2/29/2004 $11,521 $11,575 $12,031 3/31/2004 $11,440 $11,400 $11,956 4/30/2004 $11,279 $11,221 $11,718 5/31/2004 $11,289 $11,375 $11,832 6/30/2004 $11,471 $11,596 $12,080 7/31/2004 $11,309 $11,212 $11,689 8/31/2004 $11,440 $11,258 $11,745 9/30/2004 $11,622 $11,380 $11,971 10/31/2004 $11,803 $11,554 $12,267 11/30/2004 $12,307 $12,021 $12,917 12/31/2004 $12,668 $12,430 $13,414 1/31/2005 $12,400 $12,127 $13,114 2/28/2005 $12,803 $12,382 $13,536 3/31/2005 $12,624 $12,163 $13,280 4/30/2005 $12,426 $11,932 $12,999 5/31/2005 $12,614 $12,312 $13,239 6/30/2005 $12,843 $12,330 $13,360 7/31/2005 $13,145 $12,788 $13,830 8/31/2005 $13,207 $12,671 $13,940 9/30/2005 $13,343 $12,774 $14,306 10/31/2005 $12,957 $12,561 $13,962 11/30/2005 $13,134 $13,036 $14,435 12/31/2005 $13,444 $13,041 $14,758 1/31/2006 $13,852 $13,386 $15,420 2/28/2006 $13,928 $13,422 $15,404 3/31/2006 $14,163 $13,589 $15,749 4/30/2006 $14,414 $13,772 $16,236 5/31/2006 $14,174 $13,375 $15,696 6/30/2006 $14,217 $13,394 $15,698 7/31/2006 $14,414 $13,476 $15,799 8/31/2006 $14,743 $13,797 $16,217 9/30/2006 $14,907 $14,152 $16,415 10/31/2006 $15,356 $14,614 $17,021 11/30/2006 $15,717 $14,891 $17,447 12/31/2006 $16,018 $15,100 $17,806 1/31/2007 $16,224 $15,329 $18,020 2/28/2007 $16,144 $15,029 $17,934 3/31/2007 $16,373 $15,197 $18,270 4/30/2007 $16,932 $15,870 $19,086 5/31/2007 $17,340 $16,424 $19,640 6/30/2007 $17,153 $16,151 $19,495 7/31/2007 $16,547 $15,650 $19,067 8/31/2007 $16,489 $15,885 $19,061 9/30/2007 $16,909 $16,479 $19,974 10/31/2007 $17,212 $16,741 $20,591 11/30/2007 $16,687 $16,041 $19,759 12/31/2007 $16,485 $15,930 $19,510 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS R 12/31/07 ---------------------------------------------- 1-Year +2.92% ---------------------------------------------- 3-Year +9.18% ---------------------------------------------- Since Inception (8/15/03) +12.10% ---------------------------------------------- Annual Report | 19 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- ADVISOR CLASS 12/31/07 ---------------------------------------------- 1-Year +3.48% ---------------------------------------------- 3-Year +9.73% ---------------------------------------------- Since Inception (8/15/03) +12.64% ---------------------------------------------- ADVISOR CLASS (8/15/03-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] FT Founding Funds DATE Allocation Fund S&P 500 6 MSCI World Index 6 -------------------------------------------------------------------------------- 8/15/2003 $10,000 $10,000 $10,000 8/31/2003 $10,040 $10,101 $10,113 9/30/2003 $10,100 $ 9,993 $10,177 10/31/2003 $10,420 $10,559 $10,783 11/30/2003 $10,640 $10,652 $10,950 12/31/2003 $11,175 $11,210 $11,639 1/31/2004 $11,326 $11,416 $11,829 2/29/2004 $11,538 $11,575 $12,031 3/31/2004 $11,457 $11,400 $11,956 4/30/2004 $11,306 $11,221 $11,718 5/31/2004 $11,326 $11,375 $11,832 6/30/2004 $11,508 $11,596 $12,080 7/31/2004 $11,346 $11,212 $11,689 8/31/2004 $11,477 $11,258 $11,745 9/30/2004 $11,669 $11,380 $11,971 10/31/2004 $11,861 $11,554 $12,267 11/30/2004 $12,375 $12,021 $12,917 12/31/2004 $12,744 $12,430 $13,414 1/31/2005 $12,475 $12,127 $13,114 2/28/2005 $12,889 $12,382 $13,536 3/31/2005 $12,710 $12,163 $13,280 4/30/2005 $12,511 $11,932 $12,999 5/31/2005 $12,710 $12,312 $13,239 6/30/2005 $12,940 $12,330 $13,360 7/31/2005 $13,253 $12,788 $13,830 8/31/2005 $13,326 $12,671 $13,940 9/30/2005 $13,472 $12,774 $14,306 10/31/2005 $13,086 $12,561 $13,962 11/30/2005 $13,263 $13,036 $14,435 12/31/2005 $13,589 $13,041 $14,758 1/31/2006 $14,011 $13,386 $15,420 2/28/2006 $14,087 $13,422 $15,404 3/31/2006 $14,335 $13,589 $15,749 4/30/2006 $14,599 $13,772 $16,236 5/31/2006 $14,357 $13,375 $15,696 6/30/2006 $14,401 $13,394 $15,698 7/31/2006 $14,621 $13,476 $15,799 8/31/2006 $14,952 $13,797 $16,217 9/30/2006 $15,128 $14,152 $16,415 10/31/2006 $15,591 $14,614 $17,021 11/30/2006 $15,955 $14,891 $17,447 12/31/2006 $16,270 $15,100 $17,806 1/31/2007 $16,491 $15,329 $18,020 2/28/2007 $16,421 $15,029 $17,934 3/31/2007 $16,664 $15,197 $18,270 4/30/2007 $17,229 $15,870 $19,086 5/31/2007 $17,653 $16,424 $19,640 6/30/2007 $17,477 $16,151 $19,495 7/31/2007 $16,864 $15,650 $19,067 8/31/2007 $16,817 $15,885 $19,061 9/30/2007 $17,253 $16,479 $19,974 10/31/2007 $17,559 $16,741 $20,591 11/30/2007 $17,029 $16,041 $19,759 12/31/2007 $16,836 $15,930 $19,510 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. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS 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 OR 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. If the administrator had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 ---------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 962.20 $2.42 ---------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.74 $2.50 ---------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 958.80 $5.88 ---------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.21 $6.06 ---------------------------------------------------------------------------------------------------------------------- CLASS C ---------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 959.20 $5.88 ---------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.21 $6.06 ---------------------------------------------------------------------------------------------------------------------- CLASS R ---------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 961.10 $3.41 ---------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.73 $3.52 ---------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS ---------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 963.40 $0.94 ---------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.25 $0.97 ----------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.49%; B: 1.19%; C: 1.19%; R: 0.69%; and Advisor: 0.19%), 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, 2007. PERFORMANCE OVERVIEW Franklin Templeton Perspectives Allocation Fund - Class A posted a +6.79% cumulative total return for the 12 months under review. The Fund performed comparably to 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 +6.83%. 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 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Domestic Equity 66.7% Foreign Equity 33.0% Short-Term Investments & Other Net Assets 0.3% * 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 fiscal year under review, the Fund's performance benefited most from Franklin Flex Cap Growth Fund - Advisor Class and Franklin Growth Fund - Advisor Class. Templeton Growth Fund - Advisor Class produced positive results but underperformed the Fund's hybrid benchmark index. 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 Franklin Advisers Inc. Franklin Templeton Perspectives Allocation Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2007, 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 12/31/07 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 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.27 $13.17 $12.90 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.1615 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0071 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.4240 -------------------------------------------------------------------------------------- TOTAL $0.5926 -------------------------------------------------------------------------------------- CLASS C (SYMBOL: FPCAX) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.26 $13.08 $12.82 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.0804 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0071 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.4240 -------------------------------------------------------------------------------------- TOTAL $0.5115 -------------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.27 $13.17 $12.90 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.1351 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0071 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.4240 -------------------------------------------------------------------------------------- TOTAL $0.5662 -------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.29 $13.22 $12.93 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.2036 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0071 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.4240 -------------------------------------------------------------------------------------- TOTAL $0.6347 --------------------------------------------------------------------------------------
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 3-YEAR INCEPTION (8/2/04) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +6.79% +32.19% +49.28% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +0.62% +7.61% +10.52% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,062 $12,462 $14,069 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 1.49% ------------------------------------------------------------------------------------------------ With Waiver 1.27% ------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 3-YEAR INCEPTION (8/2/04) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +6.11% +29.61% +46.02% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +5.11% +9.03% +11.73% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,511 $12,961 $14,602 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 2.13% ------------------------------------------------------------------------------------------------ With Waiver 1.91% ------------------------------------------------------------------------------------------------ CLASS R 1-YEAR 3-YEAR INCEPTION (8/2/04) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +6.58% +31.61% +48.48% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +6.58% +9.59% +12.28% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,658 $13,161 $14,848 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 1.64% ------------------------------------------------------------------------------------------------ With Waiver 1.42% ------------------------------------------------------------------------------------------------ ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (8/2/04) ------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +7.26% +33.68% +51.07% ------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +7.26% +10.16% +12.85% ------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,726 $13,368 $15,107 ------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------ Without Waiver 1.14% ------------------------------------------------------------------------------------------------ With Waiver 0.92% ------------------------------------------------------------------------------------------------
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. THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 (8/2/04-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] DATE FT Perspectives Allocation Fund S&P 500 6 MSCI World Index 6 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 $11,086 $11,475 1/31/2005 $10,367 $10,816 $11,219 2/28/2005 $10,681 $11,043 $11,580 3/31/2005 $10,519 $10,848 $11,361 4/30/2005 $10,328 $10,642 $11,120 5/31/2005 $10,566 $10,981 $11,326 6/30/2005 $10,624 $10,996 $11,429 7/31/2005 $10,958 $11,405 $11,831 8/31/2005 $11,006 $11,301 $11,926 9/30/2005 $11,168 $11,393 $12,239 10/31/2005 $10,910 $11,203 $11,944 11/30/2005 $11,273 $11,626 $12,349 12/31/2005 $11,488 $11,631 $12,626 1/31/2006 $11,916 $11,938 $13,192 2/28/2006 $11,945 $11,971 $13,178 3/31/2006 $12,169 $12,120 $13,473 4/30/2006 $12,318 $12,283 $13,890 5/31/2006 $11,903 $11,929 $13,428 6/30/2006 $11,942 $11,945 $13,429 7/31/2006 $11,922 $12,019 $13,516 8/31/2006 $12,189 $12,305 $13,874 9/30/2006 $12,377 $12,622 $14,043 10/31/2006 $12,753 $13,033 $14,562 11/30/2006 $13,030 $13,281 $14,926 12/31/2006 $13,175 $13,467 $15,233 1/31/2007 $13,461 $13,671 $15,416 2/28/2007 $13,257 $13,404 $15,342 3/31/2007 $13,429 $13,554 $15,629 4/30/2007 $13,948 $14,154 $16,328 5/31/2007 $14,353 $14,648 $16,802 6/30/2007 $14,280 $14,405 $16,678 7/31/2007 $13,865 $13,958 $16,312 8/31/2007 $13,928 $14,167 $16,307 9/30/2007 $14,436 $14,697 $17,088 10/31/2007 $14,789 $14,931 $17,616 11/30/2007 $14,249 $14,307 $16,904 12/31/2007 $14,069 $14,207 $16,690 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS A 12/31/07 ---------------------------------------------- 1-Year +0.62% ---------------------------------------------- 3-Year +7.61% ---------------------------------------------- Since Inception (8/2/04) +10.52% ---------------------------------------------- CLASS C (8/2/04-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] DATE FT Perspectives Allocation Fund S&P 500 6 MSCI World Index 6 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 $11,086 $11,475 1/31/2005 $10,964 $10,816 $11,219 2/28/2005 $11,286 $11,043 $11,580 3/31/2005 $11,115 $10,848 $11,361 4/30/2005 $10,902 $10,642 $11,120 5/31/2005 $11,155 $10,981 $11,326 6/30/2005 $11,206 $10,996 $11,429 7/31/2005 $11,550 $11,405 $11,831 8/31/2005 $11,591 $11,301 $11,926 9/30/2005 $11,763 $11,393 $12,239 10/31/2005 $11,479 $11,203 $11,944 11/30/2005 $11,854 $11,626 $12,349 12/31/2005 $12,080 $11,631 $12,626 1/31/2006 $12,512 $11,938 $13,192 2/28/2006 $12,543 $11,971 $13,178 3/31/2006 $12,769 $12,120 $13,473 4/30/2006 $12,915 $12,283 $13,890 5/31/2006 $12,476 $11,929 $13,428 6/30/2006 $12,518 $11,945 $13,429 7/31/2006 $12,487 $12,019 $13,516 8/31/2006 $12,758 $12,305 $13,874 9/30/2006 $12,946 $12,622 $14,043 10/31/2006 $13,333 $13,033 $14,562 11/30/2006 $13,615 $13,281 $14,926 12/31/2006 $13,761 $13,467 $15,233 1/31/2007 $14,050 $13,671 $15,416 2/28/2007 $13,836 $13,404 $15,342 3/31/2007 $14,006 $13,554 $15,629 4/30/2007 $14,541 $14,154 $16,328 5/31/2007 $14,955 $14,648 $16,802 6/30/2007 $14,868 $14,405 $16,678 7/31/2007 $14,421 $13,958 $16,312 8/31/2007 $14,486 $14,167 $16,307 9/30/2007 $15,010 $14,697 $17,088 10/31/2007 $15,370 $14,931 $17,616 11/30/2007 $14,792 $14,307 $16,904 12/31/2007 $14,602 $14,207 $16,690 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS C 12/31/07 ---------------------------------------------- 1-Year +5.11% ---------------------------------------------- 3-Year +9.03% ---------------------------------------------- Since Inception (8/2/04) +11.73% ---------------------------------------------- Annual Report | 27 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS R 12/31/07 ---------------------------------------------- 1-Year +6.58% ---------------------------------------------- 3-Year +9.59% ---------------------------------------------- Since Inception (8/2/04) +12.28% ---------------------------------------------- CLASS R (8/2/04-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] DATE FT Perspectives Allocation Fund S&P 500 6 MSCI World Index 6 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 $11,086 $11,475 1/31/2005 $10,989 $10,816 $11,219 2/28/2005 $11,322 $11,043 $11,580 3/31/2005 $11,159 $10,848 $11,361 4/30/2005 $10,946 $10,642 $11,120 5/31/2005 $11,199 $10,981 $11,326 6/30/2005 $11,260 $10,996 $11,429 7/31/2005 $11,605 $11,405 $11,831 8/31/2005 $11,655 $11,301 $11,926 9/30/2005 $11,828 $11,393 $12,239 10/31/2005 $11,554 $11,203 $11,944 11/30/2005 $11,939 $11,626 $12,349 12/31/2005 $12,168 $11,631 $12,626 1/31/2006 $12,612 $11,938 $13,192 2/28/2006 $12,643 $11,971 $13,178 3/31/2006 $12,880 $12,120 $13,473 4/30/2006 $13,037 $12,283 $13,890 5/31/2006 $12,587 $11,929 $13,428 6/30/2006 $12,639 $11,945 $13,429 7/31/2006 $12,608 $12,019 $13,516 8/31/2006 $12,890 $12,305 $13,874 9/30/2006 $13,089 $12,622 $14,043 10/31/2006 $13,487 $13,033 $14,562 11/30/2006 $13,781 $13,281 $14,926 12/31/2006 $13,931 $13,467 $15,233 1/31/2007 $14,223 $13,671 $15,416 2/28/2007 $14,017 $13,404 $15,342 3/31/2007 $14,200 $13,554 $15,629 4/30/2007 $14,738 $14,154 $16,328 5/31/2007 $15,166 $14,648 $16,802 6/30/2007 $15,078 $14,405 $16,678 7/31/2007 $14,639 $13,958 $16,312 8/31/2007 $14,705 $14,167 $16,307 9/30/2007 $15,243 $14,697 $17,088 10/31/2007 $15,616 $14,931 $17,616 11/30/2007 $15,034 $14,307 $16,904 12/31/2007 $14,848 $14,207 $16,690 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- ADVISOR CLASS 12/31/07 ---------------------------------------------- 1-Year +7.26% ---------------------------------------------- 3-Year +10.16% ---------------------------------------------- Since Inception (8/2/04) +12.85% ---------------------------------------------- ADVISOR CLASS (8/2/04-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] DATE FT Perspectives Allocation Fund S&P 500 6 MSCI World Index 6 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 $11,086 $11,475 1/31/2005 $11,008 $10,816 $11,219 2/28/2005 $11,341 $11,043 $11,580 3/31/2005 $11,178 $10,848 $11,361 4/30/2005 $10,975 $10,642 $11,120 5/31/2005 $11,239 $10,981 $11,326 6/30/2005 $11,300 $10,996 $11,429 7/31/2005 $11,655 $11,405 $11,831 8/31/2005 $11,705 $11,301 $11,926 9/30/2005 $11,888 $11,393 $12,239 10/31/2005 $11,614 $11,203 $11,944 11/30/2005 $12,010 $11,626 $12,349 12/31/2005 $12,241 $11,631 $12,626 1/31/2006 $12,697 $11,938 $13,192 2/28/2006 $12,728 $11,971 $13,178 3/31/2006 $12,977 $12,120 $13,473 4/30/2006 $13,134 $12,283 $13,890 5/31/2006 $12,693 $11,929 $13,428 6/30/2006 $12,745 $11,945 $13,429 7/31/2006 $12,724 $12,019 $13,516 8/31/2006 $13,019 $12,305 $13,874 9/30/2006 $13,218 $12,622 $14,043 10/31/2006 $13,618 $13,033 $14,562 11/30/2006 $13,923 $13,281 $14,926 12/31/2006 $14,085 $13,467 $15,233 1/31/2007 $14,390 $13,671 $15,416 2/28/2007 $14,183 $13,404 $15,342 3/31/2007 $14,367 $13,554 $15,629 4/30/2007 $14,932 $14,154 $16,328 5/31/2007 $15,363 $14,648 $16,802 6/30/2007 $15,286 $14,405 $16,678 7/31/2007 $14,843 $13,958 $16,312 8/31/2007 $14,921 $14,167 $16,307 9/30/2007 $15,496 $14,697 $17,088 10/31/2007 $15,884 $14,931 $17,616 11/30/2007 $15,297 $14,307 $16,904 12/31/2007 $15,107 $14,207 $16,690 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, THE FUND 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 OR 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. If the administrator had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 -------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 985.20 $2.45 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.74 $2.50 -------------------------------------------------------------------------------------------------------------- CLASS C -------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 982.10 $5.90 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.26 $6.01 -------------------------------------------------------------------------------------------------------------- CLASS R -------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 984.70 $3.45 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.73 $3.52 -------------------------------------------------------------------------------------------------------------- ADVISOR CLASS -------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 988.30 $0.90 -------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.30 $0.92 --------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.49%; C: 1.18%; R: 0.69%; and Advisor: 0.18%), 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 2007 2006 2005 2004 h 2004 i ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 14.09 $ 12.71 $ 12.20 $ 11.02 $ 10.00 ----------------------------------------------------------------- Income from investment operations a: Net investment income b,c ........................... 0.15 0.11 0.09 0.09 0.01 Net realized and unrealized gains (losses) .......... 0.57 1.81 0.71 1.21 1.07 ----------------------------------------------------------------- Total from investment operations ....................... 0.72 1.92 0.80 1.30 1.08 ----------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................. (0.17) (0.16) (0.10) (0.07) -- Net realized gains .................................. (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ............................... -- -- -- -- (0.06) ----------------------------------------------------------------- Total distributions .................................... (0.59) (0.54) (0.29) (0.12) (0.06) ----------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g ----------------------------------------------------------------- Net asset value, end of year ........................... $ 14.22 $ 14.09 $ 12.71 $ 12.20 $ 11.02 ================================================================= Total return d ......................................... 5.20% 15.25% 6.63% 11.77% 10.85% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 0.64% 0.65% 0.66% 0.68% 0.74% Expenses net of waiver and payments by affiliates f .... 0.50% 0.50% 0.58% 0.68% 0.47% Net investment income c ................................ 0.99% 0.82% 0.72% 1.86% 0.14% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 497,314 $ 458,460 $ 353,016 $ 238,564 $ 157,792 Portfolio turnover rate ................................ 1.72% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.72% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 13.99 $ 12.62 $ 12.12 $ 10.95 $ 10.00 ----------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b,c .................... 0.05 0.01 0.01 0.06 (0.06) Net realized and unrealized gains (losses) .......... 0.57 1.81 0.70 1.20 1.06 ----------------------------------------------------------------- Total from investment operations ....................... 0.62 1.82 0.71 1.26 1.00 ----------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................. (0.07) (0.07) (0.02) (0.04) -- Net realized gains .................................. (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ............................... -- -- -- -- (0.05) ----------------------------------------------------------------- Total distributions .................................... (0.49) (0.45) (0.21) (0.09) (0.05) ----------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g ----------------------------------------------------------------- Net asset value, end of year ........................... $ 14.12 $ 13.99 $ 12.62 $ 12.12 $ 10.95 ================================================================= Total return d ......................................... 4.49% 14.55% 5.89% 11.50% 10.02% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 1.31% 1.30% 1.31% 1.33% 1.39% Expenses net of waiver and payments by affiliates f .... 1.16% 1.15% 1.23% 1.33% 1.12% Net investment income (loss) c ......................... 0.32% 0.17% 0.07% 1.21% (0.51)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 72,530 $ 76,408 $ 71,496 $ 66,562 $ 44,297 Portfolio turnover rate ................................ 1.72% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.72% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 13.96 $ 12.61 $ 12.11 $ 10.94 $ 10.00 ----------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b,c .................... 0.05 0.02 0.01 0.06 (0.05) Net realized and unrealized gains (losses) .......... 0.57 1.79 0.71 1.20 1.04 ----------------------------------------------------------------- Total from investment operations ....................... 0.62 1.81 0.72 1.26 0.99 ----------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................. (0.08) (0.08) (0.03) (0.04) -- Net realized gains .................................. (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ............................... -- -- -- -- (0.05) ----------------------------------------------------------------- Total distributions .................................... (0.50) (0.46) (0.22) (0.09) (0.05) ----------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g ----------------------------------------------------------------- Net asset value, end of year ........................... $ 14.08 $ 13.96 $ 12.61 $ 12.11 $ 10.94 ================================================================= Total return d ......................................... 4.50% 14.48% 6.02% 11.49% 9.93% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 1.30% 1.29% 1.29% 1.33% 1.39% Expenses net of waiver and payments by affiliates f .... 1.16% 1.14% 1.21% 1.33% 1.12% Net investment income (loss) c ......................... 0.33% 0.18% 0.09% 1.21% (0.51)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 181,951 $ 166,688 $ 132,459 $ 96,487 $ 73,272 Portfolio turnover rate ................................ 1.72% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.72% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 14.07 $ 12.69 $ 12.18 $ 11.00 $ 10.00 ----------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b,c .................... 0.12 0.09 0.05 0.08 (0.02) Net realized and unrealized gains (losses) .......... 0.57 1.81 0.73 1.21 1.08 ----------------------------------------------------------------- Total from investment operations ....................... 0.69 1.90 0.78 1.29 1.06 ----------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................. (0.14) (0.14) (0.08) (0.06) -- Net realized gains .................................. (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ............................... -- -- -- -- (0.06) ----------------------------------------------------------------- Total distributions .................................... (0.56) (0.52) (0.27) (0.11) (0.06) ----------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g ----------------------------------------------------------------- Net asset value, end of year ........................... $ 14.20 $ 14.07 $ 12.69 $ 12.18 $ 11.00 ================================================================= Total return d ......................................... 5.02% 15.10% 6.43% 11.73% 10.65% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 0.81% 0.80% 0.81% 0.83% 0.89% Expenses net of waiver and payments by affiliates f .... 0.66% 0.65% 0.73% 0.83% 0.62% Net investment income (loss) c ......................... 0.82% 0.67% 0.57% 1.71% (0.01)% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 2,602 $ 2,534 $ 2,190 $ 1,944 $ 1,408 Portfolio turnover rate ................................ 1.72% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.72% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 14.12 $ 12.73 $ 12.21 $ 11.02 $ 10.00 ----------------------------------------------------------------- Income from investment operations a: Net investment income b,c ........................... 0.19 0.15 0.13 0.11 0.04 Net realized and unrealized gains (losses) .......... 0.58 1.83 0.72 1.21 1.05 ----------------------------------------------------------------- Total from investment operations ....................... 0.77 1.98 0.85 1.32 1.09 ----------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ............................. (0.22) (0.21) (0.14) (0.08) -- Net realized gains .................................. (0.42) (0.38) (0.19) (0.05) -- Tax return of capital ............................... -- -- -- -- (0.07) ----------------------------------------------------------------- Total distributions .................................... (0.64) (0.59) (0.33) (0.13) (0.07) ----------------------------------------------------------------- Redemption fees ........................................ -- g -- g -- g -- g -- g ----------------------------------------------------------------- Net asset value, end of year ........................... $ 14.25 $ 14.12 $ 12.73 $ 12.21 $ 11.02 ================================================================= Total return d ......................................... 5.53% 15.65% 6.93% 12.09% 10.92% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f .... 0.31% 0.30% 0.31% 0.33% 0.39% Expenses net of waiver and payments by affiliates f .... 0.16% 0.15% 0.23% 0.33% 0.12% Net investment income c ................................ 1.32% 1.17% 1.07% 2.21% 0.49% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 3,243 $ 3,073 $ 2,792 $ 2,097 $ 1,181 Portfolio turnover rate ................................ 1.72% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.72% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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, 2007
---------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND SHARES VALUE ---------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 99.9% DOMESTIC EQUITY 75.3% Franklin Capital Growth Fund, Advisor Class .............................. 15,539,485 $ 193,777,383 Franklin Growth Fund, Advisor Class ...................................... 4,293,676 190,982,694 Mutual Shares Fund, Class Z .............................................. 7,319,176 185,467,908 -------------- 570,227,985 -------------- FOREIGN EQUITY 24.6% Templeton Growth Fund Inc., Advisor Class ................................ 7,756,196 186,846,754 -------------- TOTAL LONG TERM INVESTMENTS (COST $642,043,363) .......................... 757,074,739 -------------- SHORT TERM INVESTMENT (COST $2,001) 0.0% b MONEY MARKET FUND 0.0% b c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ..... 2,001 2,001 -------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $642,045,364) 99.9% .......... 757,076,740 OTHER ASSETS, LESS LIABILITIES 0.1% ...................................... 562,737 -------------- NET ASSETS 100.0% ........................................................ $ 757,639,477 ==============
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 2007 2006 2005 2004 h 2004 i ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................... $ 13.98 $ 12.50 $ 12.28 $ 11.21 $ 10.00 --------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ............................. 0.43 0.40 0.37 0.22 0.23 Net realized and unrealized gains (losses) ............ -- g 1.99 0.40 1.14 1.07 --------------------------------------------------------------------- Total from investment operations ......................... 0.43 2.39 0.77 1.36 1.30 --------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds .............................. (0.44) (0.44) (0.30) (0.23) (0.09) Net realized gains .................................... (0.47) (0.47) (0.25) (0.06) -- --------------------------------------------------------------------- Total distributions ...................................... (0.91) (0.91) (0.55) (0.29) (0.09) --------------------------------------------------------------------- Redemption fees .......................................... -- g -- g -- g -- g -- g --------------------------------------------------------------------- Net asset value, end of year ............................. $ 13.50 $ 13.98 $ 12.50 $ 12.28 $ 11.21 ===================================================================== Total return d ........................................... 3.12% 19.34% 6.31% 12.16% 13.00% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ...... 0.55% 0.57% 0.58% 0.60% 0.61% Expenses net of waiver and payments by affiliates f ...... 0.50% 0.50% 0.54% 0.60% 0.49% Net investment income c 2.99% 3.00% 2.98% 4.48% 2.16% SUPPLEMENTAL DATA Net assets, end of year (000's) .......................... $10,161,473 $7,288,143 $4,051,695 $1,640,876 $ 882,175 Portfolio turnover rate .................................. 0.73% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $ 13.93 $ 12.46 $ 12.23 $ 11.16 $ 10.00 ------------------------------------------------------------- Income from investment operations a: Net investment income b,c ................................ 0.35 0.28 0.26 0.19 0.16 Net realized and unrealized gains (losses) ............... (0.02) 2.00 0.43 1.13 1.08 ------------------------------------------------------------- Total from investment operations ............................ 0.33 2.28 0.69 1.32 1.24 ------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................................. (0.34) (0.34) (0.21) (0.19) (0.08) Net realized gains ....................................... (0.47) (0.47) (0.25) (0.06) -- ------------------------------------------------------------- Total distributions ......................................... (0.81) (0.81) (0.46) (0.25) (0.08) ------------------------------------------------------------- Redemption fees ............................................. -- g -- g -- g -- g -- g ------------------------------------------------------------- Net asset value, end of year ................................ $ 13.45 $ 13.93 $ 12.46 $ 12.23 $ 11.16 ============================================================= Total return d .............................................. 2.36% 18.53% 5.58% 11.90% 12.39% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......... 1.22% 1.22% 1.23% 1.25% 1.26% Expenses net of waiver and payments by affiliates f ......... 1.17% 1.15% 1.19% 1.25% 1.14% Net investment income c ..................................... 2.32% 2.35% 2.33% 3.83% 1.51% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $722,716 $766,452 $688,590 $612,553 $357,282 Portfolio turnover rate ..................................... 0.73% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $ 13.78 $ 12.36 $ 12.23 $ 11.16 $ 10.00 ------------------------------------------------------------------- Income from investment operations a: Net investment income b,c ................................ 0.29 0.31 0.29 0.19 0.17 Net realized and unrealized gains (losses) ............... 0.05 1.95 0.39 1.13 1.07 ------------------------------------------------------------------- Total from investment operations ............................ 0.34 2.26 0.68 1.32 1.24 ------------------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................................. (0.36) (0.37) (0.30) (0.19) (0.08) Net realized gains ....................................... (0.47) (0.47) (0.25) (0.06) -- ------------------------------------------------------------------- Total distributions ......................................... (0.83) (0.84) (0.55) (0.25) (0.08) ------------------------------------------------------------------- Redemption fees ............................................. -- g -- g -- g -- g -- g ------------------------------------------------------------------- Net asset value, end of year ................................ $ 13.29 $ 13.78 $ 12.36 $ 12.23 $ 11.16 =================================================================== Total return d .............................................. 2.47% 18.50% 5.63% 11.79% 12.40% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......... 1.22% 1.22% 1.20% 1.25% 1.26% Expenses net of waiver and payments by affiliates f ......... 1.17% 1.15% 1.16% 1.25% 1.14% Net investment income c ..................................... 2.32% 2.35% 2.36% 3.83% 1.51% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $5,295,157 $3,692,307 $2,075,041 $927,786 $535,778 Portfolio turnover rate ..................................... 0.73% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $ 13.98 $ 12.50 $ 12.28 $ 11.22 $ 10.00 ------------------------------------------------------------ Income from investment operations a: Net investment income b,c ................................ 0.42 0.37 0.33 0.22 0.20 Net realized and unrealized gains (losses) ............... (0.01) 1.99 0.42 1.13 1.11 ------------------------------------------------------------ Total from investment operations ............................ 0.41 2.36 0.75 1.35 1.31 ------------------------------------------------------------ Less distributions from: Net investment income and short term gains received from Underlying Funds ................................. (0.42) (0.41) (0.28) (0.23) (0.09) Net realized gains ....................................... (0.47) (0.47) (0.25) (0.06) -- ------------------------------------------------------------ Total distributions ......................................... (0.89) (0.88) (0.53) (0.29) (0.09) ------------------------------------------------------------ Redemption fees ............................................. -- g -- g -- g -- g -- g ------------------------------------------------------------ Net asset value, end of year ................................ $ 13.50 $ 13.98 $ 12.50 $ 12.28 $ 11.22 ============================================================ Total return d .............................................. 2.92% 19.15% 6.12% 12.02% 13.09% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......... 0.72% 0.72% 0.73% 0.75% 0.76% Expenses net of waiver and payments by affiliates f ......... 0.67% 0.65% 0.69% 0.75% 0.64% Net investment income c ..................................... 2.82% 2.85% 2.83% 4.33% 2.01% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $29,028 $24,435 $17,247 $12,101 $ 5,225 Portfolio turnover rate ..................................... 0.73% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h 2004 i ------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $ 14.05 $ 12.55 $ 12.32 $11.25 $10.00 ------------------------------------------------------- Income from investment operations a: Net investment income b,c ................................ 0.48 0.47 0.39 0.24 0.25 Net realized and unrealized gains (losses) ............... 0.01 1.98 0.42 1.14 1.09 ------------------------------------------------------- Total from investment operations ............................ 0.49 2.45 0.81 1.38 1.34 ------------------------------------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................................. (0.49) (0.48) (0.33) (0.25) (0.09) Net realized gains ....................................... (0.47) (0.47) (0.25) (0.06) -- ------------------------------------------------------- Total distributions ......................................... (0.96) (0.95) (0.58) (0.31) (0.09) ------------------------------------------------------- Redemption fees ............................................. -- g -- g -- g -- g -- g ------------------------------------------------------- Net asset value, end of year ................................ $ 13.58 $ 14.05 $ 12.55 $12.32 $11.25 ======================================================= Total return d .............................................. 3.48% 19.73% 6.63% 12.32% 13.46% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......... 0.22% 0.22% 0.23% 0.25% 0.26% Expenses net of waiver and payments by affiliates f ......... 0.17% 0.15% 0.19% 0.25% 0.14% Net investment income c ..................................... 3.32% 3.35% 3.33% 4.83% 2.51% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $46,866 $25,124 $12,535 $7,792 $4,991 Portfolio turnover rate ..................................... 0.73% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2004 to December 31, 2004. 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, 2007
----------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND SHARES VALUE ----------------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 99.9% DOMESTIC EQUITY 33.2% Mutual Shares Fund, Class Z ............................................. 212,972,694 $ 5,396,728,059 ---------------- DOMESTIC HYBRID 33.5% Franklin Income Fund Inc., Advisor Class ................................ 2,120,165,039 5,448,824,151 ---------------- FOREIGN EQUITY 33.2% Templeton Growth Fund Inc., Advisor Class ............................... 224,197,404 5,400,915,451 ---------------- TOTAL LONG TERM INVESTMENTS (COST $15,985,803,870) ...................... 16,246,467,661 ---------------- SHORT TERM INVESTMENT (COST $21,205) 0.0% b MONEY MARKET FUND 0.0% b c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% .... 21,205 21,205 ---------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $15,985,825,075) 99.9% ...... 16,246,488,866 OTHER ASSETS, LESS LIABILITIES 0.1% ..................................... 8,751,391 ---------------- NET ASSETS 100.0% ....................................................... $16,255,240,257 ================
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 2007 2006 2005 2004 h ------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................ $ 12.90 $ 11.79 $ 11.19 $ 10.00 ------------------------------------------ Income from investment operations a: Net investment income b,c .................................................. 0.15 0.17 0.16 0.17 Net realized and unrealized gains (losses) ................................. 0.71 1.55 0.73 1.12 ------------------------------------------ Total from investment operations .............................................. 0.86 1.72 0.89 1.29 ------------------------------------------ Less distributions from: Net investment income and short term gains received from Underlying Funds .. (0.16) (0.19) (0.13) (0.07) Net realized gains ......................................................... (0.43) (0.42) (0.16) (0.03) ------------------------------------------ Total distributions ........................................................... (0.59) (0.61) (0.29) (0.10) ------------------------------------------ Redemption fees ............................................................... -- g -- g -- g -- g ------------------------------------------ Net asset value, end of year .................................................. $ 13.17 $ 12.90 $ 11.79 $ 11.19 ========================================== Total return d ................................................................ 6.79% 14.69% 7.93% 12.93% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ........................... 0.68% 0.72% 0.90% 2.31% Expenses net of waiver and payments by affiliates f ........................... 0.50% 0.50% 0.46% 0.39% Net investment income c ....................................................... 1.09% 1.18% 1.41% 3.78% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................... $228,876 $190,189 $103,348 $16,155 Portfolio turnover rate ....................................................... 2.53% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.74% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 2, 2004 to December 31, 2004. 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 2007 2006 2005 2004 h ------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................ $ 12.82 $ 11.74 $ 11.18 $ 10.00 ------------------------------------------ Income from investment operations a: Net investment income b,c .................................................. 0.06 0.08 0.09 0.15 Net realized and unrealized gains (losses) ................................. 0.71 1.54 0.72 1.12 ------------------------------------------ Total from investment operations .............................................. 0.77 1.62 0.81 1.27 ------------------------------------------ Less distributions from: Net investment income and short term gains received from Underlying Funds .. (0.08) (0.12) (0.09) (0.06) Net realized gains ......................................................... (0.43) (0.42) (0.16) (0.03) ------------------------------------------ Total distributions ........................................................... (0.51) (0.54) (0.25) (0.09) ------------------------------------------ Redemption fees ............................................................... -- g -- g -- g -- g ------------------------------------------ Net asset value, end of year .................................................. $ 13.08 $ 12.82 $ 11.74 $ 11.18 ========================================== Total return d ................................................................ 6.11% 13.92% 7.22% 12.66% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ........................... 1.34% 1.36% 1.55% 2.96% Expenses net of waiver and payments by affiliates f ........................... 1.16% 1.14% 1.11% 1.04% Net investment income c ....................................................... 0.43% 0.54% 0.76% 3.13% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................... $ 84,173 $ 68,482 $ 36,568 $ 4,558 Portfolio turnover rate ....................................................... 2.53% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.74% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 2, 2004 (commencement of operations) to December 31, 2004. 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, 2007 2006 2005 2004 h ------------------------------------------------ CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ......................................... $ 12.90 $ 11.79 $ 11.18 $ 10.00 ------------------------------------------------ Income from investment operations a: Net investment income b,c ............................................... 0.11 0.14 0.11 0.15 Net realized and unrealized gains (losses) .............................. 0.73 1.55 0.77 1.13 ------------------------------------------------ Total from investment operations ........................................... 0.84 1.69 0.88 1.28 ------------------------------------------------ Less distributions from: Net investment income and short term gains received from Underlying Funds ................................................................ (0.14) (0.16) (0.11) (0.07) Net realized gains ...................................................... (0.43) (0.42) (0.16) (0.03) ------------------------------------------------ Total distributions ........................................................ (0.57) (0.58) (0.27) (0.10) ------------------------------------------------ Redemption fees ............................................................ -- g -- g -- g -- g ------------------------------------------------ Net asset value, end of year ............................................... $ 13.17 $ 12.90 $ 11.79 $ 11.18 ================================================ Total return d ............................................................. 6.58% 14.49% 7.86% 12.81% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ........................ 0.85% 0.87% 1.05% 2.46% Expenses net of waiver and payments by affiliates f ........................ 0.67% 0.65% 0.61% 0.54% Net investment income c .................................................... 0.92% 1.03% 1.26% 3.63% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................ $ 1,433 $ 1,539 $ 1,287 $ 260 Portfolio turnover rate .................................................... 2.53% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.74% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 2, 2004 (commencement of operations) to December 31, 2004. 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, 2007 2006 2005 2004 h ------------------------------------------------ ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ......................................... $ 12.93 $ 11.81 $ 11.19 $ 10.00 ------------------------------------------------ Income from investment operations a: Net investment income b,c ............................................... 0.24 0.22 0.11 0.14 Net realized and unrealized gains (losses) .............................. 0.68 1.54 0.82 1.16 ------------------------------------------------ Total from investment operations ........................................... 0.92 1.76 0.93 1.30 ------------------------------------------------ Less distributions from: Net investment income and short term gains received from Underlying Funds ................................................................ (0.20) (0.22) (0.15) (0.08) Net realized gains ...................................................... (0.43) (0.42) (0.16) (0.03) ------------------------------------------------ Total distributions ........................................................ (0.63) (0.64) (0.31) (0.11) ------------------------------------------------ Redemption fees ............................................................ -- g -- g -- g -- g ------------------------------------------------ Net asset value, end of year ............................................... $ 13.22 $ 12.93 $ 11.81 $11.19 ================================================ Total return d ............................................................. 7.26% 15.07% 8.31% 13.01% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ........................ 0.35% 0.37% 0.55% 1.96% Expenses net of waiver and payments by affiliates f ........................ 0.17% 0.15% 0.11% 0.04% Net investment income c .................................................... 1.42% 1.53% 1.76% 4.13% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................ $ 2,804 $ 1,931 $ 1,104 $ 196 Portfolio turnover rate .................................................... 2.53% 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.74% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 2, 2004 (commencement of operations) to December 31, 2004. Annual Report | The accompanying notes are an integral part of these financial statements. | 47 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
---------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND SHARES VALUE ---------------------------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 99.7% DOMESTIC EQUITY 66.7% Franklin Flex Cap Growth Fund, Advisor Class ............................................... 2,166,760 $ 105,824,562 Mutual Shares Fund, Class Z ................................................................ 4,169,739 105,661,195 -------------- 211,485,757 -------------- FOREIGN EQUITY 33.0% Templeton Growth Fund Inc., Advisor Class .................................................. 4,354,551 104,901,123 -------------- TOTAL LONG TERM INVESTMENTS (COST $292,695,870) ............................................ 316,386,880 -------------- SHORT TERM INVESTMENT (COST $101,416) 0.0% b MONEY MARKET FUND 0.0% b c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ....................... 101,416 101,416 -------------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $292,797,286) 99.7% ............................ 316,488,296 OTHER ASSETS, LESS LIABILITIES 0.3% ........................................................ 798,405 -------------- NET ASSETS 100.0% .......................................................................... $ 317,286,701 ==============
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, 2007
--------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND --------------------------------------------------- Assets: Investments in Underlying Funds (Note 6): Cost ............................................ $642,045,364 $15,985,825,075 $292,797,286 =================================================== Value ........................................... $757,076,740 $16,246,488,866 $316,488,296 Receivables: Investment securities sold ...................... 200,000 53,310,354 -- Capital shares sold ............................. 2,173,637 66,257,785 1,252,250 Other assets ...................................... -- -- 62,199 --------------------------------------------------- Total assets .................................... 759,450,377 16,366,057,005 317,802,745 --------------------------------------------------- Liabilities: Payables: Capital shares redeemed ......................... 878,154 40,300,623 188,216 Affiliates ...................................... 689,632 15,702,352 289,905 Unaffiliated transfer agent fees ................ -- -- 37,923 Funds advanced by custodian ....................... 168,938 50,560,181 -- Accrued expenses and other liabilities ............ 74,176 4,253,592 -- --------------------------------------------------- Total liabilities ............................... 1,810,900 110,816,748 516,044 --------------------------------------------------- Net assets, at value .......................... $757,639,477 $16,255,240,257 $317,286,701 =================================================== Net assets consist of: Paid-in capital ................................... $627,365,467 $15,668,399,523 $287,318,086 Undistributed net investment income (loss) ........ 806,821 9,727,549 131,201 Net unrealized appreciation (depreciation) ........ 115,031,376 260,663,791 23,691,010 Accumulated net realized gain (loss) .............. 14,435,813 316,449,394 6,146,404 --------------------------------------------------- Net assets, at value .......................... $757,639,477 $16,255,240,257 $317,286,701 ===================================================
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, 2007
--------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND --------------------------------------------------- CLASS A: Net assets, at value ..................................................... $ 497,313,641 $10,161,472,993 $ 228,876,495 =================================================== Shares outstanding ....................................................... 34,971,941 752,935,770 17,380,634 =================================================== Net asset value per share ................................................ $ 14.22 $ 13.50 $ 13.17 =================================================== Maximum offering price per share (net assets value per share / 94.25%) ... $ 15.09 $ 14.32 $ 13.97 =================================================== CLASS B: Net assets, at value ..................................................... $ 72,530,042 $ 722,716,433 ================================= Shares outstanding ....................................................... 5,137,358 53,713,964 ================================= Net asset value and maximum offering price per share a ................... $ 14.12 $ 13.45 ================================= CLASS C: Net assets, at value ..................................................... $ 181,951,036 $ 5,295,157,115 $ 84,172,685 =================================================== Shares outstanding ....................................................... 12,924,676 398,501,247 6,437,328 =================================================== Net asset value and maximum offering price per share a ................... $ 14.08 $ 13.29 $ 13.08 =================================================== CLASS R: Net assets, at value ..................................................... $ 2,601,727 $ 29,027,502 $ 1,433,392 =================================================== Shares outstanding ....................................................... 183,245 2,150,112 108,842 =================================================== Net asset value and maximum offering price per share a ................... $ 14.20 $ 13.50 $ 13.17 =================================================== ADVISOR CLASS: Net assets, at value ..................................................... $ 3,243,031 $ 46,866,214 $ 2,804,129 =================================================== Shares outstanding ....................................................... 227,573 3,451,123 212,093 =================================================== Net asset value and maximum offering price per share a ................... $ 14.25 $ 13.58 $ 13.22 ===================================================
a Redemption price is equal to the 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, 2007
------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN TEMPLETON TEMPLETON TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------ Investment income: Dividends from Underlying Funds (Note 6) ............................... $ 11,270,120 $ 524,310,165 $ 4,711,028 ------------------------------------------------------ Expenses: Administrative fees (Note 3a) .......................................... 756,867 14,954,069 297,015 Distribution fees (Note 3b) Class A .............................................................. 1,626,574 30,537,397 709,152 Class B .............................................................. 766,114 7,682,361 -- Class C .............................................................. 1,793,784 48,679,511 767,350 Class R .............................................................. 13,393 142,467 7,248 Transfer agent fees (Note 3d) .......................................... 1,326,515 15,747,007 618,854 Custodian fees ......................................................... 514 10,148 -- Reports to shareholders ................................................ 83,762 1,215,933 17,098 Registration and filing fees ........................................... 96,238 828,774 60,041 Professional fees ...................................................... 30,702 169,521 25,948 Trustees' fees and expenses ............................................ 3,506 90,018 1,630 Other .................................................................. 19,440 296,895 10,354 ------------------------------------------------------ Total expenses ....................................................... 6,517,409 120,354,101 2,514,690 Expenses waived/paid by affiliates (Note 3e) ......................... (1,074,823) (7,850,670) (538,626) ------------------------------------------------------ Net expenses ....................................................... 5,442,586 112,503,431 1,976,064 ------------------------------------------------------ Net investment income ............................................ 5,827,534 411,806,734 2,734,964 ------------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Sale of investments in Underlying Funds .............................. 484,595 (11,778,472) 107,078 Realized gain distributions by Underlying Funds ...................... 26,194,063 676,352,654 12,125,385 ------------------------------------------------------ Net realized gain (loss) from Underlying Funds ................... 26,678,658 664,574,182 12,232,463 ------------------------------------------------------ Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ................................................. 2,933,990 (789,793,282) 2,728,681 ------------------------------------------------------ Net realized and unrealized gain (loss) ................................... 29,612,648 (125,219,100) 14,961,144 ------------------------------------------------------ Net increase (decrease) in net assets resulting from operations ........... $ 35,440,182 $ 286,587,634 $ 17,696,108 ======================================================
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, 2007 2006 ---------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ............................................................. $ 5,827,534 $ 3,736,014 Net realized gain (loss) from Underlying Funds ........................................... 26,678,658 24,029,110 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .. 2,933,990 61,294,086 ---------------------------------- Net increase (decrease) in net assets resulting from operations ...................... 35,440,182 89,059,210 ---------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ................................................................................ (5,840,602) (5,156,182) Class B ................................................................................ (347,605) (395,188) Class C ................................................................................ (976,333) (951,148) Class R ................................................................................ (25,991) (25,068) Advisor Class .......................................................................... (48,599) (44,139) Net realized gains: Class A ................................................................................ (14,073,351) (11,448,102) Class B ................................................................................ (2,191,830) (2,054,806) Class C ................................................................................ (5,194,889) (4,266,699) Class R ................................................................................ (75,541) (65,663) Advisor Class .......................................................................... (92,288) (79,089) ---------------------------------- Total distributions to shareholders ........................................................... (28,867,029) (24,486,084) ---------------------------------- Capital share transactions: (Note 2) Class A ................................................................................ 34,638,044 63,989,093 Class B ................................................................................ (4,799,240) (2,554,475) Class C ................................................................................ 13,884,383 19,093,712 Class R ................................................................................ 42,997 112,639 Advisor Class .......................................................................... 135,731 (5,903) ---------------------------------- Total capital share transactions ........................................................... 43,901,915 80,635,066 ---------------------------------- Redemption fees ............................................................................ 1,283 2,409 ---------------------------------- Net increase (decrease) in net assets ................................................ 50,476,351 145,210,601 Net assets: Beginning of year .......................................................................... 707,163,126 561,952,525 ---------------------------------- End of year ................................................................................ $ 757,639,477 $ 707,163,126 ================================== Undistributed net investment income included in net assets: End of year ................................................................................ $ 806,821 $ 746,559 ==================================
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, 2007 2006 ---------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................... $ 411,806,734 $ 245,818,909 Net realized gain (loss) from Underlying Funds ........................................... 664,574,182 497,747,137 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .. (789,793,282) 866,728,549 ---------------------------------- Net increase (decrease) in net assets resulting from operations ...................... 286,587,634 1,610,294,595 ---------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ................................................................................ (317,349,633) (215,722,803) Class B ................................................................................ (17,434,411) (18,066,213) Class C ................................................................................ (136,416,205) (93,577,572) Class R ................................................................................ (850,119) (683,952) Advisor Class .......................................................................... (1,589,342) (799,059) Net realized gains: Class A ................................................................................ (304,268,073) (202,445,425) Class B ................................................................................ (24,803,530) (25,277,173) Class C ................................................................................ (160,810,003) (104,093,208) Class R ................................................................................ (913,018) (727,036) Advisor Class .......................................................................... (1,390,383) (652,974) ---------------------------------- Total distributions to shareholders ........................................................ (965,824,717) (662,045,415) ---------------------------------- Capital share transactions: (Note 2) Class A ................................................................................ 3,296,660,627 2,657,895,916 Class B ................................................................................ (20,839,227) (1,624,509) Class C ................................................................................ 1,832,949,853 1,330,975,579 Class R ................................................................................ 5,610,819 4,909,568 Advisor Class .......................................................................... 23,543,435 10,900,983 ---------------------------------- Total capital share transactions ........................................................... 5,137,925,507 4,003,057,537 ---------------------------------- Redemption fees ............................................................................ 90,601 45,813 ---------------------------------- Net increase (decrease) in net assets ................................................ 4,458,779,025 4,951,352,530 Net assets: Beginning of year .......................................................................... 11,796,461,232 6,845,108,702 ---------------------------------- End of year ................................................................................ $16,255,240,257 $11,796,461,232 ================================== Undistributed net investment income included in net assets: End of year ................................................................................ $ 9,727,549 $ 6,495,779 ==================================
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, 2007 2006 ---------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................... $ 2,734,964 $ 2,101,962 Net realized gain (loss) from Underlying Funds ........................................... 12,232,463 10,241,921 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds .. 2,728,681 16,328,995 ---------------------------------- Net increase (decrease) in net assets resulting from operations ........................ 17,696,108 28,672,878 ---------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ................................................................................ (2,720,323) (2,636,779) Class C ................................................................................ (498,075) (608,817) Class R ................................................................................ (14,529) (18,516) Advisor Class .......................................................................... (41,571) (31,836) Net realized gains: Class A ................................................................................ (6,969,461) (5,309,666) Class C ................................................................................ (2,547,116) (1,947,481) Class R ................................................................................ (45,646) (48,316) Advisor Class .......................................................................... (76,998) (51,944) ---------------------------------- Total distributions to shareholders ........................................................ (12,913,719) (10,653,355) ---------------------------------- Capital share transactions: (Note 2) Class A ................................................................................ 35,125,183 73,695,077 Class C ................................................................................ 14,529,010 27,278,019 Class R ................................................................................ (143,982) 129,556 Advisor Class .......................................................................... 852,484 709,790 ---------------------------------- Total capital share transactions ........................................................... 50,362,695 101,812,442 ---------------------------------- Redemption fees ............................................................................ 509 1,365 ---------------------------------- Net increase (decrease) in net assets .................................................. 55,145,593 119,833,330 Net assets: Beginning of year .......................................................................... 262,141,108 142,307,778 ---------------------------------- End of year ................................................................................ $ 317,286,701 $ 262,141,108 ================================== Undistributed net investment income included in net assets: End of year ................................................................................ $ 131,201 $ 105,807 ==================================
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 (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of ten separate funds. All funds included in this report (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 (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 it is each fund's policy 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 of America. 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 | 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) 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 per share distributions, by class, are generally due to differences in class specific expenses. 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, on behalf of the Funds, 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, 2007, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's 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, 2007 Shares sold ...................... 6,378,170 $ 93,084,616 292,721,549 $ 4,204,831,048 Shares issued in reinvestment of distributions ............... 1,343,124 18,899,053 43,121,092 585,972,631 Shares redeemed .................. (5,283,476) (77,345,625) (104,395,290) (1,494,143,052) ------------------------------------------------------------------- Net increase (decrease) .......... 2,437,818 $ 34,638,044 231,447,351 $ 3,296,660,627 =================================================================== 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 =================================================================== CLASS B SHARES: Year ended December 31, 2007 Shares sold ...................... 163,283 $ 2,375,521 1,830,543 $ 26,037,839 Shares issued in reinvestment of distributions ............... 173,408 2,410,075 2,891,384 39,193,366 Shares redeemed .................. (661,660) (9,584,836) (6,046,820) (86,070,432) ------------------------------------------------------------------- Net increase (decrease) .......... (324,969) $ (4,799,240) (1,324,893) $ (20,839,227) =================================================================== 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) =================================================================== CLASS C SHARES: Year ended December 31, 2007 Shares sold ...................... 2,444,225 $ 35,225,036 157,486,626 $ 2,223,665,616 Shares issued in reinvestment of distributions ............... 411,520 5,713,280 19,278,071 257,996,100 Shares redeemed .................. (1,872,480) (27,053,933) (46,146,097) (648,711,863) ------------------------------------------------------------------- Net increase (decrease) .......... 983,265 $ 13,884,383 130,618,600 $ 1,832,949,853 =================================================================== Year ended December 31, 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 ===================================================================
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, 2007 Shares sold ...................... 29,749 $ 432,620 685,879 $ 9,833,344 Shares issued in reinvestment of distributions ............... 7,237 101,532 129,305 1,757,748 Shares redeemed .................. (33,870) (491,155) (413,096) (5,980,273) ------------------------------------------------------------------- Net increase (decrease) .......... 3,116 $ 42,997 402,088 $ 5,610,819 =================================================================== 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 =================================================================== ADVISOR CLASS SHARES: Year ended December 31, 2007 Shares sold ...................... 25,060 $ 368,676 2,787,785 $ 40,332,750 Shares issued in reinvestment of distributions ............... 9,535 134,617 200,669 2,743,050 Shares redeemed .................. (24,639) (367,562) (1,325,204) (19,532,365) ------------------------------------------------------------------- Net increase (decrease) .......... 9,956 $ 135,731 1,663,250 $ 23,543,435 =================================================================== 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 ===================================================================
------------------------------- FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND ------------------------------- SHARES AMOUNT ------------------------------- CLASS A SHARES: Year ended December 31, 2007 Shares sold ....................................... 4,365,614 $ 58,774,977 Shares issued in reinvestment of distributions .... 718,932 9,372,129 Shares redeemed ................................... (2,442,712) (33,021,923) ------------------------------- Net increase (decrease) ........................... 2,641,834 $ 35,125,183 =============================== 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 ===============================
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, 2007 Shares sold ...................................... 1,691,743 $ 22,521,919 Shares issued in reinvestment of distributions ... 218,500 2,821,600 Shares redeemed .................................. (813,348) (10,814,509) ------------------------------- Net increase (decrease) .......................... 1,096,895 $ 14,529,010 =============================== 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 =============================== CLASS R SHARES: Year ended December 31, 2007 Shares sold ...................................... 20,847 $ 278,831 Shares issued in reinvestment of distributions ... 4,625 60,158 Shares redeemed .................................. (35,903) (482,971) ------------------------------- Net increase (decrease) .......................... (10,431) $ (143,982) =============================== 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 =============================== ADVISOR CLASS SHARES: Year ended December 31, 2007 Shares sold ...................................... 121,870 $ 1,673,964 Shares issued in reinvestment of distributions ... 7,764 101,709 Shares redeemed .................................. (66,889) (923,189) ------------------------------- Net increase (decrease) .......................... 62,745 $ 852,484 =============================== 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 ===============================
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 certain 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 the average daily net assets of each of the Funds 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 a certain percentage per year of its average daily net assets of each class 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% The Board of Trustees has agreed to limit the current rate to 0.30% per year for Class A shares for the period of August 1, 2007 through January 31, 2009. 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 .................. $501,714 $22,354,082 $299,238 Contingent deferred sales charges retained ................ $131,928 $ 2,088,536 $ 14,045
60 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. TRANSFER AGENT FEES For the year ended December 31, 2007, 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 ................ $805,644 $8,005,167 $394,752
E. WAIVER AND EXPENSE REIMBURSEMENTS FT Services and Investor Services have agreed in advance to waive all or a portion of their fees and to assume payment of other expenses through April 30, 2009. Total expenses waived/paid are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. After April 30, 2009, FT Services and Investor Services may discontinue this waiver at any time upon notice to the Funds' Board of Trustees. 4. INCOME TAXES The Funds have reviewed the tax positions taken on federal income tax returns, for each of the three open tax years and as of December 31, 2007 and have determined that no provision for income tax is required in the Funds' financial statements. The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows:
-------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO ALLOCATION FUND FOUNDING FUNDS ALLOCATION FUND -------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 2007 2006 2007 2006 -------------------------------------------------------------- Distributions paid from: Ordinary income .......... $ 7,797,367 $ 6,624,465 $475,261,307 $ 329,011,319 Long term capital gain ... 21,069,662 17,861,619 490,563,410 333,034,096 -------------------------------------------------------------- $ 28,867,029 $24,486,084 $965,824,717 $ 662,045,415 ==============================================================
-------------------------------- FRANKLIN TEMPLETON PERSPECTIVES ALLOCATION FUND -------------------------------- YEAR ENDED DECEMBER 31, 2007 2006 -------------------------------- Distributions paid from: Ordinary income .................. $ 3,440,711 $ 3,297,921 Long term capital gain ........... 9,473,008 7,355,434 -------------------------------- $ 12,913,719 $ 10,653,355 ================================ Annual Report | 61 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) At December 31, 2007, 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 ......................... $ 642,752,013 $ 16,001,089,841 $ 292,946,030 ============================================================= Unrealized appreciation ..................... $ 114,324,727 $ 245,399,025 $ 23,542,266 Unrealized depreciation ..................... -- -- -- ------------------------------------------------------------- Net unrealized appreciation (depreciation) .. $ 114,324,727 $ 245,399,025 $ 23,542,266 ============================================================= Undistributed ordinary income ............... $ 806,822 $ 9,727,549 $ 135,705 Undistributed long term capital gains ....... 15,142,462 331,714,160 6,290,644 ------------------------------------------------------------- Distributable earnings ...................... $ 15,949,284 $ 341,441,709 $ 6,426,349 =============================================================
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 gains 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, 2007, were as follows:
------------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ------------------------------------------------------------- Purchases ................................... $ 59,887,327 $ 5,495,895,827 $ 59,383,308 Sales ....................................... $ 13,003,633 $ 168,175,984 $ 7,504,212
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, 2007, the Funds held the following positions which exceed 5% of the Underlying Funds' shares outstanding: -------------------------------------------------------------------------------- NAME OF ISSUER % OF SHARES HELD -------------------------------------------------------------------------------- FRANLIN TEMPLETON COREFOLIO ALLOCATION FUND Franklin Capital Growth Fund ....................... 12.64% Franklin Growth Fund ............................... 6.41% FRANLIN TEMPLETON FOUNDING FUNDS ALLOCATION FUND Mutual Shares Fund, Class Z ........................ 21.25% Templeton Growth Fund Inc. ......................... 14.59% Franklin Income Fund Inc. .......................... 8.98% The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (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 AND LITIGATION 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 and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, 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. Annual Report | 63 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. REGULATORY AND LITIGATION MATTERS (CONTINUED) 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 PRONOUNCEMENT In September 2006, Financial Accounting Standards Board (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 THE 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, 2007, 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 five years in the period then ended, 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 securities at December 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2008 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, 2007: ----------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ----------------------------------------------------------- $24,739,217 $608,713,545 $11,560,489 Under Section 871(k)(2)(C) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as short term capital gain dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2007: ----------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ----------------------------------------------------------- $521,933 $1,572,412 $170,717 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, 2007. ----------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ----------------------------------------------------------- 94.32% 40.04% 66.54% 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, 2007. ----------------------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON COREFOLIO FOUNDING FUNDS PERSPECTIVES ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ----------------------------------------------------------- $12,101,709 $329,160,862 $4,867,023 In January 2008, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2007. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. 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 serves 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 141 Bar-S Foods (meat packing company). One Franklin Parkway 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 121 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. ------------------------------------------------------------------------------------------------------------------------------------ SAM GINN (1937) Trustee Since April 2007 121 Chevron Corporation (global energy One Franklin Parkway company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Trustee Since 1998 141 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), H.J. Heinz San Mateo, CA 94403-1906 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). ------------------------------------------------------------------------------------------------------------------------------------
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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 ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (1929) Trustee Since 1995 121 Center for Creative Land Recycling One Franklin Parkway (brownfield 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). ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Trustee Since April 2007 141 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas) and Sentient San Mateo, CA 94403-1906 Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Trustee Since April 2007 141 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). ------------------------------------------------------------------------------------------------------------------------------------ JOHN B. WILSON (1959) Lead Trustee since 121 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since January 2008 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 (consulting firm) (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 141 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 42 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------
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 ------------------------------------------------------------------------------------------------------------------------------------ **GREGORY E. JOHNSON (1961) Trustee Since April 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 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 President Vice President - AML Compliance - AML since 2006 Compliance 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). ------------------------------------------------------------------------------------------------------------------------------------ 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 28 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 Suite 2100 and 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. ------------------------------------------------------------------------------------------------------------------------------------
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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 ------------------------------------------------------------------------------------------------------------------------------------ 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. ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) President President and Not Applicable Not Applicable One Franklin Parkway and Chief Chief Executive San Mateo, CA 94403-1906 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. ------------------------------------------------------------------------------------------------------------------------------------ KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ 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). ------------------------------------------------------------------------------------------------------------------------------------
70 | 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 ------------------------------------------------------------------------------------------------------------------------------------ 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 some of the other subsidiaries of Franklin Resources, Inc. and 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 is considered to be an interested person of the Trust under the federal securities laws due to his position as officer, director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Trust's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Trust under the federal securities laws due to his position as officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. Note 3: Prior to December 31, 2007, Rupert H. Johnson, Jr. 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 HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON 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. WILSON IS AN INDEPENDENT BOARD MEMBER 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 FUNDS 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 1 GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund 1 Templeton Growth Fund Templeton World Fund GROWTH Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Growth Opportunities Fund 2 Franklin Small Cap Growth Fund II 3 Franklin Small-Mid Cap Growth Fund VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund 1 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 1 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 4 Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Focused Core Equity Fund Franklin Growth Fund Franklin Rising Dividends 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(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund 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 5 Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 5 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 5 Templeton Global Bond Fund Templeton Income Fund Templeton International Bond 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 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 and select retirement plans can continue adding to their accounts. 2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to Franklin Growth Opportunities Fund. The fund's investment goal and strategy remained the same. 3. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 4. 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. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 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. The fund invests primarily in 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. 12/07 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 A2007 02/08 [GRAPHIC OMITTED] -------------------------------------------------------------------------------- DECEMBER 31, 2007 -------------------------------------------------------------------------------- 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 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] Not part of the annual report Contents SHAREHOLDER LETTER ........................................................ 1 ANNUAL REPORT Economic and Market Overview .............................................. 3 Franklin Templeton 2015 Retirement Target Fund ............................ 5 Franklin Templeton 2025 Retirement Target Fund ............................ 15 Franklin Templeton 2035 Retirement Target Fund ............................ 25 Franklin Templeton 2045 Retirement Target Fund ............................ 35 Financial Highlights and Statements of Investments ........................ 45 Financial Statements ...................................................... 65 Notes to Financial Statements ............................................. 70 Report of Independent Registered Public Accounting Firm ................... 80 Tax Designation ........................................................... 81 Board Members and Officers ................................................ 82 Shareholder Information ................................................... 87 -------------------------------------------------------------------------------- Annual Report Economic and Market Overview During the 12 months ended December 31, 2007, the U.S. economy advanced at a moderate but uneven pace. After slow first quarter growth, gross domestic product (GDP) advanced solidly in the second quarter, supported by federal defense spending, accelerating exports and declining imports, and greater business spending. In the third quarter, growth accelerated despite a struggling housing market and the abrupt unraveling of the subprime mortgage market. The housing downturn affected the overall economy by fourth quarter 2007 when GDP growth decelerated as credit conditions worsened and consumer spending slowed. Consumer confidence declined through period-end largely due to rising mortgage and fuel costs, falling home prices and a weaker job market. Oil prices were volatile and established a new record high in November, nearing $99 per barrel. For the 12 months ended December 31, 2007, the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher than its 10-year average rate. 1 Facing the prospect of slower economic growth, the Federal Reserve Board lowered the federal funds target rate to 4.25% from 5.25% during the period. As investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year Treasury note yield fell from 4.71% at the beginning of the period to 4.04% on December 31, 2007. The global economy remained resilient despite elevated energy prices and widespread fears of contagion from the deteriorating U.S. housing situation. Consumer and corporate demand strength, particularly in China and other developing economies, generally favorable employment and accommodative monetary policies continued to underpin the current global expansionary period that began in 2002. These factors also contributed to the strength of global equity markets during 2007. However, concerns about slower growth and declining asset quality surfaced in the first quarter. Initially centered on the U.S. subprime mortgage market, they spread in August to global capital markets. Difficulties in assessing risk and the value of collateral in the structured finance industry contributed 1. Source: Bureau of Labor Statistics. Annual Report | 3 to declining risk appetite among lenders and investors. The private equity industry, which relies on the availability of cheap credit, played a pivotal role in several large and high-profile acquisitions, helped boost merger and acquisition activity in the first half of 2007, and was an important driver of equity performance. A second-half tightening of liquidity led to slower deal activity and weighed on market performance. However, in 2007, global merger and acquisition activity still reached record levels. To alleviate the credit crunch and restore investor confidence, the world's major central banks infused capital into the system. However, credit and equity markets continued to face headwinds as write-downs and losses from subprime mortgage financing affected many large financial institutions toward the end of the year, and equity prices remained volatile. For the year, however, global and non-U.S. equity markets registered the fifth consecutive year of double-digit total returns. Broad-based stock performance by European and Asian shares at least doubled that of U.S. stocks, while emerging market equity returns more than tripled those in developed markets. In addition, U.S. dollar weakness versus the currencies of many major trading partners enhanced equity returns for U.S.-based investors holding stocks denominated in these currencies. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. 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 GOAL 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 allocates 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), with an increasing emphasis on income as the target date of 2015 approaches. -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton 2015 Retirement Target Fund Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ........................................................ 45.7% Foreign Equity ......................................................... 21.0% Domestic Fixed Income .................................................. 15.5% Foreign Fixed Income ................................................... 8.2% Short-Term Investments & Other Net Assets .............................. 9.6% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 2015 Retirement Target Fund covers the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton 2015 Retirement Target Fund - Class A posted a +9.84% cumulative total return for the 12 months ended December 31, 2007. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (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 THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 49. Annual Report | 5 TOP 10 FUND HOLDINGS Franklin Templeton 2015 Retirement Target Fund 12/31/07 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Mutual Shares Fund - Class Z 13.5% -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund - Advisor Class 13.1% -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II - Advisor Class 11.1% -------------------------------------------------------------------------------- Templeton Global Bond Fund - Advisor Class 8.2% -------------------------------------------------------------------------------- Franklin U.S. Government Securities Fund - Advisor Class 7.9% -------------------------------------------------------------------------------- Mutual European Fund - Class Z 7.7% -------------------------------------------------------------------------------- Franklin Total Return Fund - Advisor Class 5.4% -------------------------------------------------------------------------------- Templeton China World Fund - Advisor Class 3.9% -------------------------------------------------------------------------------- Templeton Foreign Fund - Advisor Class 3.9% -------------------------------------------------------------------------------- Franklin Natural Resources Fund - Advisor Class 3.4% -------------------------------------------------------------------------------- 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 +5.49%, +11.63%, +6.97% and +4.91%, 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 maximizing income appropriate to the Fund's risk profile. 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 target 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 distributions. 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 68.5% 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, 2007, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Mutual Shares Fund - Class Z, representing 13.5% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 65.5% 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 8.2% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, outperformed the S&P 500, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, underperformed the S&P 500. 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, while Franklin U.S. Government Securities Fund - Advisor Class underperformed the LB U.S. Aggregate Index. Thank you for your continued 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, 2007, 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 12/31/07 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 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: N/A) CHANGE 12/31/07 12/31/06 ------------------------------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.66 $11.35 $10.69 ------------------------------------------------------------------------------------------------------ DISTRIBUTIONS (1/1/07-12/31/07) ------------------------------------------------------------------------------------------------------ Dividend Income $0.2313 ------------------------------------------------------------------------------------------------------ Long-Term Capital Gain $0.1569 ------------------------------------------------------------------------------------------------------ TOTAL $0.3882 ------------------------------------------------------------------------------------------------------ CLASS C (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 ------------------------------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.61 $11.28 $10.67 ------------------------------------------------------------------------------------------------------ DISTRIBUTIONS (1/1/07-12/31/07) ------------------------------------------------------------------------------------------------------ Dividend Income $0.1933 ------------------------------------------------------------------------------------------------------ Long-Term Capital Gain $0.1569 ------------------------------------------------------------------------------------------------------ TOTAL $0.3502 ------------------------------------------------------------------------------------------------------ CLASS R (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 ------------------------------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.64 $11.32 $10.68 ------------------------------------------------------------------------------------------------------ DISTRIBUTIONS (1/1/07-12/31/07) ------------------------------------------------------------------------------------------------------ Dividend Income $0.2238 ------------------------------------------------------------------------------------------------------ Long-Term Capital Gain $0.1569 ------------------------------------------------------------------------------------------------------ TOTAL $0.3807 ------------------------------------------------------------------------------------------------------ ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 ------------------------------------------------------------------------------------------------------ Net Asset Value (NAV) +$0.67 $11.37 $10.70 ------------------------------------------------------------------------------------------------------ DISTRIBUTIONS (1/1/07-12/31/07) ------------------------------------------------------------------------------------------------------ Dividend Income $0.2612 ------------------------------------------------------------------------------------------------------ Long-Term Capital Gain $0.1569 ------------------------------------------------------------------------------------------------------ TOTAL $0.4181 ------------------------------------------------------------------------------------------------------
8 | 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 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 (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +9.84% +19.27% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +3.54% +8.61% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,354 $11,241 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 7.75% ------------------------------------------------------------------------------------------------------ With Waiver 1.32% ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +9.02% +18.07% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +8.02% +12.44% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,802 $11,807 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 8.40% ------------------------------------------------------------------------------------------------------ With Waiver 1.97% ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +9.59% +18.88% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +9.59% +12.99% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,959 $11,888 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 7.90% ------------------------------------------------------------------------------------------------------ With Waiver 1.47% ------------------------------------------------------------------------------------------------------ ADVISOR CLASS 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +10.21% +19.86% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +10.21% +13.64% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $11,021 $11,986 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 7.40% ------------------------------------------------------------------------------------------------------ With Waiver 0.97% ------------------------------------------------------------------------------------------------------
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. THE MANAGER HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 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 12/31/07 ------------------------------------- 1-Year +3.54% ------------------------------------- Since Inception (8/1/06) +8.61% ------------------------------------- CLASS A (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2015 Retirement MSCI EAFE LB U.S. Aggregate P&R 90-Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $ 9,425 $10,000 $10,000 $10,000 $10,000 8/31/2006 $ 9,576 $10,238 $10,278 $10,153 $10,044 9/30/2006 $ 9,604 $10,502 $10,296 $10,242 $10,088 10/31/2006 $ 9,887 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,160 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,235 $11,205 $11,366 $10,369 $10,214 1/31/2007 $10,378 $11,375 $11,444 $10,365 $10,256 2/28/2007 $10,369 $11,152 $11,538 $10,525 $10,296 3/31/2007 $10,514 $11,277 $11,838 $10,525 $10,343 4/30/2007 $10,801 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,060 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,020 $11,985 $12,627 $10,470 $10,473 7/31/2007 $10,845 $11,613 $12,442 $10,558 $10,513 8/31/2007 $10,893 $11,787 $12,251 $10,687 $10,573 9/30/2007 $11,363 $12,228 $12,909 $10,768 $10,611 10/31/2007 $11,733 $12,423 $13,417 $10,865 $10,644 11/30/2007 $11,295 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,241 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ------------------------------------- CLASS C 12/31/07 ------------------------------------- 1-Year +8.02% ------------------------------------- Since Inception (8/1/06) +12.44% ------------------------------------- CLASS C (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2015 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,150 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,180 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,480 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,760 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,830 $11,205 $11,366 $10,369 $10,214 1/31/2007 $10,972 $11,375 $11,444 $10,365 $10,256 2/28/2007 $10,952 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,096 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,401 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,665 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,613 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,427 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,469 $11,787 $12,251 $10,687 $10,573 9/30/2007 $11,961 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,332 $12,423 $13,417 $10,865 $10,644 11/30/2007 $11,868 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,807 $11,821 $12,688 $11,091 $10,716
10 | Annual Report Performance Summary (CONTINUED) CLASS R (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2015 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,160 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,190 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,490 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,770 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,848 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,001 $11,375 $11,444 $10,365 $10,256 2/28/2007 $10,990 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,145 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,449 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,714 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,678 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,493 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,534 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,030 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,413 $12,423 $13,417 $10,865 $10,644 11/30/2007 $11,948 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,888 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ------------------------------------ CLASS R 12/31/07 ------------------------------------ 1-Year +9.59% ------------------------------------ Since Inception (8/1/06) +12.99% ------------------------------------ ADVISOR CLASS (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2015 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,160 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,200 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,500 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,790 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,875 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,028 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,028 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,182 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,487 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,762 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,731 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,545 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,597 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,105 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,499 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,043 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,986 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ------------------------------------- ADVISOR CLASS 12/31/07 ------------------------------------- 1-Year +10.21% ------------------------------------- Since Inception (8/1/06) +13.64% ------------------------------------- Annual Report | 11 Performance Summary (CONTINUED) 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 THE FUND INVESTS 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. If the manager had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 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 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. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,020.10 $2.44 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.79 $2.45 -------------------------------------------------------------------------------------------------------------------------- CLASS C -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.80 $5.95 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.31 $5.96 -------------------------------------------------------------------------------------------------------------------------- CLASS R -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,018.00 $3.41 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.83 $3.41 -------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,021.70 $0.87 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.35 $0.87 --------------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.48%; C: 1.17%; R: 0.67%; and Advisor: 0.17%), 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 2025 Retirement Target Fund YOUR FUND'S GOAL 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 allocates 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), with an increasing emphasis on income as the target date of 2025 approaches. -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton 2025 Retirement Target Fund Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ........................................................ 56.0% Foreign Equity ......................................................... 25.9% Domestic Fixed Income .................................................. 9.0% Foreign Fixed Income ................................................... 4.6% Short-Term Investments & Other Net Assets ....................................................... 4.5% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 2025 Retirement Target Fund covers the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton 2025 Retirement Target Fund - Class A posted a +10.19% cumulative total return for the 12 months ended December 31, 2007. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (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 THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 54. Annual Report | 15 TOP 10 FUND HOLDINGS Franklin Templeton 2025 Retirement Target Fund 12/31/07 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Mutual Shares Fund - Class Z 16.5% -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund - Advisor Class 15.8% -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II - Advisor Class 13.8% -------------------------------------------------------------------------------- Mutual European Fund - Class Z 9.6% -------------------------------------------------------------------------------- Templeton China World Fund - Advisor Class 4.8% -------------------------------------------------------------------------------- Templeton Foreign Fund - Advisor Class 4.7% -------------------------------------------------------------------------------- Templeton Global Bond Fund - Advisor Class 4.6% -------------------------------------------------------------------------------- Franklin U.S. Government Securities Fund - Advisor Class 4.4% -------------------------------------------------------------------------------- Franklin Growth Opportunities Fund - Advisor Class 4.3% -------------------------------------------------------------------------------- Franklin Natural Resources Fund - Advisor Class 4.2% -------------------------------------------------------------------------------- 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 +5.49%, +11.63%, +6.97% and +4.91%, respectively, during the same time.1 You can find other performance data in the Performance Summary beginning on page 18. 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 maximizing income appropriate to the Fund's risk profile. 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 target 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 distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 16 | Annual Report At period-end, Franklin Templeton 2025 Retirement Target Fund's domestic equity exposure was 68.3% 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, 2007, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Mutual Shares Fund - Class Z, representing 16.5% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 66.4% 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 4.6% of total net assets. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, outperformed the S&P 500, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, underperformed the S&P 500. 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, while Franklin U.S. Government Securities Fund - Advisor Class underperformed the LB U.S. Aggregate Index. Thank you for your continued 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, 2007, 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 12/31/07 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 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: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.67 $11.45 $10.78 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.2065 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0003 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2194 -------------------------------------------------------------------------------------- TOTAL $0.4262 -------------------------------------------------------------------------------------- CLASS C (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.63 $11.40 $10.77 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.1650 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0003 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2194 -------------------------------------------------------------------------------------- TOTAL $0.3847 -------------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.67 $11.44 $10.77 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.1971 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0003 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2194 -------------------------------------------------------------------------------------- TOTAL $0.4168 -------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 -------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.67 $11.46 $10.79 -------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) -------------------------------------------------------------------------------------- Dividend Income $0.2360 -------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0003 -------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2194 -------------------------------------------------------------------------------------- TOTAL $0.4557 --------------------------------------------------------------------------------------
18 | 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 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 (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +10.19% +20.56% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +3.83% +9.44% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,383 $11,363 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 4.98% ------------------------------------------------------------------------------------------- With Waiver 1.35% ------------------------------------------------------------------------------------------- CLASS C 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +9.43% +19.50% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +8.43% +13.40% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,843 $11,950 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 5.63% ------------------------------------------------------------------------------------------- With Waiver 2.00% ------------------------------------------------------------------------------------------- CLASS R 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +10.11% +20.36% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +10.11% +13.98% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,011 $12,036 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 5.13% ------------------------------------------------------------------------------------------- With Waiver 1.50% ------------------------------------------------------------------------------------------- ADVISOR CLASS 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +10.46% +21.04% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +10.46% +14.43% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,046 $12,104 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 4.63% ------------------------------------------------------------------------------------------- With Waiver 1.00% -------------------------------------------------------------------------------------------
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. THE MANAGER HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 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 12/31/07 -------------------------------------- 1-Year +3.83% -------------------------------------- Since Inception (8/1/06) +9.44% -------------------------------------- CLASS A (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2025 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $ 9,425 $10,000 $10,000 $10,000 $10,000 8/31/2006 $ 9,595 $10,238 $10,278 $10,153 $10,044 9/30/2006 $ 9,614 $10,502 $10,296 $10,242 $10,088 10/31/2006 $ 9,934 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,226 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,312 $11,205 $11,366 $10,369 $10,214 1/31/2007 $10,494 $11,375 $11,444 $10,365 $10,256 2/28/2007 $10,475 $11,152 $11,538 $10,525 $10,296 3/31/2007 $10,572 $11,277 $11,838 $10,525 $10,343 4/30/2007 $10,898 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,204 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,170 $11,985 $12,627 $10,470 $10,473 7/31/2007 $10,956 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,024 $11,787 $12,251 $10,687 $10,573 9/30/2007 $11,555 $12,228 $12,909 $10,768 $10,611 10/31/2007 $11,964 $12,423 $13,417 $10,865 $10,644 11/30/2007 $11,428 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,363 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN --------------------------------------- CLASS C 12/31/07 --------------------------------------- 1-Year +8.43% --------------------------------------- Since Inception (8/1/06) +13.40% --------------------------------------- CLASS C (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2025 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,170 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,190 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,530 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,830 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,920 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,102 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,082 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,175 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,510 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,834 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,790 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,553 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,625 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,174 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,607 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,019 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,950 $11,821 $12,688 $11,091 $10,716
20 | Annual Report Performance Summary (CONTINUED) CLASS R (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2025 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,180 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,200 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,540 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,840 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,931 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,124 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,103 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,207 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,552 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,877 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,838 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,601 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,683 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,241 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,675 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,097 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,036 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN --------------------------------------- CLASS R 12/31/07 --------------------------------------- 1-Year +10.11% --------------------------------------- Since Inception (8/1/06) +13.98% --------------------------------------- ADVISOR CLASS (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2025 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,180 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,210 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,550 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,860 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,957 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,140 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,130 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,234 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,579 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,914 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,880 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,652 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,725 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,297 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,743 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,163 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,104 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN --------------------------------------- ADVISOR CLASS 12/31/07 --------------------------------------- 1-Year +10.46% --------------------------------------- Since Inception (8/1/06) +14.43% --------------------------------------- Annual Report | 21 Performance Summary (CONTINUED) 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 THE FUND INVESTS 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. If the manager had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 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 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 | 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,017.30 $2.34 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.89 $2.35 --------------------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,013.50 $5.89 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.36 $5.90 --------------------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.70 $3.35 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.88 $3.36 --------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,018.90 $0.81 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.40 $0.82 ---------------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.46%; C: 1.16%; R: 0.66%; and Advisor: 0.16%), 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 2035 Retirement Target Fund YOUR FUND'S GOAL 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 allocates 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), with an increasing emphasis on income as the target date of 2035 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. -------------------------------------------------------------------------------- This annual report for Franklin Templeton 2035 Retirement Target Fund covers the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton 2035 Retirement Target Fund - Class A posted a cumulative total return of +11.05% for the 12 months ended December 31, 2007. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (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 +5.49%, +11.63%, +6.97% and +4.91%, respectively, during the same time.1 You can find other performance data in the Performance Summary beginning on page 28. ASSET ALLOCATION* Franklin Templeton 2035 Retirement Target Fund Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Domestic Equity 64.2% Foreign Equity 29.9% Domestic Fixed Income 1.5% Foreign Fixed Income 0.8% Short-Term Investments & Other Net Assets 3.6% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset 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 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 SOI, WHICH BEGINS ON PAGE 59. Annual Report | 25 TOP 10 FUND HOLDINGS Franklin Templeton 2035 Retirement Target Fund 12/31/07 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Mutual Shares Fund - Class Z 18.6% -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund - Advisor Class 18.5% -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II - Advisor Class 15.8% -------------------------------------------------------------------------------- Mutual European Fund - Class Z 11.0% -------------------------------------------------------------------------------- Templeton China World Fund - Advisor Class 5.5% -------------------------------------------------------------------------------- Templeton Foreign Fund - Advisor Class 5.4% -------------------------------------------------------------------------------- Franklin Natural Resources Fund - Advisor Class 4.8% -------------------------------------------------------------------------------- Franklin Growth Opportunities Fund -Advisor Class 4.8% -------------------------------------------------------------------------------- Franklin Gold and Precious Metals Fund - Advisor Class 4.2% -------------------------------------------------------------------------------- Franklin Global Real Estate Fund - Advisor Class 3.8% -------------------------------------------------------------------------------- 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. At period-end, Franklin Templeton 2035 Retirement Target Fund's domestic equity exposure was 68.2% 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, 2007, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Mutual Shares Fund - Class Z, representing 18.6% of the Fund's total net assets, was our largest equity fund weighting at period-end. On the fixed income side, domestic exposure was 67.1% of the Fund's total fixed income weighting, with the balance represented by foreign fixed income. Templeton Global Bond Fund - Advisor Class and Franklin U.S. Government Securities Fund - Advisor Class were our largest fixed income fund weightings at 0.8% of total net assets each. Our largest domestic growth fund holding, Franklin Flex Cap Growth Fund - Advisor Class, outperformed the S&P 500, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, underperformed the S&P 500. 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, while Franklin U.S. Government Securities Fund - Advisor Class underperformed the LB U.S. Aggregate Index. 26 | Annual Report Thank you for your continued 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, 2007, 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 12/31/07 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 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: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.73 $11.61 $10.88 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1634 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2959 --------------------------------------------------------------------------------------- TOTAL $0.4603 --------------------------------------------------------------------------------------- CLASS C (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.66 $11.52 $10.86 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1420 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2959 --------------------------------------------------------------------------------------- TOTAL $0.4389 --------------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.71 $11.59 $10.88 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1617 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2959 --------------------------------------------------------------------------------------- TOTAL $0.4586 --------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.75 $11.64 $10.89 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1855 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.2959 --------------------------------------------------------------------------------------- TOTAL $0.4824 ---------------------------------------------------------------------------------------
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 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 (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +11.05% +22.64% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +4.70% +10.77% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,470 $11,559 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 9.90% ------------------------------------------------------------------------------------------------------ With Waiver 1.39% ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +10.12% +21.29% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +9.12% +14.60% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $10,912 $12,129 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 10.55% ------------------------------------------------------------------------------------------------------ With Waiver 2.04% ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +10.76% +22.27% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +10.76% +15.25% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $11,076 $12,227 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 10.05% ------------------------------------------------------------------------------------------------------ With Waiver 1.54% ------------------------------------------------------------------------------------------------------ ADVISOR CLASS 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 2 +11.34% +23.14% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 3 +11.34% +15.83% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 4 $11,134 $12,314 ------------------------------------------------------------------------------------------------------ Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------------------ Without Waiver 9.55% ------------------------------------------------------------------------------------------------------ With Waiver 1.04% ------------------------------------------------------------------------------------------------------
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. THE MANAGER HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. 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 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 12/31/07 ----------------------------------- 1-Year +4.70% ----------------------------------- Since Inception (8/1/06) +10.77% ----------------------------------- CLASS A (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2035 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 INDEX 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $ 9,425 $10,000 $10,000 $10,000 $10,000 8/31/2006 $ 9,614 $10,238 $10,278 $10,153 $10,044 9/30/2006 $ 9,632 $10,502 $10,296 $10,242 $10,088 10/31/2006 $ 9,981 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,311 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,409 $11,205 $11,366 $10,369 $10,214 1/31/2007 $10,610 $11,375 $11,444 $10,365 $10,256 2/28/2007 $10,552 $11,152 $11,538 $10,525 $10,296 3/31/2007 $10,708 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,062 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,416 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,387 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,094 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,182 $11,787 $12,251 $10,687 $10,573 9/30/2007 $11,769 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,268 $12,423 $13,417 $10,865 $10,644 11/30/2007 $11,622 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,559 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ----------------------------------- CLASS C 12/31/07 ----------------------------------- 1-Year +9.12% ----------------------------------- Since Inception (8/1/06) +14.60% ----------------------------------- CLASS C (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2035 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,190 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,210 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,580 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,910 $11,050 $11,020 $10,430 $10,170 12/31/2006 $11,014 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,217 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,146 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,311 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,676 $11,776 $12,374 $10,582 $10,387 5/31/2007 $12,051 $12,187 $12,608 $10,502 $10,434 6/30/2007 $12,000 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,689 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,782 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,394 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,903 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,208 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,129 $11,821 $12,688 $11,091 $10,716
30 | Annual Report Performance Summary (CONTINUED) CLASS R (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2035 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,190 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,220 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,590 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,930 $11,050 $11,020 $10,430 $10,170 12/31/2006 $11,040 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,253 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,182 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,337 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,712 $11,776 $12,374 $10,582 $10,387 5/31/2007 $12,098 $12,187 $12,608 $10,502 $10,434 6/30/2007 $12,057 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,746 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,839 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,462 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,981 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,296 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,227 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ----------------------------------- CLASS R 12/31/07 ----------------------------------- 1-Year +10.76% ----------------------------------- Since Inception (8/1/06) +15.25% ----------------------------------- ADVISOR CLASS (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2035 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ------------------------------------------------------------------------------------------------ 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,200 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,230 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,610 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,950 $11,050 $11,020 $10,430 $10,170 12/31/2006 $11,060 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,284 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,213 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,388 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,764 $11,776 $12,374 $10,582 $10,387 5/31/2007 $12,150 $12,187 $12,608 $10,502 $10,434 6/30/2007 $12,120 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,808 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,912 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,535 $12,228 $12,909 $10,768 $10,611 10/31/2007 $13,065 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,390 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,314 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ----------------------------------- ADVISOR CLASS 12/31/07 ----------------------------------- 1-Year +11.34% ----------------------------------- Since Inception (8/1/06) +15.83% ----------------------------------- Annual Report | 31 Performance Summary (CONTINUED) 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 THE FUND INVESTS 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. If the manager had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. See page 25 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 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. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,015.10 $2.39 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.84 $2.40 -------------------------------------------------------------------------------------------------------------------------- CLASS C -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,010.70 $5.88 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.36 $5.90 -------------------------------------------------------------------------------------------------------------------------- CLASS R -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,014.10 $3.35 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.88 $3.36 -------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.10 $0.81 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.40 $0.82 --------------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.47%; C: 1.16%; R: 0.66%; and Advisor: 0.16%), 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 2045 Retirement Target Fund YOUR FUND'S GOAL 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 allocates 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), with an increasing emphasis on income as the target date of 2045 approaches. -------------------------------------------------------------------------------- ASSET ALLOCATION* Franklin Templeton 2045 Retirement Target Fund Based on Total Net Assets as of 12/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Equity ........................................................ 65.7% Foreign Equity ......................................................... 30.9% Short-Term Investments & Other Net Assets ....................................................... 3.4% * The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 2045 Retirement Target Fund covers the fiscal year ended December 31, 2007. PERFORMANCE OVERVIEW Franklin Templeton 2045 Retirement Target Fund - Class A posted a cumulative total return of +11.32% for the 12 months ended December 31, 2007. By comparison the Fund's benchmarks, the Standard & Poor's 500 Index (S&P 500) and Morgan Stanley Capital International (MSCI) Europe, THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S SOI, WHICH BEGINS ON PAGE 64. Annual Report | 35 TOP 10 FUND HOLDINGS Franklin Templeton 2045 Retirement Target Fund 12/31/07 -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS -------------------------------------------------------------------------------- Mutual Shares Fund - Class Z 18.9% -------------------------------------------------------------------------------- Franklin Flex Cap Growth Fund - Advisor Class 18.4% -------------------------------------------------------------------------------- Franklin Small Cap Growth Fund II - Advisor Class 16.4% -------------------------------------------------------------------------------- Mutual European Fund - Class Z 11.4% -------------------------------------------------------------------------------- Templeton China World Fund - Advisor Class 5.8% -------------------------------------------------------------------------------- Templeton Foreign Fund - Advisor Class 5.5% -------------------------------------------------------------------------------- Franklin Growth Opportunities Fund - Advisor Class 5.1% -------------------------------------------------------------------------------- Franklin Natural Resources Fund - Advisor Class 5.0% -------------------------------------------------------------------------------- Franklin Gold and Precious Metals Fund - Advisor Class 4.3% -------------------------------------------------------------------------------- Franklin Global Real Estate Fund - Advisor Class 3.9% -------------------------------------------------------------------------------- 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 +5.49%, +11.63%, +6.97% and +4.91%, respectively, during the same time.1 You can find other performance data in the Performance Summary beginning on page 38. 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. 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 distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 36 | Annual Report At period-end, Franklin Templeton 2045 Retirement Target Fund's domestic equity exposure was 68.0% 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, 2007, we held shares in large-, mid- and small-capitalization equity funds, representing both growth and value styles. Mutual Shares Fund - Class Z, 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 Flex Cap Growth Fund - Advisor Class, outperformed the S&P 500, while our largest domestic value fund holding, Mutual Shares Fund - Class Z, underperformed the S&P 500. Our largest foreign equity holding, Mutual European Fund - Class Z, outperformed the MSCI EAFE Index, while Franklin Global Real Estate Fund - Advisor Class underperformed the MSCI EAFE Index. Thank you for your continued 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, 2007, 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 | 37 Performance Summary as of 12/31/07 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 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: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.68 $11.57 $10.89 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1614 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3883 --------------------------------------------------------------------------------------- TOTAL $0.5507 --------------------------------------------------------------------------------------- CLASS C (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.61 $11.48 $10.87 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1417 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3883 --------------------------------------------------------------------------------------- TOTAL $0.5310 --------------------------------------------------------------------------------------- CLASS R (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.66 $11.54 $10.88 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1598 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3883 --------------------------------------------------------------------------------------- TOTAL $0.5491 --------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: N/A) CHANGE 12/31/07 12/31/06 --------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.69 $11.59 $10.90 --------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/07-12/31/07) --------------------------------------------------------------------------------------- Dividend Income $0.1881 --------------------------------------------------------------------------------------- Short-Term Capital Gain $0.0010 --------------------------------------------------------------------------------------- Long-Term Capital Gain $0.3883 --------------------------------------------------------------------------------------- TOTAL $0.5774 ---------------------------------------------------------------------------------------
38 | 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 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 (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +11.32% +23.07% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +4.96% +11.05% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,496 $11,600 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 10.11% ------------------------------------------------------------------------------------------- With Waiver 1.39% ------------------------------------------------------------------------------------------- CLASS C 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +10.50% +21.88% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +9.50% +14.99% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,950 $12,188 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 10.76% ------------------------------------------------------------------------------------------- With Waiver 2.04% ------------------------------------------------------------------------------------------- CLASS R 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +11.13% +22.74% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +11.13% +15.56% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,113 $12,274 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 10.26% ------------------------------------------------------------------------------------------- With Waiver 1.54% ------------------------------------------------------------------------------------------- ADVISOR CLASS 1-YEAR INCEPTION (8/1/06) ------------------------------------------------------------------------------------------- Cumulative Total Return 2 +11.65% +23.62% ------------------------------------------------------------------------------------------- Average Annual Total Return 3 +11.65% +16.15% ------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,165 $12,362 ------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 ------------------------------------------------------------------------------------------- Without Waiver 9.76% ------------------------------------------------------------------------------------------- With Waiver 1.04% -------------------------------------------------------------------------------------------
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. THE MANAGER HAS CONTRACTUALLY AGREED TO LIMIT FUND EXPENSES SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES) FOR EACH SHARE CLASS UNTIL 4/30/09. Annual Report | 39 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. AVERAGE ANNUAL TOTAL RETURN ----------------------------------- CLASS A 12/31/07 ----------------------------------- 1-Year +4.96% ----------------------------------- Since Inception (8/1/06) +11.05% ----------------------------------- CLASS A (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2045 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ----------------------------------------------------------------------------------------------- 8/1/2006 $ 9,425 $10,000 $10,000 $10,000 $10,000 8/31/2006 $ 9,614 $10,238 $10,278 $10,153 $10,044 9/30/2006 $ 9,632 $10,502 $10,296 $10,242 $10,088 10/31/2006 $ 9,991 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,311 $11,050 $11,020 $10,430 $10,170 12/31/2006 $10,420 $11,205 $11,366 $10,369 $10,214 1/31/2007 $10,621 $11,375 $11,444 $10,365 $10,256 2/28/2007 $10,563 $11,152 $11,538 $10,525 $10,296 3/31/2007 $10,738 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,093 $11,776 $12,374 $10,582 $10,387 5/31/2007 $11,456 $12,187 $12,608 $10,502 $10,434 6/30/2007 $11,432 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,137 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,245 $11,787 $12,251 $10,687 $10,573 9/30/2007 $11,846 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,338 $12,423 $13,417 $10,865 $10,644 11/30/2007 $11,668 $11,903 $12,980 $11,060 $10,692 12/31/2007 $11,600 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ----------------------------------- CLASS C 12/31/07 ----------------------------------- 1-Year +9.50% ----------------------------------- Since Inception (8/1/06) +14.99% ----------------------------------- CLASS C (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2045 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ----------------------------------------------------------------------------------------------- 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,190 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,210 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,590 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,920 $11,050 $11,020 $10,430 $10,170 12/31/2006 $11,030 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,243 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,172 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,347 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,723 $11,776 $12,374 $10,582 $10,387 5/31/2007 $12,098 $12,187 $12,608 $10,502 $10,434 6/30/2007 $12,062 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,749 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,843 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,470 $12,228 $12,909 $10,768 $10,611 10/31/2007 $12,992 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,271 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,188 $11,821 $12,688 $11,091 $10,716
40 | Annual Report Performance Summary (CONTINUED) CLASS R (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2045 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ----------------------------------------------------------------------------------------------- 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,200 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,220 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,600 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,940 $11,050 $11,020 $10,430 $10,170 12/31/2006 $11,044 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,268 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,207 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,382 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,758 $11,776 $12,374 $10,582 $10,387 5/31/2007 $12,144 $12,187 $12,608 $10,502 $10,434 6/30/2007 $12,108 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,805 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,909 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,536 $12,228 $12,909 $10,768 $10,611 10/31/2007 $13,059 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,359 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,274 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ----------------------------------- CLASS R 12/31/07 ----------------------------------- 1-Year +11.13% ----------------------------------- Since Inception (8/1/06) +15.56% ----------------------------------- ADVISOR CLASS (8/1/06-12/31/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FT 2045 Retirement MSCI EAFE LB U.S. Aggregate P&R 90 Day U.S. DATE Target Fund S&P 500 6 Index 6 Index 6 T-Bill Index 6 ----------------------------------------------------------------------------------------------- 8/1/2006 $10,000 $10,000 $10,000 $10,000 $10,000 8/31/2006 $10,200 $10,238 $10,278 $10,153 $10,044 9/30/2006 $10,230 $10,502 $10,296 $10,242 $10,088 10/31/2006 $10,610 $10,844 $10,697 $10,310 $10,127 11/30/2006 $10,960 $11,050 $11,020 $10,430 $10,170 12/31/2006 $11,072 $11,205 $11,366 $10,369 $10,214 1/31/2007 $11,285 $11,375 $11,444 $10,365 $10,256 2/28/2007 $11,235 $11,152 $11,538 $10,525 $10,296 3/31/2007 $11,420 $11,277 $11,838 $10,525 $10,343 4/30/2007 $11,796 $11,776 $12,374 $10,582 $10,387 5/31/2007 $12,193 $12,187 $12,608 $10,502 $10,434 6/30/2007 $12,167 $11,985 $12,627 $10,470 $10,473 7/31/2007 $11,864 $11,613 $12,442 $10,558 $10,513 8/31/2007 $11,968 $11,787 $12,251 $10,687 $10,573 9/30/2007 $12,606 $12,228 $12,909 $10,768 $10,611 10/31/2007 $13,139 $12,423 $13,417 $10,865 $10,644 11/30/2007 $12,439 $11,903 $12,980 $11,060 $10,692 12/31/2007 $12,362 $11,821 $12,688 $11,091 $10,716
AVERAGE ANNUAL TOTAL RETURN ----------------------------------- ADVISOR CLASS 12/31/07 ----------------------------------- 1-Year +11.65% ----------------------------------- Since Inception (8/1/06) +16.15% ----------------------------------- Annual Report | 41 Performance Summary (CONTINUED) 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 THE FUND INVESTS 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. If the manager had not waived fees, the Fund's total returns would have been lower. 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. Figures are as stated in the Fund's prospectus current as of the date of this report. 6. Sources: Standard & Poor's Micropal; Lehman Brothers Inc. See page 36 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. 42 | 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 | 43 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07 -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,014.70 $2.34 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.89 $2.35 -------------------------------------------------------------------------------------------------------------------------- CLASS C -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,010.40 $5.83 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.41 $5.85 -------------------------------------------------------------------------------------------------------------------------- CLASS R -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,013.70 $3.30 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.93 $3.31 -------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS -------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.10 $0.76 -------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,024.45 $0.77 --------------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio excluding expenses of the underlying funds, net of expense waivers, annualized for each class (A: 0.46%; 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. 44 | Annual Report Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
-------------------- YEAR ENDED DECEMBER 31, CLASS A 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.69 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.33 0.13 Net realized and unrealized gains (losses) .................................. 0.72 0.73 -------------------- Total from investment operations ............................................... 1.05 0.86 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.23) (0.15) Net realized gains .......................................................... (0.16) (0.02) -------------------- Total distributions ............................................................ (0.39) (0.17) -------------------- Redemption fees ................................................................ -- g -- -------------------- Net asset value, end of year ................................................... $ 11.35 $ 10.69 ==================== Total return d ................................................................. 9.84% 8.59% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 3.60% 12.13% Expenses net of waiver and payments by affiliates f ............................ 0.48% 0.50% Net investment income c ........................................................ 3.11% 2.92% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 5,269 $ 1,364 Portfolio turnover rate ........................................................ 8.19% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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. | 45 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
-------------------- YEAR ENDED DECEMBER 31, CLASS C 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.67 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.36 0.14 Net realized and unrealized gains (losses) .................................. 0.60 0.69 -------------------- Total from investment operations ............................................... 0.96 0.83 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.19) (0.14) Net realized gains .......................................................... (0.16) (0.02) -------------------- Total distributions ............................................................ (0.35) (0.16) -------------------- Redemption fees ................................................................ -- g -- -------------------- Net asset value, end of year ................................................... $ 11.28 $ 10.67 ==================== Total return d ................................................................. 9.02% 8.30% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 4.28% 12.78% Expenses net of waiver and payments by affiliates f ............................ 1.16% 1.15% Net investment income c ........................................................ 2.43% 2.27% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 2,213 $ 63 Portfolio turnover rate ........................................................ 8.19% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2006 (commencement of operations) to December 31, 2006. 46 | 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
-------------------- YEAR ENDED DECEMBER 31, CLASS R 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.68 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.34 0.11 Net realized and unrealized gains (losses) .................................. 0.68 0.74 -------------------- Total from investment operations ............................................... 1.02 0.85 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.22) (0.15) Net realized gains .......................................................... (0.16) (0.02) -------------------- Total distributions ............................................................ (0.38) (0.17) -------------------- Redemption fees ................................................................ -- g -- -------------------- Net asset value, end of year ................................................... $ 11.32 $ 10.68 ==================== Total return d ................................................................. 9.59% 8.48% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 3.78% 12.28% Expenses net of waiver and payments by affiliates f ............................ 0.66% 0.65% Net investment income c ........................................................ 2.93% 2.77% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 1,071 $ 11 Portfolio turnover rate ........................................................ 8.19% 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 repurchases 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 investmentincome 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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. | 47 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND
-------------------- YEAR ENDED DECEMBER 31, ADVISOR CLASS 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.70 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.30 0.17 Net realized and unrealized gains (losses) .................................. 0.79 0.71 -------------------- Total from investment operations ............................................... 1.09 0.88 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.26) (0.16) Net realized gains .......................................................... (0.16) (0.02) -------------------- Total distributions ............................................................ (0.42) (0.18) -------------------- Redemption fees ................................................................ -- g -- -------------------- Net asset value, end of year ................................................... $ 11.37 $ 10.70 ==================== Total return d ................................................................. 10.21% 8.75% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 3.28% 11.78% Expenses net of waiver and payments by affiliates f ............................ 0.16% 0.15% Net investment income c ........................................................ 3.43% 3.27% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 32 $ 20 Portfolio turnover rate ........................................................ 8.19% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.80% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2006 (commencement of operations) to December 31, 2006. 48 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------ FRANKLIN TEMPLETON 2015 RETIREMENT TARGET FUND SHARES VALUE ------------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 90.4% DOMESTIC EQUITY 45.7% Franklin Flex Cap Growth Fund, Advisor Class ........................................... 23,067 $1,126,589 b Franklin Growth Opportunities Fund, Advisor Class ...................................... 12,848 281,886 Franklin MicroCap Value Fund, Advisor Class ............................................ 3,029 103,252 Franklin Natural Resources Fund, Advisor Class ......................................... 6,539 295,359 b Franklin Small Cap Growth Fund II, Advisor Class ....................................... 89,766 953,316 Mutual Shares Fund, Class Z ............................................................ 45,864 1,162,203 ----------- 3,922,605 ----------- DOMESTIC FIXED INCOME 15.5% Franklin Strategic Mortgage Portfolio .................................................. 19,671 186,287 Franklin Total Return Fund, Advisor Class .............................................. 47,109 467,793 Franklin U.S. Government Securities Fund, Advisor Class ................................ 104,823 682,398 ----------- 1,336,478 ----------- FOREIGN EQUITY 21.0% Franklin Global Real Estate Fund, Advisor Class ........................................ 22,057 219,245 Franklin Gold and Precious Metals Fund, Advisor Class .................................. 6,769 253,643 Mutual European Fund, Class Z .......................................................... 25,203 663,334 Templeton China World Fund, Advisor Class .............................................. 7,662 337,815 Templeton Foreign Fund, Advisor Class .................................................. 26,594 331,357 ----------- 1,805,394 ----------- FOREIGN FIXED INCOME 8.2% Templeton Global Bond Fund, Advisor Class .............................................. 61,757 704,027 ----------- TOTAL LONG TERM INVESTMENTS (COST $7,867,881) .......................................... 7,768,504 ----------- SHORT TERM INVESTMENT (COST $477,896) 5.6% MONEY MARKET FUND 5.6% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ................... 477,896 477,896 ----------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $8,345,777) 96.0% .......................... 8,246,400 OTHER ASSETS, LESS LIABILITIES 4.0% .................................................... 339,592 ----------- NET ASSETS 100.0% ...................................................................... $8,585,992 ===========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2007. 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. | 49 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
-------------------- YEAR ENDED DECEMBER 31, CLASS A 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.78 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.28 0.12 Net realized and unrealized gains (losses) .................................. 0.82 0.82 -------------------- Total from investment operations ............................................... 1.10 0.94 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.21) (0.14) Net realized gains .......................................................... (0.22) (0.02) -------------------- Total distributions ............................................................ (0.43) (0.16) -------------------- Redemption fees ................................................................ -- g -- g -------------------- Net asset value, end of year ................................................... $ 11.45 $ 10.78 ==================== Total return d ................................................................. 10.19% 9.41% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 3.31% 10.76% Expenses net of waiver and payments by affiliates f ............................ 0.47% 0.50% Net investment income c ........................................................ 2.55% 2.78% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 6,952 $ 1,699 Portfolio turnover rate ........................................................ 16.28% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.84% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2006 (commencement of operations) to December 31, 2006. 50 | 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
-------------------- YEAR ENDED DECEMBER 31, CLASS C 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.77 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.28 0.10 Net realized and unrealized gains (losses) .................................. 0.74 0.82 -------------------- Total from investment operations ............................................... 1.02 0.92 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.17) (0.13) Net realized gains .......................................................... (0.22) (0.02) -------------------- Total distributions ............................................................ (0.39) (0.15) -------------------- Redemption fees ................................................................ -- g -- g -------------------- Net asset value, end of year ................................................... $ 11.40 $ 10.77 ==================== Total return d ................................................................. 9.43% 9.20% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 3.99% 11.41% Expenses net of waiver and payments by affiliates f ............................ 1.15% 1.15% Net investment income c ........................................................ 1.87% 2.13% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 1,104 $ 54 Portfolio turnover rate ........................................................ 16.28% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.84% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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. | 51 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND
-------------------- YEAR ENDED DECEMBER 31, CLASS R 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.77 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.27 0.11 Net realized and unrealized gains (losses) .................................. 0.82 0.82 -------------------- Total from investment operations ............................................... 1.09 0.93 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.20) (0.14) Net realized gains .......................................................... (0.22) (0.02) -------------------- Total distributions ............................................................ (0.42) (0.16) -------------------- Redemption fees ................................................................ -- g -- g -------------------- Net asset value, end of year ................................................... $ 11.44 $ 10.77 ==================== Total return d ................................................................. 10.11% 9.31% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 3.49% 10.91% Expenses net of waiver and payments by affiliates f ............................ 0.65% 0.65% Net investment income c ........................................................ 2.37% 2.63% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 188 $ 19 Portfolio turnover rate ........................................................ 16.28% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.84% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2006 (commencement of operations) to December 31, 2006. 52 | 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
-------------------- YEAR ENDED DECEMBER 31, ADVISOR CLASS 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.79 $ 10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.46 0.20 Net realized and unrealized gains (losses) .................................. 0.67 0.76 -------------------- Total from investment operations ............................................... 1.13 0.96 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.24) (0.15) Net realized gains .......................................................... (0.22) (0.02) -------------------- Total distributions ............................................................ (0.46) (0.17) -------------------- Redemption fees ................................................................ -- g -- g -------------------- Net asset value, end of year ................................................... $ 11.46 $ 10.79 ==================== Total return d ................................................................. 10.46% 9.57% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 2.99% 10.41% Expenses net of waiver and payments by affiliates f ............................ 0.15% 0.15% Net investment income c ........................................................ 2.87% 3.13% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 417 $ 51 Portfolio turnover rate ........................................................ 16.28% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.84% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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. | 53 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------ FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND SHARES VALUE ------------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 95.5% DOMESTIC EQUITY 56.0% Franklin Flex Cap Growth Fund, Advisor Class .............................................. 27,938 $1,364,505 b Franklin Growth Opportunities Fund, Advisor Class ......................................... 16,855 369,795 Franklin MicroCap Value Fund, Advisor Class ............................................... 3,612 123,122 Franklin Natural Resources Fund, Advisor Class ............................................ 8,091 365,452 b Franklin Small Cap Growth Fund II, Advisor Class .......................................... 112,581 1,195,605 Mutual Shares Fund, Class Z ............................................................... 56,424 1,429,776 ----------- 4,848,255 ----------- DOMESTIC FIXED INCOME 9.0% Franklin Strategic Mortgage Portfolio ..................................................... 14,684 139,059 Franklin Total Return Fund, Advisor Class ................................................. 26,791 266,034 Franklin U.S. Government Securities Fund, Advisor Class ................................... 58,193 378,835 ----------- 783,928 ----------- FOREIGN EQUITY 25.9% Franklin Global Real Estate Fund, Advisor Class ........................................... 28,891 287,173 Franklin Gold and Precious Metals Fund, Advisor Class ..................................... 8,279 310,204 Mutual European Fund, Class Z ............................................................. 31,673 833,643 Templeton China World Fund, Advisor Class ................................................. 9,441 416,291 Templeton Foreign Fund, Advisor Class ..................................................... 32,378 403,446 ----------- 2,250,757 ----------- FOREIGN FIXED INCOME 4.6% Templeton Global Bond Fund, Advisor Class ................................................. 34,861 397,411 ----------- TOTAL LONG TERM INVESTMENTS (COST $8,442,277) ............................................. 8,280,351 ----------- SHORT TERM INVESTMENT (COST $255,870) 3.0% MONEY MARKET FUND 3.0% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ...................... 255,870 255,870 ----------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $8,698,147) 98.5% ............................. 8,536,221 OTHER ASSETS, LESS LIABILITIES 1.5% ....................................................... 125,814 ----------- NET ASSETS 100.0% ......................................................................... $8,662,035 ===========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2007. c The rate shown is the annualized seven-day yield at period end. 54 | 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
------------------------- YEAR ENDED DECEMBER 31, CLASS A 2007 2006 h ------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................................................... $ 10.88 $ 10.00 ------------------------- Income from investment operations a: Net investment income b, c ............................................................... 0.22 0.09 Net realized and unrealized gains (losses) ............................................... 0.97 0.95 ------------------------- Total from investment operations . .......................................................... 1.19 1.04 ------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................ (0.16) (0.13) Net realized gains ....................................................................... (0.30) (0.03) ------------------------- Total distributions ......................................................................... (0.46) (0.16) ------------------------- Redemption fees ............................................................................. -- g -- ------------------------- Net asset value, end of year ................................................................ $ 11.61 $ 10.88 ========================= Total return d .............................................................................. 11.05% 10.44% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......................................... 5.16% 13.47% Expenses net of waiver and payments by affiliates f ......................................... 0.48% 0.50% Net investment income c . ................................................................... 2.07% 2.04% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................................. $ 3,760 $ 1,171 Portfolio turnover rate . ................................................................... 14.95% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.88% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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 HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
------------------------- YEAR ENDED DECEMBER 31, CLASS C 2007 2006 h ------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................................................... $ 10.86 $ 10.00 ------------------------- Income from investment operations a: Net investment income b, c ............................................................... 0.26 0.12 Net realized and unrealized gains (losses) ............................................... 0.84 0.89 ------------------------- Total from investment operations ............................................................ 1.10 1.01 ------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................ (0.14) (0.12) Net realized gains ....................................................................... (0.30) (0.03) ------------------------- Total distributions ......................................................................... (0.44) (0.15) ------------------------- Redemption fees ............................................................................. -- g -- ------------------------- Net asset value, end of year ................................................................ $ 11.52 $ 10.86 ========================= Total return d .............................................................................. 10.12% 10.14% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......................................... 5.84% 14.12% Expenses net of waiver and payments by affiliates f ......................................... 1.16% 1.15% Net investment income c ..................................................................... 1.39% 1.39% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................................. $ 1,103 $ 57 Portfolio turnover rate ..................................................................... 14.95% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.88% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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 FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
------------------------- YEAR ENDED DECEMBER 31, CLASS R 2007 2006 h ------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................................................... $ 10.88 $ 10.00 ------------------------- Income from investment operations a: Net investment income b, c ............................................................... 0.28 0.11 Net realized and unrealized gains (losses) ............................................... 0.89 0.93 ------------------------- Total from investment operations ............................................................ 1.17 1.04 ------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................ (0.16) (0.13) Net realized gains ....................................................................... (0.30) (0.03) ------------------------- Total distributions ......................................................................... (0.46) (0.16) ------------------------- Redemption fees ............................................................................. -- g -- ------------------------- Net asset value, end of year ................................................................ $ 11.59 $ 10.88 ========================= Total return d .............................................................................. 10.76% 10.40% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......................................... 5.34% 13.62% Expenses net of waiver and payments by affiliates f ......................................... 0.66% 0.65% Net investment income c ..................................................................... 1.89% 1.89% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................................. $ 314 $ 23 Portfolio turnover rate ..................................................................... 14.95% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.88% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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. | 57 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND
------------------------- YEAR ENDED DECEMBER 31, ADVISOR CLASS 2007 2006 h ------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................................................... $ 10.89 $ 10.00 ------------------------- Income from investment operations a: Net investment income b, c ............................................................... 0.20 0.18 Net realized and unrealized gains (losses) ............................................... 1.04 0.88 ------------------------- Total from investment operations ............................................................ 1.24 1.06 ------------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ................ (0.19) (0.14) Net realized gains ....................................................................... (0.30) (0.03) ------------------------- Total distributions ......................................................................... (0.49) (0.17) ------------------------- Redemption fees ............................................................................. -- g -- ------------------------- Net asset value, end of year ................................................................ $ 11.64 $ 10.89 ========================= Total return d .............................................................................. 11.34% 10.60% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ......................................... 4.84% 13.12% Expenses net of waiver and payments by affiliates f ......................................... 0.16% 0.15% Net investment income c ..................................................................... 2.39% 2.39% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................................................. $ 119 $ 59 Portfolio turnover rate ..................................................................... 14.95% 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 repurchases 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 Ratios are annualized for periods less than one year. f Does not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.88% for the year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2006 (commencement of operations) to December 31, 2006. 58 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------ FRANKLIN TEMPLETON 2035 RETIREMENT TARGET FUND SHARES VALUE ------------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 96.4% DOMESTIC EQUITY 64.2% Franklin Flex Cap Growth Fund, Advisor Class .............................................. 20,090 $ 981,194 b Franklin Growth Opportunities Fund, Advisor Class ......................................... 11,549 253,396 Franklin MicroCap Value Fund, Advisor Class ............................................... 2,670 91,013 Franklin Natural Resources Fund, Advisor Class ............................................ 5,660 255,659 b Franklin Small Cap Growth Fund II, Advisor Class .......................................... 78,647 835,230 Mutual Shares Fund, Class Z ............................................................... 38,816 983,600 ----------- 3,400,092 ----------- DOMESTIC FIXED INCOME 1.5% Franklin Strategic Mortgage Portfolio ..................................................... 1,568 14,853 Franklin Total Return Fund, Advisor Class ................................................. 2,795 27,752 Franklin U.S. Government Securities Fund, Advisor Class ................................... 6,166 40,140 ----------- 82,745 ----------- FOREIGN EQUITY 29.9% Franklin Global Real Estate Fund, Advisor Class ........................................... 20,300 201,780 Franklin Gold and Precious Metals Fund, Advisor Class ..................................... 5,955 223,149 Mutual European Fund, Class Z ............................................................. 22,145 582,842 Templeton China World Fund, Advisor Class ................................................. 6,597 290,876 Templeton Foreign Fund, Advisor Class ..................................................... 22,919 285,565 ----------- 1,584,212 ----------- FOREIGN FIXED INCOME 0.8% Templeton Global Bond Fund, Advisor Class ................................................. 3,555 40,522 ----------- TOTAL LONG TERM INVESTMENTS (COST $5,183,090) ............................................. 5,107,571 ----------- SHORT TERM INVESTMENT (COST $74,072) 1.4% MONEY MARKET FUND 1.4% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ...................... 74,072 74,072 ----------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $5,257,162) 97.8% ............................. 5,181,643 OTHER ASSETS, LESS LIABILITIES 2.2% ....................................................... 114,408 ----------- NET ASSETS 100.0% ......................................................................... $5,296,051 ===========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2007. 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. | 59 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
-------------------- YEAR ENDED DECEMBER 31, CLASS A 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $10.89 $10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.17 0.08 Net realized and unrealized gains (losses) .................................. 1.06 0.97 -------------------- Total from investment operations ............................................... 1.23 1.05 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.16) (0.13) Net realized gains .......................................................... (0.39) (0.03) -------------------- Total distributions ............................................................ (0.55) (0.16) -------------------- Redemption fees ................................................................ -- g -- -------------------- Net asset value, end of year ................................................... $11.57 $10.89 ==================== Total return d ................................................................. 11.32% 10.55% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 6.86% 13.15% Expenses net of waiver and payments by affiliates f ............................ 0.47% 0.50% Net investment income c ........................................................ 1.70% 1.97% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $2,439 $1,169 Portfolio turnover rate ........................................................ 24.40% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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 year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2006 (commencement of operations) to December 31, 2006. 60 | 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
-------------------- YEAR ENDED DECEMBER 31, CLASS C 2007 2006 h -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $10.87 $10.00 -------------------- Income from investment operations a: Net investment income b, c .................................................. 0.23 0.16 Net realized and unrealized gains (losses) .................................. 0.91 0.87 -------------------- Total from investment operations ............................................... 1.14 1.03 -------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.14) (0.13) Net realized gains .......................................................... (0.39) (0.03) -------------------- Total distributions ............................................................ (0.53) (0.16) -------------------- Redemption fees ................................................................ -- g -- -------------------- Net asset value, end of year ................................................... $11.48 $10.87 ==================== Total return d ................................................................. 10.50% 10.30% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 7.55% 13.74% Expenses net of waiver and payments by affiliates f ............................ 1.16% 1.09% Net investment income c ........................................................ 1.01% 1.38% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 487 $ 67 Portfolio turnover rate ........................................................ 24.40% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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 year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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. | 61 Franklin Templeton Fund Allocator Series FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND
------------------- YEAR ENDED DECEMBER 31, CLASS R 2007 2006 h ------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.88 $ 10.00 ------------------- Income from investment operations a: Net investment income b, c................................................... 0.24 0.08 Net realized and unrealized gains (losses) .................................. 0.97 0.96 ------------------- Total from investment operations ............................................... 1.21 1.04 ------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.16) (0.13) Net realized gains .......................................................... (0.39) (0.03) ------------------- Total distributions ............................................................ (0.55) (0.16) ------------------- Redemption fees ................................................................ --g -- ------------------- Net asset value, end of year ................................................... $ 11.54 $ 10.88 =================== Total return d ................................................................. 11.13% 10.44% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 7.04% 13.30% Expenses net of waiver and payments by affiliates f ............................ 0.65% 0.65% Net investment income c......................................................... 1.52% 1.82% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 160 $ 12 Portfolio turnover rate ........................................................ 24.40% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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 year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h For the period August 1, 2006 (commencement of operations) to December 31, 2006. 62 | 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
------------------- YEAR ENDED DECEMBER 31, ADVISOR CLASS 2007 2006 h ------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................................. $ 10.90 $ 10.00 ------------------- Income from investment operations a: Net investment income b, c .................................................. 0.49 0.12 Net realized and unrealized gains (losses) .................................. 0.78 0.95 ------------------- Total from investment operations ............................................... 1.27 1.07 ------------------- Less distributions from: Net investment income and short term gains received from Underlying Funds ... (0.19) (0.14) Net realized gains .......................................................... (0.39) (0.03) ------------------- Total distributions ............................................................ (0.58) (0.17) ------------------- Redemption fees ................................................................ --g -- ------------------- Net asset value, end of year ................................................... $ 11.59 $ 10.90 =================== Total return d ................................................................. 11.65% 10.72% RATIOS TO AVERAGE NET ASSETS e Expenses before waiver and payments by affiliates f ............................ 6.54% 12.80% Expenses net of waiver and payments by affiliates f ............................ 0.15% 0.15% Net investment income c ........................................................ 2.02% 2.32% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................................ $ 164 $ 17 Portfolio turnover rate ........................................................ 24.40% 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 repurchases 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 Ratios are annualized for periods less than one year. f 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 year ended December 31, 2007. g Amount rounds to less than $0.01 per share. h 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. | 63 Franklin Templeton Fund Allocator Series STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
--------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND SHARES VALUE --------------------------------------------------------------------------------------------------------- INVESTMENTS IN UNDERLYING FUNDS a LONG TERM INVESTMENTS 96.6% DOMESTIC EQUITY 65.7% Franklin Flex Cap Growth Fund, Advisor Class ................................. 12,210 $ 596,323 b Franklin Growth Opportunities Fund, Advisor Class ............................ 7,611 166,994 Franklin MicroCap Value Fund, Advisor Class .................................. 1,708 58,216 Franklin Natural Resources Fund, Advisor Class ............................... 3,621 163,579 b Franklin Small Cap Growth Fund II, Advisor Class ............................. 50,246 533,602 Mutual Shares Fund, Class Z .................................................. 24,299 615,742 ----------- 2,134,456 ----------- FOREIGN EQUITY 30.9% Franklin Global Real Estate Fund, Advisor Class .............................. 12,803 127,264 Franklin Gold and Precious Metals Fund, Advisor Class ........................ 3,737 140,020 Mutual European Fund, Class Z ................................................ 14,099 371,097 Templeton China World Fund, Advisor Class .................................... 4,245 187,158 Templeton Foreign Fund, Advisor Class ........................................ 14,396 179,373 ----------- 1,004,912 ----------- TOTAL LONG TERM INVESTMENTS (COST $3,140,066) ................................ 3,139,368 ----------- SHORT TERM INVESTMENT (COST $133) 0.0% c MONEY MARKET FUND 0.0% c d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ......... 133 133 ----------- TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $3,140,199) 96.6% ................ 3,139,501 OTHER ASSETS, LESS LIABILITIES 3.4% .......................................... 109,991 ----------- NET ASSETS 100.0% ............................................................ $3,249,492 ===========
a See Note 6 regarding investments in Underlying Funds. b Non-income producing for the twelve months ended December 31, 2007. c Rounds to less than 0.1% of net assets. d The rate shown is the annualized seven-day yield at period end. 64 | 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, 2007
------------------------------------------------------------------------------- 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 ....................................... $ 8,345,777 $ 8,698,147 $ 5,257,162 $ 3,140,199 =============================================================================== Value ...................................... $ 8,246,400 $ 8,536,221 $ 5,181,643 $ 3,139,501 Receivables: Investment securities sold ................. -- -- -- 21,000 Capital shares sold ........................ 251,717 34,332 21,182 13,304 Affiliates ................................. 112,548 117,609 118,558 122,199 ------------------------------------------------------------------------------- Total assets ............................ 8,610,665 8,688,162 5,321,383 3,296,004 ------------------------------------------------------------------------------- Liabilities: Payables: Reports to shareholders .................... 4,335 5,371 4,100 4,304 Professional fees .......................... 19,987 20,049 20,337 20,537 Funds advanced by custodian ................... -- -- -- 20,733 Accrued expenses and other liabilities ........ 351 707 895 938 ------------------------------------------------------------------------------- Total liabilities ....................... 24,673 26,127 25,332 46,512 ------------------------------------------------------------------------------- Net assets, at value ................. $ 8,585,992 $ 8,662,035 $ 5,296,051 $ 3,249,492 =============================================================================== Net assets consist of: Paid-in capital ............................... $ 8,412,464 $ 8,481,624 $ 5,132,136 $ 3,097,549 Undistributed net investment income ........... 2,414 2,524 1,418 1,101 Net unrealized appreciation (depreciation) .... (99,377) (161,926) (75,519) (698) Accumulated net realized gain (loss) .......... 270,491 339,813 238,016 151,540 ------------------------------------------------------------------------------- Net assets, at value ................. $ 8,585,992 $ 8,662,035 $ 5,296,051 $ 3,249,492 ===============================================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 65 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) December 31, 2007
------------------------------------------------------------------------------- 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 .......................... $ 5,269,300 $ 6,952,466 $ 3,760,187 $ 2,438,556 =============================================================================== Shares outstanding ............................ 464,236 607,215 323,744 210,774 =============================================================================== Net asset value per share a ................... $ 11.35 $ 11.45 $ 11.61 $ 11.57 =============================================================================== Maximum offering price per share (net asset value per share / 94.25%) ....... $ 12.04 $ 12.15 $ 12.32 $ 12.28 =============================================================================== CLASS C: Net assets, at value .......................... $ 2,213,463 $ 1,104,364 $ 1,102,628 $ 487,050 =============================================================================== Shares outstanding ............................ 196,211 96,860 95,696 42,417 =============================================================================== Net asset value and maximum offering price per share a .......................... $ 11.28 $ 11.40 $ 11.52 $ 11.48 =============================================================================== CLASS R: Net assets, at value .......................... $ 1,070,738 $ 188,354 $ 314,010 $ 159,788 =============================================================================== Shares outstanding ............................ 94,550 16,471 27,094 13,843 =============================================================================== Net asset value and maximum offering price per share a .......................... $ 11.32 $ 11.44 $ 11.59 $ 11.54 =============================================================================== ADVISOR CLASS: Net assets, at value .......................... $ 32,491 $ 416,851 $ 119,226 $ 164,098 =============================================================================== Shares outstanding ............................ 2,858 36,384 10,242 14,162 =============================================================================== Net asset value and maximum offering price per share a .......................... $ 11.37 $ 11.46 $ 11.64 $ 11.59 ===============================================================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 66 | 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, 2007
------------------------------------------------------------------------------- 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) ................................... $ 147,939 $ 143,472 $ 70,514 $ 44,232 Interest ...................................... 265 49 -- -- ------------------------------------------------------------------------------- Total investment income ................. 148,204 143,521 70,514 44,232 ------------------------------------------------------------------------------- Expenses: Asset allocation fees (Note 3a) ............... 9,697 11,402 6,777 5,020 Distribution fees: (Note 3c) Class A .................................... 9,267 13,013 6,903 5,563 Class C .................................... 7,793 4,696 4,119 1,938 Class R .................................... 2,246 398 629 384 Transfer agent fees (Note 3e) ................. 5,039 8,431 8,593 8,992 Reports to shareholders ....................... 11,365 14,793 11,368 9,980 Registration and filing fees .................. 40,692 40,559 39,932 40,144 Professional fees ............................. 24,646 24,707 24,567 25,247 Trustees' fees and expenses ................... 16 18 11 8 Amortization of offering costs ................ 42,919 40,867 41,490 42,697 Other ......................................... 949 1,014 1,135 975 ------------------------------------------------------------------------------- Total expenses .......................... 154,629 159,898 145,524 140,948 Expenses waived/paid by affiliates (Note 3f) ............................ (128,628) (134,463) (129,554) (129,991) ------------------------------------------------------------------------------- Net expenses ...................... 26,001 25,435 15,970 10,957 ------------------------------------------------------------------------------- Net investment income .......... 122,203 118,086 54,544 33,275 ------------------------------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Sale of investments in Underlying Funds .... (24,735) (54,535) (27,424) (23,536) Realized gain distributions by Underlying Funds ........................ 328,232 446,005 297,404 201,211 ------------------------------------------------------------------------------- Net realized gain (loss) ....... 303,497 391,470 269,980 177,675 ------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ........................... (132,654) (195,462) (116,810) (42,627) ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) .......... 170,843 196,008 153,170 135,048 ------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ..................... $ 293,046 $ 314,094 $ 207,714 $ 168,323 ===============================================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 67 Franklin Templeton Fund Allocator Series FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------- FRANKLIN TEMPLETON 2015 FRANKLIN TEMPLETON 2025 RETIREMENT TARGET FUND RETIREMENT TARGET FUND ----------------------------------------------------------- YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2007 2006 a 2007 2006 a ----------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ......................... $ 122,203 $ 14,810 $ 118,086 $ 15,985 Net realized gain (loss) from Underlying Funds ........................... 303,497 52,764 391,470 76,897 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ........................... (132,654) 33,277 (195,462) 33,536 ----------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............ 293,046 100,851 314,094 126,418 ----------------------------------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A ....................................... (89,066) (19,061) (116,293) (22,186) Class C ....................................... (31,491) (827) (15,006) (641) Class R ....................................... (17,779) (149) (2,899) (247) Advisor Class ................................. (736) (289) (7,148) (691) Net realized gains: Class A ....................................... (42,032) (2,441) (81,106) (3,104) Class C ....................................... (12,628) (112) (9,526) (97) Class R ....................................... (7,035) (19) (1,831) (34) Advisor Class ................................. (438) (36) (3,157) (92) ----------------------------------------------------------- Total distributions to shareholders .............. (201,205) (22,934) (236,966) (27,092) ----------------------------------------------------------- Capital share transactions: (Note 2) Class A ....................................... 3,834,014 1,289,499 5,156,687 1,604,063 Class C ....................................... 2,150,974 61,466 1,061,155 50,514 Class R ....................................... 1,040,251 10,000 166,698 18,158 Advisor Class ................................. 10,740 19,249 377,760 50,386 ----------------------------------------------------------- Total capital share transactions ................. 7,035,979 1,380,214 6,762,300 1,723,121 ----------------------------------------------------------- Redemption fees .................................. 41 -- 157 3 ----------------------------------------------------------- Net increase (decrease) in net assets ... 7,127,861 1,458,131 6,839,585 1,822,450 Net assets: Beginning of year ................................ 1,458,131 -- 1,822,450 -- ----------------------------------------------------------- End of year ...................................... $ 8,585,992 $1,458,131 $8,662,035 $1,822,450 =========================================================== Undistributed net investment income included in net assets: End of year ................................... $ 2,414 $ 467 $ 2,524 $ 533 ===========================================================
a For the period August 1, 2006 (commencement of operations) to December 31, 2006. 68 | 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
----------------------------------------------------------- FRANKLIN TEMPLETON 2035 FRANKLIN TEMPLETON 2045 RETIREMENT TARGET FUND RETIREMENT TARGET FUND ----------------------------------------------------------- YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2007 2006 a 2007 2006 a ----------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ......................... $ 54,544 $ 9,489 $ 33,275 $ 9,142 Net realized gain (loss) from Underlying Funds ........................... 269,980 60,838 177,675 60,512 Net change in unrealized appreciation (depreciation) on investments in Underlying Funds ........................... (116,810) 41,291 (42,627) 41,929 ----------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............ 207,714 111,618 168,323 111,583 ----------------------------------------------------------- Distributions to shareholders from: Net investment income and short term gains received from Underlying Funds: Class A .................................... (50,435) (14,155) (33,285) (14,304) Class C .................................... (13,163) (627) (5,813) (776) Class R .................................... (4,205) (271) (2,128) (145) Advisor Class .............................. (1,855) (736) (2,578) (213) Net realized gains: Class A .................................... (52,659) (3,461) (57,461) (3,421) Class C .................................... (10,159) (166) (5,731) (194) Class R .................................... (3,259) (68) (2,945) (35) Advisor Class .............................. (2,845) (171) (1,299) (48) ----------------------------------------------------------- Total distributions to shareholders .............. (138,580) (19,655) (111,240) (19,136) ----------------------------------------------------------- Capital share transactions: (Note 2) Class A .................................... 2,512,921 1,084,636 1,203,127 1,079,556 Class C .................................... 1,061,051 54,747 421,465 65,871 Class R .................................... 286,076 21,604 148,108 11,306 Advisor Class .............................. 56,592 57,003 154,787 15,738 ----------------------------------------------------------- Total capital share transactions ................. 3,916,640 1,217,990 1,927,487 1,172,471 ----------------------------------------------------------- Redemption fees .................................. 324 -- 4 -- ----------------------------------------------------------- Net increase (decrease) in net assets ... 3,986,098 1,309,953 1,984,574 1,264,918 Net assets: Beginning of year ................................ 1,309,953 -- 1,264,918 -- ----------------------------------------------------------- End of year ...................................... $ 5,296,051 $1,309,953 $3,249,492 $1,264,918 =========================================================== Undistributed net investment income included in net assets: End of year ................................... $ 1,418 $ 389 $ 1,101 $ 366 ===========================================================
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. | 69 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Templeton Fund Allocator Series (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of ten separate funds. All funds included in this report (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 (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 it is each fund's policy 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 of America. 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. 70 | 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 per share distributions, by class, are generally due to differences in class specific expenses. 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, on behalf of the Funds, 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 | 71 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At December 31, 2007, 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: Year ended December 31, 2007 Shares sold ...................................... 349,875 $ 3,984,778 488,498 $ 5,580,914 Shares issued in reinvestment of distributions ... 8,114 92,217 13,553 155,750 Shares redeemed .................................. (21,395) (242,981) (52,414) (579,977) ------------------------------------------------ Net increase (decrease) .......................... 336,594 $ 3,834,014 449,637 $ 5,156,687 ================================================ 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: Year ended December 31, 2007 Shares sold ...................................... 213,584 $ 2,410,848 95,440 $ 1,102,577 Shares issued in reinvestment of distributions ... 3,651 41,268 2,077 23,770 Shares redeemed .................................. (26,962) (301,142) (5,644) (65,192) ------------------------------------------------ Net increase (decrease) .......................... 190,273 $ 2,150,974 91,873 $ 1,061,155 ================================================ 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: Year ended December 31, 2007 Shares sold ...................................... 95,945 $ 1,067,714 14,340 $ 162,416 Shares issued in reinvestment of distributions ... 2,189 24,812 376 4,314 Shares redeemed .................................. (4,584) (52,275) (3) (32) ------------------------------------------------ Net increase (decrease) .......................... 93,550 $ 1,040,251 14,713 $ 166,698 ================================================ 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 ================================================
72 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT TARGET FUND TARGET FUND ---------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------- ADVISOR CLASS SHARES: Year ended December 31, 2007 Shares sold ...................................... 949 $ 10,200 40,489 $ 477,407 Shares issued in reinvestment of distributions ... 66 755 857 9,849 Shares redeemed .................................. (19) (215) (9,694) (109,496) ---------------------------------------------- Net increase (decrease) .......................... 996 $ 10,740 31,652 $ 377,760 ============================================== 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: Year ended December 31, 2007 Shares sold ...................................... 225,018 $ 2,619,493 106,830 $ 1,245,860 Shares issued in reinvestment of distributions ... 5,002 58,354 3,171 36,890 Shares redeemed .................................. (13,914) (164,926) (6,631) (79,623) ----------------------------------------------- Net increase (decrease) .......................... 216,106 $ 2,512,921 103,370 $ 1,203,127 =============================================== 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: Year ended December 31, 2007 Shares sold ...................................... 89,429 $ 1,049,217 37,380 $ 434,652 Shares issued in reinvestment of distributions ... 1,859 21,536 848 9,798 Shares redeemed .................................. (822) (9,702) (1,957) (22,985) ----------------------------------------------- Net increase (decrease) .......................... 90,466 $ 1,061,051 36,271 $ 421,465 =============================================== 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 | 73 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: Year ended December 31, 2007 Shares sold ...................................... 24,371 $ 279,217 12,508 $ 145,703 Shares issued in reinvestment of distributions ... 602 7,005 389 4,524 Shares redeemed .................................. (12) (146) (175) (2,119) ------------------------------------------- Net increase (decrease) .......................... 24,961 $ 286,076 12,722 $ 148,108 =========================================== 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: Year ended December 31, 2007 Shares sold ...................................... 5,961 $ 68,751 12,616 $ 154,574 Shares issued in reinvestment of distributions ... 360 4,217 284 3,300 Shares redeemed .................................. (1,463) (16,376) (261) (3,087) ------------------------------------------- Net increase (decrease) .......................... 4,858 $ 56,592 12,639 $ 154,787 =========================================== 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 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 certain 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
74 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) 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 Directors 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% The Board of Trustees has agreed to limit the current rate to 0.30% per year for Class A shares for the period of August 1, 2007 through January 31, 2009. 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 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 ....................... $ 15,365 $ 16,395 $ 9,609 $ 6,048 Contingent deferred sales charges retained ........... $ 12 $ 76 $ 85 $ 48
Annual Report | 75 Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) E. TRANSFER AGENT FEES For the year ended December 31, 2007, 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 .................................. $ 3,494 $ 5,821 $ 5,855 $ 6,143
F. WAIVER AND EXPENSE REIMBURSEMENTS Advisers and Investor Services have agreed in advance to waive all or a portion of their respective fees and to assume payment of other expenses through April 30, 2009. Total expenses waived/paid are not subject to reimbursement by the Funds subsequent to the Funds' fiscal year end. After April 30, 2009, Advisers may discontinue this waiver at any time upon notice to the Funds' Board of Trustees. G. OTHER AFFILIATED TRANSACTIONS At December 31, 2007, 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 ------------------------------------------------------------------------------ 12.93% 12.95% 21.45% 35.21% 4. INCOME TAXES The Funds have reviewed the tax positions taken on the federal income tax return, for the one open tax year and as of December 31, 2007 and have determined that no provision for income tax is required in the Funds' financial statements. The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows: ---------------------------------------- FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT TARGET FUND TARGET FUND ---------------------------------------- 2007 2006 2007 2006 ---------------------------------------- Distributions paid from: Ordinary income .................. $139,072 $20,516 $141,458 $23,883 Long term capital gain ........... 62,133 2,418 95,508 3,209 ---------------------------------------- $201,205 $22,934 $236,966 $27,092 ======================================== 76 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED)
------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND ------------------------------------------------------ 2007 2006 2007 2006 ------------------------------------------------------ Distributions paid from: Ordinary income ................................... $ 69,862 $ 16,605 $ 43,962 $ 16,084 Long term capital gain ............................ 68,718 3,050 67,278 3,052 ------------------------------------------------------ $ 138,580 $ 19,655 $ 111,240 $ 19,136 ======================================================
At December 31, 2007, 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 .................................. $ 8,348,603 $ 8,722,494 $ 5,266,509 $ 3,152,705 ====================================================== Unrealized appreciation .............................. $ 184,343 $ 228,818 $ 172,504 $ 151,732 Unrealized depreciation .............................. (286,546) (415,091) (257,370) (164,936) ------------------------------------------------------ Net unrealized appreciation (depreciation) ........... $ (102,203) $ (186,273) $ (84,866) $ (13,204) ====================================================== Undistributed ordinary income ........................ $ 2,414 $ 2,524 $ 1,418 $ 1,101 Undistributed long term capital gains ................ 273,317 364,160 247,364 164,046 ------------------------------------------------------ Distributable earnings ............................... $ 275,731 $ 366,684 $ 248,782 $ 165,147 ======================================================
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of short term capital gains 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 gains 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, 2007, 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 ............................................ $ 6,881,729 $ 7,546,384 $ 4,441,864 $ 2,516,899 Sales ................................................ $ 318,937 $ 741,017 $ 402,540 $ 478,467
Annual Report | 77 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 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, 2007, 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 (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, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 7. REGULATORY AND LITIGATION 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 and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, 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. 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. 78 | Annual Report Franklin Templeton Fund Allocator Series NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. NEW ACCOUNTING PRONOUNCEMENT In September 2006, the Financial Accounting Standards Board (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 | 79 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 Allocator Series, hereafter referred to as the "Funds") at December 31, 2007, 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 two years in the period then ended, 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 investment in the Underlying Funds at December 31, 2007 by correspondence with the transfer agent of the Underlying Funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2008 80 | 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, 2007: ------------------------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------------------------ $289,447 $391,211 $262,945 $178,534 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, 2007: ------------------------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------------------------ 16.17% 20.47% 28.33% 29.92% 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, 2007. ------------------------------------------------------------------------------ FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON FRANKLIN TEMPLETON 2015 RETIREMENT 2025 RETIREMENT 2035 RETIREMENT 2045 RETIREMENT TARGET FUND TARGET FUND TARGET FUND TARGET FUND ------------------------------------------------------------------------------ $54,691 $72,208 $49,106 $32,830 In January 2008, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2007. 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 | 81 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 serves 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 141 Bar-S Foods (meat packing company). One Franklin Parkway 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 121 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. ------------------------------------------------------------------------------------------------------------------------------------ SAM GINN (1937) Trustee Since April 2007 121 Chevron Corporation (global energy One Franklin Parkway company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Trustee Since 1998 141 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), H.J. Heinz San Mateo, CA 94403-1906 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). -------------------------------------------------------------------------------- 82 | 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 ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (1929) Trustee Since 1995 121 Center for Creative Land Recycling One Franklin Parkway (brownfield 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). ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Trustee Since April 2007 141 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas) and San Mateo, CA 94403-1906 Sentient Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Trustee Since April 2007 141 None One Franklin Parkway San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). ------------------------------------------------------------------------------------------------------------------------------------ JOHN B. WILSON (1959) Lead Trustee since 121 None One Franklin Parkway Independent 2006 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since January 2008
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 (consulting firm) (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 141 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 42 of the investment companies in Franklin Templeton Investments. -------------------------------------------------------------------------------- Annual Report | 83
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ **GREGORY E. JOHNSON (1961) Trustee Since April 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 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 President Vice President - AML Compliance - AML since 2006 Compliance
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). ------------------------------------------------------------------------------------------------------------------------------------ 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 28 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 Suite 2100 and Chief Fort Lauderdale, Executive FL 33394-3091 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. -------------------------------------------------------------------------------- 84 | 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 ------------------------------------------------------------------------------------------------------------------------------------ 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. ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) President President and Not Applicable Not Applicable One Franklin Parkway and Chief Chief Executive San Mateo, CA 94403-1906 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. ------------------------------------------------------------------------------------------------------------------------------------ KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ 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). -------------------------------------------------------------------------------- Annual Report | 85
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ 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 some of the other subsidiaries of Franklin Resources, Inc. and 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 is considered to be an interested person of the Trust under the federal securities laws due to his position as officer, director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Trust's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Trust under the federal securities laws due to his position as officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. Note 3: Prior to December 31, 2007, Rupert H. Johnson, Jr. 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 HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON 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. WILSON IS AN INDEPENDENT BOARD MEMBER 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. 86 | Annual Report Franklin Templeton Fund Allocator Series SHAREHOLDER INFORMATION FRANKLIN TEMPLETON RETIREMENT TARGET FUNDS 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 Fund'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 | 87 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 FUNDS 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 1 GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund 1 Templeton Growth Fund Templeton World Fund GROWTH Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Growth Opportunities Fund 2 Franklin Small Cap Growth Fund II 3 Franklin Small-Mid Cap Growth Fund VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund 1 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 1 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 4 Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Focused Core Equity Fund Franklin Growth Fund Franklin Rising Dividends 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(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund 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 5 Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 5 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 5 Templeton Global Bond Fund Templeton Income Fund Templeton International Bond 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 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 and select retirement plans can continue adding to their accounts. 2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to Franklin Growth Opportunities Fund. The fund's investment goal and strategy remained the same. 3. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 4. 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. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 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. The fund invests primarily in 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. 12/07 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 A2007 02/08 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 John B. Wilson, and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $207,774 for the fiscal year ended December 31, 2007 and $200,837 for the fiscal year ended December 31, 2006. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $46,000 for the fiscal year ended December 31, 2007 and $0 for the fiscal year ended December 31, 2006. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended December 31, 2007 and $5,267 for the fiscal year ended December 31, 2006. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended December 31, 2007 and $170,594 for the fiscal year ended December 31, 2006. The services for which these fees were paid included review of materials provided to the fund Board in connect with the investment management contract renewal process. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii)pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $46,000 for the fiscal year ended December 31, 2007 and $175,861 for the fiscal year ended December 31, 2006. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. 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 Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting 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/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date February 27, 2008 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/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date February 27, 2008 By /S/LAURA F. FERGERSON --------------------- Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date February 27, 2008