N-CSR 1 aform.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 811-00537 --------- FRANKLIN CUSTODIAN FUNDS, INC. ------------------------------ (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: 9/30 ---- Date of reporting period: 9/30/06 ------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] -------------------------------------------------------------------------------- SEPTEMBER 30, 2006 -------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund -------------------------------------------------------------------------------- ANNUAL REPORT AND SHAREHOLDER LETTER -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN Eligible shareholders CUSTODIAN FUNDS, INC. 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 Franklin DynaTech Fund ................................................... 3 Franklin Growth Fund ..................................................... 12 Franklin Income Fund ..................................................... 22 Franklin U.S. Government Securities Fund ................................. 37 Franklin Utilities Fund .................................................. 50 Financial Highlights and Statements of Investments ....................... 61 Financial Statements ..................................................... 108 Notes to Financial Statements ............................................ 117 Report of Independent Registered Public Accounting Firm .................. 136 Tax Designation .......................................................... 137 Board Members and Officers ............................................... 138 Shareholder Information .................................................. 142 -------------------------------------------------------------------------------- Annual Report Franklin DynaTech Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing substantially in the equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. -------------------------------------------------------------------------------- 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 DynaTech Fund covers the fiscal year ended September 30, 2006. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A posted a +3.28% cumulative total return for the 12 months under review. The Fund performed comparably to its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of +3.28% for the same period. 1 The Fund underperformed the broad Standard & Poor's 500 Index (S&P 500), which posted a +10.78% cumulative total return. 2 You can find the Fund's long-term performance data in the Performance Summary beginning on page 7. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2006, the U.S. economy advanced at a moderate pace. After a slow fourth quarter 2005, gross domestic product grew an annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates of 2.6% in the second quarter and 1.6% in the third quarter. Growth was driven by corporate profits, and consumer and government spending. Export growth picked up some momentum, but a wide trade deficit remained. Employment generally increased and the unemployment rate fell from 5.1% to 4.6%. 3 1. Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. 2. 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 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 3. Source: Bureau of Labor Statistics. 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 64. Annual Report | 3 PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 9/30/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Semiconductors 10.3% Biotechnology 9.4% Packaged Software 9.0% Medical Specialties 8.7% Telecommunications Equipment 6.0% Internet Software & Services 5.0% Computer Processing Hardware 4.4% Electronic Production Equipment 4.0% Information Technology Services 4.0% Air Freight & Couriers 3.5% Electronic Equipment & Instruments 3.4% Oilfield Services & Equipment 3.2% Other Pharmaceuticals 2.8% Major Pharmaceuticals 2.7% Services to the Health Industry 2.5% Recreational Products 2.1% Other 18.8% Short-Term Investments & Other Net Assets 0.2% Although labor costs rose during the reporting period, hiring increased in many industries and personal income grew. Elevated energy and other commodity prices were a primary economic concern. Oil prices were volatile and declined from a record high of $77 per barrel in July to $63 at period-end. Medical and pharmacy costs climbed substantially. Consumer confidence and spending remained strong but could weaken with the impact of higher prices. As home price appreciation slowed, borrowing against home equity flattened and could have a gradual effect on consumer spending. Inflation was also a concern, as the core Consumer Price Index (CPI) rose 2.9% for the 12 months ended September 30, 2006, which was higher than the 2.2% 10-year average. 4 The Federal Reserve Board (Fed) raised the federal funds target rate incrementally from 3.75% to 5.25%. In August and September, the Fed left the rate unchanged, citing moderate economic growth, a cooling housing market, and the lagging effect of prior tightening. The Fed stated that some inflation risk may remain and the extent and timing of any additional interest rate hikes will depend upon incoming data on inflation and economic growth. In this environment, equity markets experienced dramatic rallies late in the period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 5 Telecommunications, materials and financials stocks performed particularly well. 4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 5. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 2 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Annual Report INVESTMENT STRATEGY Based on our independent analysis of individual companies, we search for leading companies that we believe have a sustainable competitive advantage due to state-of-the-art and innovative products, technologies and business models. We consider such factors as a company's competitive positioning, patents, new products, market share, industry growth, recent operational execution and managerial strength. We use a conservative, bottom-up research process to buy and hold what we consider to be undervalued companies. MANAGER'S DISCUSSION During the year under review, several holdings contributed to Fund performance. In particular, the Fund's overweighted position in Internet software and services company Google rose 27% in value mainly due to the strong online advertising market. Computer processing hardware company Apple Computer, which appreciated 44% in value during the reporting period, benefited from a strong product cycle, which included the iPod. Strength in the global oil markets benefited oilfield services and equipment company Schlumberger, which surged 48% in value. Some stocks had negative returns and hurt Fund performance during the reporting period. Internet software and services company Yahoo! fell 25% in value largely due to the delay of Project Panama, the company's algorithmic search product. We reduced the Fund's exposure to Yahoo! during the year under review. NAVTEQ Corp., a packaged navigation software company, declined 48% in value for the time we held it. NAVTEQ recently shifted its design focus from pre-installed auto maps to less expensive portable navigation devices. The company fell short of its revenue forecasts partly due to lower auto sales and a delay in the launch of new personal navigation devices. We sold our shares of NAVTEQ near period-end. Autodesk, a packaged software company, fell 25% in value mainly due to stock option concerns and a perceived end to the company's 2D design software in favor of 3D. TOP 10 HOLDINGS Franklin DynaTech Fund 9/30/06 ------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS ------------------------------------------------------------------------------- Microsoft Corp. 3.8% PACKAGED SOFTWARE ------------------------------------------------------------------------------- Intel Corp. 3.5% SEMICONDUCTORS ------------------------------------------------------------------------------- Genentech Inc. 3.4% BIOTECHNOLOGY ------------------------------------------------------------------------------- Google Inc., A 3.0% INTERNET SOFTWARE & SERVICES ------------------------------------------------------------------------------- Adobe Systems Inc. 2.6% PACKAGED SOFTWARE ------------------------------------------------------------------------------- Motorola Inc. 2.5% TELECOMMUNICATIONS EQUIPMENT ------------------------------------------------------------------------------- Apple Computer Inc. 2.4% COMPUTER PROCESSING HARDWARE ------------------------------------------------------------------------------- Amgen Inc. 2.1% BIOTECHNOLOGY ------------------------------------------------------------------------------- Hewlett-Packard Co. 2.1% COMPUTER PROCESSING HARDWARE ------------------------------------------------------------------------------- Electronic Arts Inc. 2.1% RECREATIONAL PRODUCTS ------------------------------------------------------------------------------- Annual Report | 5 Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. [PHOTO OMITTED] /s/ Matthew J. Moberg Matthew J. Moberg, CPA [PHOTO OMITTED] /s/ Robert R. Dean Robert R. Dean, CFA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Annual Report Performance Summary as of 9/30/06 FRANKLIN DYNATECH 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 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 INFORMATION ------------------------------------------------------------------------------- CLASS A (SYMBOL: FKDNX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.82 $25.80 $24.98 ------------------------------------------------------------------------------- CLASS B (SYMBOL: FDNBX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.60 $24.75 $24.15 ------------------------------------------------------------------------------- CLASS C (SYMBOL: FDYNX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.60 $24.50 $23.90 ------------------------------------------------------------------------------- PERFORMANCE 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. 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 1 +3.28% +39.61% +115.78% ----------------------------------------------------------------------------------------- Average Annual Total Return 2 -2.64% +5.65% +7.35% ----------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,736 $13,161 $20,332 ----------------------------------------------------------------------------------------- CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00) ----------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.48% +34.40% -9.15% ----------------------------------------------------------------------------------------- Average Annual Total Return 2 -1.52% +5.77% -1.43% ----------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,848 $13,240 $9,085 ----------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR ----------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.51% +34.52% +99.39% ----------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.51% +6.11% +7.14% ----------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,151 $13,452 $19,939 -----------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 7 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 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 indexes are unmanaged. 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 9/30/06 -------------------------------------------- 1-Year -2.64% -------------------------------------------- 5-Year +5.65% -------------------------------------------- 10-Year +7.35% -------------------------------------------- CLASS A (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN DYNATECH NASDAQ 100 DATE FUND S&P 500 4 INDEX 4 10/1/1996 $9,422 $10,000 $10,000 10/31/1996 $9,597 $10,276 $10,196 11/30/1996 $10,517 $11,052 $11,308 12/31/1996 $10,518 $10,833 $11,136 1/31/1997 $11,299 $11,509 $12,494 2/28/1997 $10,663 $11,600 $11,531 3/31/1997 $10,394 $11,124 $10,807 4/30/1997 $10,857 $11,787 $11,860 5/31/1997 $11,465 $12,504 $13,000 6/30/1997 $11,569 $13,064 $12,979 7/31/1997 $12,696 $14,103 $15,009 8/31/1997 $12,468 $13,314 $14,564 9/30/1997 $12,779 $14,043 $14,875 10/31/1997 $12,150 $13,574 $13,824 11/30/1997 $12,281 $14,202 $14,243 12/31/1997 $12,056 $14,446 $13,433 1/31/1998 $12,470 $14,605 $14,522 2/28/1998 $13,023 $15,658 $16,190 3/31/1998 $13,082 $16,459 $16,550 4/30/1998 $13,333 $16,625 $16,922 5/31/1998 $12,861 $16,339 $16,162 6/30/1998 $13,488 $17,003 $18,132 7/31/1998 $13,555 $16,822 $18,673 8/31/1998 $12,314 $14,392 $15,461 9/30/1998 $13,171 $15,314 $18,242 10/31/1998 $13,533 $16,559 $18,988 11/30/1998 $14,367 $17,562 $21,123 12/31/1998 $15,352 $18,574 $24,893 1/31/1999 $16,548 $19,350 $28,841 2/28/1999 $15,786 $18,749 $26,103 3/31/1999 $16,302 $19,499 $28,559 4/30/1999 $16,346 $20,254 $28,965 5/31/1999 $16,077 $19,776 $28,332 6/30/1999 $16,900 $20,873 $31,140 7/31/1999 $16,885 $20,222 $30,789 8/31/1999 $17,355 $20,122 $32,497 9/30/1999 $17,273 $19,571 $32,646 10/31/1999 $17,976 $20,809 $35,759 11/30/1999 $19,037 $21,232 $40,223 12/31/1999 $21,061 $22,482 $50,271 1/31/2000 $21,274 $21,352 $48,403 2/29/2000 $23,147 $20,948 $57,851 3/31/2000 $23,382 $22,996 $59,626 4/30/2000 $22,116 $22,305 $51,157 5/31/2000 $21,054 $21,848 $45,068 6/30/2000 $22,351 $22,387 $51,030 7/31/2000 $21,956 $22,037 $48,936 8/31/2000 $23,549 $23,405 $55,284 9/30/2000 $21,691 $22,170 $48,410 10/31/2000 $21,137 $22,076 $44,502 11/30/2000 $18,885 $20,337 $33,984 12/31/2000 $18,484 $20,437 $31,749 1/31/2001 $19,416 $21,161 $35,156 2/28/2001 $17,071 $19,233 $25,873 3/31/2001 $16,070 $18,015 $21,330 4/30/2001 $17,118 $19,414 $25,152 5/31/2001 $16,854 $19,544 $24,403 6/30/2001 $16,730 $19,069 $24,848 7/31/2001 $16,202 $18,881 $22,826 8/31/2001 $15,542 $17,700 $19,926 9/30/2001 $14,564 $16,271 $15,841 10/31/2001 $15,231 $16,581 $18,504 11/30/2001 $16,178 $17,853 $21,639 12/31/2001 $16,060 $18,010 $21,382 1/31/2002 $15,934 $17,747 $21,017 2/28/2002 $15,186 $17,405 $18,428 3/31/2002 $15,651 $18,059 $19,697 4/30/2002 $14,807 $16,965 $17,315 5/31/2002 $14,618 $16,840 $16,383 6/30/2002 $13,712 $15,641 $14,255 7/31/2002 $13,003 $14,422 $13,044 8/31/2002 $12,948 $14,517 $12,777 9/30/2002 $12,112 $12,940 $11,287 10/31/2002 $13,137 $14,078 $13,416 11/30/2002 $13,948 $14,906 $15,132 12/31/2002 $12,869 $14,031 $13,346 1/31/2003 $12,727 $13,664 $13,328 2/28/2003 $12,853 $13,459 $13,690 3/31/2003 $12,963 $13,588 $13,811 4/30/2003 $13,822 $14,708 $14,996 5/31/2003 $14,847 $15,482 $16,241 6/30/2003 $15,099 $15,680 $16,293 7/31/2003 $15,643 $15,956 $17,313 8/31/2003 $16,218 $16,267 $18,184 9/30/2003 $15,895 $16,095 $17,676 10/31/2003 $16,982 $17,005 $19,203 11/30/2003 $17,298 $17,154 $19,310 12/31/2003 $17,841 $18,053 $19,902 1/31/2004 $18,228 $18,384 $20,243 2/29/2004 $18,031 $18,640 $19,935 3/31/2004 $17,928 $18,359 $19,502 4/30/2004 $17,629 $18,071 $19,000 5/31/2004 $18,346 $18,318 $19,879 6/30/2004 $18,551 $18,674 $20,563 7/31/2004 $17,014 $18,056 $18,987 8/31/2004 $16,707 $18,129 $18,557 9/30/2004 $17,345 $18,325 $19,154 10/31/2004 $17,715 $18,605 $20,157 11/30/2004 $18,511 $19,358 $21,306 12/31/2004 $19,213 $20,016 $21,979 1/31/2005 $18,070 $19,528 $20,603 2/28/2005 $18,306 $19,939 $20,486 3/31/2005 $17,905 $19,586 $20,100 4/30/2005 $17,589 $19,215 $19,263 5/31/2005 $18,811 $19,826 $20,915 6/30/2005 $18,622 $19,854 $20,249 7/31/2005 $19,575 $20,592 $21,763 8/31/2005 $19,717 $20,405 $21,445 9/30/2005 $19,685 $20,570 $21,715 10/31/2005 $19,528 $20,227 $21,411 11/30/2005 $20,781 $20,991 $22,677 12/31/2005 $20,592 $20,998 $22,306 1/31/2006 $21,419 $21,554 $23,194 2/28/2006 $21,002 $21,613 $22,650 3/31/2006 $21,136 $21,882 $23,098 4/30/2006 $21,009 $22,175 $23,058 5/31/2006 $19,638 $21,538 $21,416 6/30/2006 $19,788 $21,566 $21,357 7/31/2006 $19,173 $21,699 $20,465 8/31/2006 $19,890 $22,215 $21,418 9/30/2006 $20,332 $22,787 $22,427 AVERAGE ANNUAL TOTAL RETURN -------------------------------------------- CLASS B 9/30/06 -------------------------------------------- 1-Year -1.52% -------------------------------------------- 5-Year +5.77% -------------------------------------------- Since Inception (2/1/00) -1.43% -------------------------------------------- CLASS B (2/1/00-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN DYNATECH NASDAQ 100 DATE FUND S&P 500 4 INDEX 4 2/1/2000 $10,000 $10,000 $10,000 2/29/2000 $10,870 $9,811 $11,952 3/31/2000 $10,973 $10,770 $12,319 4/30/2000 $10,374 $10,446 $10,569 5/31/2000 $9,868 $10,232 $9,311 6/30/2000 $10,471 $10,485 $10,543 7/31/2000 $10,278 $10,321 $10,110 8/31/2000 $11,020 $10,962 $11,422 9/30/2000 $10,146 $10,383 $10,002 10/31/2000 $9,879 $10,339 $9,194 11/30/2000 $8,824 $9,524 $7,021 12/31/2000 $8,624 $9,571 $6,559 1/31/2001 $9,053 $9,911 $7,263 2/28/2001 $7,958 $9,008 $5,345 3/31/2001 $7,488 $8,437 $4,407 4/30/2001 $7,968 $9,092 $5,196 5/31/2001 $7,841 $9,153 $5,042 6/30/2001 $7,779 $8,931 $5,134 7/31/2001 $7,528 $8,843 $4,716 8/31/2001 $7,219 $8,290 $4,117 9/30/2001 $6,760 $7,620 $3,273 10/31/2001 $7,062 $7,766 $3,823 11/30/2001 $7,499 $8,361 $4,471 12/31/2001 $7,437 $8,435 $4,417 1/31/2002 $7,378 $8,312 $4,342 2/28/2002 $7,026 $8,151 $3,807 3/31/2002 $7,239 $8,458 $4,069 4/30/2002 $6,842 $7,945 $3,577 5/31/2002 $6,751 $7,887 $3,385 6/30/2002 $6,329 $7,325 $2,945 7/31/2002 $5,995 $6,754 $2,695 8/31/2002 $5,969 $6,799 $2,640 9/30/2002 $5,576 $6,060 $2,332 10/31/2002 $6,046 $6,593 $2,772 11/30/2002 $6,413 $6,981 $3,126 12/31/2002 $5,917 $6,571 $2,757 1/31/2003 $5,848 $6,399 $2,754 2/28/2003 $5,903 $6,303 $2,828 3/31/2003 $5,947 $6,364 $2,853 4/30/2003 $6,340 $6,888 $3,098 5/31/2003 $6,806 $7,251 $3,355 6/30/2003 $6,916 $7,343 $3,366 7/31/2003 $7,158 $7,473 $3,577 8/31/2003 $7,419 $7,618 $3,757 9/30/2003 $7,268 $7,538 $3,652 10/31/2003 $7,760 $7,964 $3,967 11/30/2003 $7,896 $8,034 $3,989 12/31/2003 $8,142 $8,455 $4,112 1/31/2004 $8,311 $8,610 $4,182 2/29/2004 $8,215 $8,730 $4,119 3/31/2004 $8,164 $8,598 $4,029 4/30/2004 $8,025 $8,463 $3,925 5/31/2004 $8,344 $8,579 $4,107 6/30/2004 $8,432 $8,746 $4,248 7/31/2004 $7,727 $8,456 $3,923 8/31/2004 $7,584 $8,490 $3,834 9/30/2004 $7,867 $8,582 $3,957 10/31/2004 $8,028 $8,713 $4,164 11/30/2004 $8,388 $9,066 $4,402 12/31/2004 $8,696 $9,374 $4,541 1/31/2005 $8,179 $9,146 $4,257 2/28/2005 $8,278 $9,338 $4,232 3/31/2005 $8,091 $9,173 $4,153 4/30/2005 $7,944 $8,999 $3,980 5/31/2005 $8,491 $9,285 $4,321 6/30/2005 $8,399 $9,298 $4,183 7/31/2005 $8,825 $9,644 $4,496 8/31/2005 $8,880 $9,556 $4,430 9/30/2005 $8,865 $9,634 $4,486 10/31/2005 $8,784 $9,473 $4,423 11/30/2005 $9,342 $9,831 $4,685 12/31/2005 $9,254 $9,834 $4,608 1/31/2006 $9,621 $10,095 $4,792 2/28/2006 $9,423 $10,122 $4,679 3/31/2006 $9,478 $10,248 $4,772 4/30/2006 $9,416 $10,385 $4,764 5/31/2006 $8,795 $10,087 $4,425 6/30/2006 $8,858 $10,100 $4,412 7/31/2006 $8,579 $10,163 $4,228 8/31/2006 $8,895 $10,404 $4,425 9/30/2006 $9,085 $10,672 $4,633 8 | Annual Report Performance Summary (CONTINUED) CLASS C (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN DYNATECH NASDAQ 100 DATE FUND S&P 500 4 INDEX 4 10/1/1996 $10,000 $10,000 $10,000 10/31/1996 $10,171 $10,276 $10,196 11/30/1996 $11,140 $11,052 $11,308 12/31/1996 $11,135 $10,833 $11,136 1/31/1997 $11,964 $11,509 $12,494 2/28/1997 $11,282 $11,600 $11,531 3/31/1997 $10,988 $11,124 $10,807 4/30/1997 $11,465 $11,787 $11,860 5/31/1997 $12,096 $12,504 $13,000 6/30/1997 $12,192 $13,064 $12,979 7/31/1997 $13,374 $14,103 $15,009 8/31/1997 $13,117 $13,314 $14,564 9/30/1997 $13,432 $14,043 $14,875 10/31/1997 $12,764 $13,574 $13,824 11/30/1997 $12,889 $14,202 $14,243 12/31/1997 $12,642 $14,446 $13,433 1/31/1998 $13,048 $14,605 $14,522 2/28/1998 $13,619 $15,658 $16,190 3/31/1998 $13,674 $16,459 $16,550 4/30/1998 $13,932 $16,625 $16,922 5/31/1998 $13,424 $16,339 $16,162 6/30/1998 $14,073 $17,003 $18,132 7/31/1998 $14,127 $16,822 $18,673 8/31/1998 $12,830 $14,392 $15,461 9/30/1998 $13,705 $15,314 $18,242 10/31/1998 $14,073 $16,559 $18,988 11/30/1998 $14,933 $17,562 $21,123 12/31/1998 $15,944 $18,574 $24,893 1/31/1999 $17,174 $19,350 $28,841 2/28/1999 $16,377 $18,749 $26,103 3/31/1999 $16,898 $19,499 $28,559 4/30/1999 $16,937 $20,254 $28,965 5/31/1999 $16,653 $19,776 $28,332 6/30/1999 $17,489 $20,873 $31,140 7/31/1999 $17,465 $20,222 $30,789 8/31/1999 $17,938 $20,122 $32,497 9/30/1999 $17,843 $19,571 $32,646 10/31/1999 $18,553 $20,809 $35,759 11/30/1999 $19,640 $21,232 $40,223 12/31/1999 $21,716 $22,482 $50,271 1/31/2000 $21,923 $21,352 $48,403 2/29/2000 $23,841 $20,948 $57,851 3/31/2000 $24,064 $22,996 $59,626 4/30/2000 $22,751 $22,305 $51,157 5/31/2000 $21,637 $21,848 $45,068 6/30/2000 $22,966 $22,387 $51,030 7/31/2000 $22,544 $22,037 $48,936 8/31/2000 $24,159 $23,405 $55,284 9/30/2000 $22,241 $22,170 $48,410 10/31/2000 $21,661 $22,076 $44,502 11/30/2000 $19,345 $20,337 $33,984 12/31/2000 $18,912 $20,437 $31,749 1/31/2001 $19,858 $21,161 $35,156 2/28/2001 $17,449 $19,233 $25,873 3/31/2001 $16,423 $18,015 $21,330 4/30/2001 $17,482 $19,414 $25,152 5/31/2001 $17,199 $19,544 $24,403 6/30/2001 $17,061 $19,069 $24,848 7/31/2001 $16,512 $18,881 $22,826 8/31/2001 $15,825 $17,700 $19,926 9/30/2001 $14,823 $16,271 $15,841 10/31/2001 $15,493 $16,581 $18,504 11/30/2001 $16,447 $17,853 $21,639 12/31/2001 $16,310 $18,010 $21,382 1/31/2002 $16,179 $17,747 $21,017 2/28/2002 $15,414 $17,405 $18,428 3/31/2002 $15,870 $18,059 $19,697 4/30/2002 $15,007 $16,965 $17,315 5/31/2002 $14,804 $16,840 $16,383 6/30/2002 $13,876 $15,641 $14,255 7/31/2002 $13,152 $14,422 $13,044 8/31/2002 $13,087 $14,517 $12,777 9/30/2002 $12,232 $12,940 $11,287 10/31/2002 $13,266 $14,078 $13,416 11/30/2002 $14,071 $14,906 $15,132 12/31/2002 $12,981 $14,031 $13,346 1/31/2003 $12,826 $13,664 $13,328 2/28/2003 $12,948 $13,459 $13,690 3/31/2003 $13,046 $13,588 $13,811 4/30/2003 $13,909 $14,708 $14,996 5/31/2003 $14,926 $15,482 $16,241 6/30/2003 $15,170 $15,680 $16,293 7/31/2003 $15,707 $15,956 $17,313 8/31/2003 $16,277 $16,267 $18,184 9/30/2003 $15,943 $16,095 $17,676 10/31/2003 $17,026 $17,005 $19,203 11/30/2003 $17,327 $17,154 $19,310 12/31/2003 $17,864 $18,053 $19,902 1/31/2004 $18,238 $18,384 $20,243 2/29/2004 $18,027 $18,640 $19,935 3/31/2004 $17,913 $18,359 $19,502 4/30/2004 $17,604 $18,071 $19,000 5/31/2004 $18,303 $18,318 $19,879 6/30/2004 $18,499 $18,674 $20,563 7/31/2004 $16,952 $18,056 $18,987 8/31/2004 $16,643 $18,129 $18,557 9/30/2004 $17,262 $18,325 $19,154 10/31/2004 $17,620 $18,605 $20,157 11/30/2004 $18,401 $19,358 $21,306 12/31/2004 $19,077 $20,016 $21,979 1/31/2005 $17,945 $19,528 $20,603 2/28/2005 $18,165 $19,939 $20,486 3/31/2005 $17,750 $19,586 $20,100 4/30/2005 $17,425 $19,215 $19,263 5/31/2005 $18,629 $19,826 $20,915 6/30/2005 $18,426 $19,854 $20,249 7/31/2005 $19,361 $20,592 $21,763 8/31/2005 $19,484 $20,405 $21,445 9/30/2005 $19,451 $20,570 $21,715 10/31/2005 $19,280 $20,227 $21,411 11/30/2005 $20,501 $20,991 $22,677 12/31/2005 $20,306 $20,998 $22,306 1/31/2006 $21,103 $21,554 $23,194 2/28/2006 $20,680 $21,613 $22,650 3/31/2006 $20,802 $21,882 $23,098 4/30/2006 $20,664 $22,175 $23,058 5/31/2006 $19,305 $21,538 $21,416 6/30/2006 $19,435 $21,566 $21,357 7/31/2006 $18,824 $21,699 $20,465 8/31/2006 $19,516 $22,215 $21,418 9/30/2006 $19,939 $22,787 $22,427 AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------- CLASS C 9/30/06 -------------------------------------------------- 1-Year +1.51% -------------------------------------------------- 5-Year +6.11% -------------------------------------------------- 10-Year +7.14% -------------------------------------------------- ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH INVESTING IN COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENTS. THE TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICE OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 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. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. 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 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. Annual Report | 9 Your Fund's Expenses FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 10 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
--------------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06 --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 962.00 $4.62 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.36 $4.76 --------------------------------------------------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 958.60 $8.30 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.60 $8.54 --------------------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 958.50 $8.25 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.65 $8.49 ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.94%; B: 1.69%; and C: 1.68%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. Annual Report | 11 Franklin Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing substantially in equity securities of companies that are leaders in their industries. -------------------------------------------------------------------------------- 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 Growth Fund's annual report for the fiscal year ended September 30, 2006. PERFORMANCE OVERVIEW Franklin Growth Fund - Class A posted a +12.46% cumulative total return for the 12 months under review. The Fund outperformed its benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +10.78% for the same period. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 15. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2006, the U.S. economy advanced at a moderate pace. After a slow fourth quarter 2005, gross domestic product grew an annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates of 2.6% in the second quarter and 1.6% in the third quarter. Growth was driven by corporate profits, and consumer and government spending. Export growth picked up some momentum, but a wide trade deficit remained. Employment generally increased and the unemployment rate fell from 5.1% to 4.6%. 2 Although labor costs rose during the reporting period, hiring increased in many industries and personal income grew. Elevated energy and other commodity prices were a primary economic concern. Oil prices were volatile and declined from a record high of $77 per barrel in July to $63 at period-end. Medical and pharmacy costs climbed substantially. 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 index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2. Source: Bureau of Labor Statistics. 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 73. 12 | Annual Report Consumer confidence and spending remained strong but could weaken with the impact of higher prices. As home price appreciation slowed, borrowing against home equity flattened and could have a gradual effect on consumer spending. Inflation was also a concern, as the core Consumer Price Index (CPI) rose 2.9% for the 12 months ended September 30, 2006, which was higher than the 2.2% 10-year average. 3 The Federal Reserve Board (Fed) raised the federal funds target rate incrementally from 3.75% to 5.25%. In August and September, the Fed left the rate unchanged, citing moderate economic growth, a cooling housing market, and the lagging effect of prior tightening. The Fed stated that some inflation risk may remain and the extent and timing of any additional interest rate hikes will depend upon incoming data on inflation and economic growth. In this environment, equity markets experienced dramatic rallies late in the period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 4 Telecommunications, materials and financials stocks performed particularly well. INVESTMENT STRATEGY We seek to invest in companies that have qualities such as strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in mature businesses selling at depressed prices but offering favorable recovery possibilities. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 9/30/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electronic Technology* 22.5% Health Technology* 21.6% Producer Manufacturing 18.9% Technology Services* 8.7% Transportation 6.0% Consumer Services 4.6% Distribution Services 3.0% Commercial Services 2.8% Consumer Non-Durables 2.7% Consumer Durables 2.2% Health Services 2.1% Process Industries 2.0% Other 2.2% Short-Term Investments & Other Net Assets 0.7% * Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. Annual Report | 13 TOP 10 HOLDINGS Franklin Growth Fund 9/30/06 -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS -------------------------------------------------------------------------------- Genentech Inc. 3.4% HEALTH TECHNOLOGY -------------------------------------------------------------------------------- The Boeing Co. 3.3% ELECTRONIC TECHNOLOGY -------------------------------------------------------------------------------- Apple Computer Inc. 3.2% ELECTRONIC TECHNOLOGY -------------------------------------------------------------------------------- General Dynamics Corp. 3.0% ELECTRONIC TECHNOLOGY -------------------------------------------------------------------------------- Northrop Grumman Corp. 2.8% ELECTRONIC TECHNOLOGY -------------------------------------------------------------------------------- Amgen Inc. 2.8% HEALTH TECHNOLOGY -------------------------------------------------------------------------------- Johnson & Johnson 2.7% HEALTH TECHNOLOGY -------------------------------------------------------------------------------- 3M Co. 2.5% PRODUCER MANUFACTURING -------------------------------------------------------------------------------- Pfizer Inc. 2.4% HEALTH TECHNOLOGY -------------------------------------------------------------------------------- United Technologies Corp. 2.1% PRODUCER MANUFACTURING -------------------------------------------------------------------------------- MANAGER'S DISCUSSION The Fund was nearly fully invested with holdings in 95 companies at period-end. We continued to invest in a broad array of companies of all sizes and in varied industries. During the Fund's fiscal year, performance generally was driven by individual company performances rather than any particular sector strength or weakness. Our two best performing stock holdings were Continental Airlines (+193%) and AMR, or American Airlines (+107%). Another airline position, British Airways, also performed well, rising 55% in value. Largely due to struggles faced by the airline industry in recent years, we did not accumulate significant exposure to the industry. At period-end, our six airline holdings represented 4.9% of the Fund's total net assets. Elsewhere, electronic technology holding Apple Computer rose 44% in value and contributed to performance. The company benefited from a strong product cycle, which included the iPod. The Fund had some detractors from performance during the fiscal year. For example, Yahoo! (-25%) suffered due to the delay of its Project Panama, the company's algorithmic search product. Gateway (-30%) and Dell (-33%) fell in value amid disappointing earnings results. Thank you for your continued participation in Franklin Growth Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 14 | Annual Report Performance Summary as of 9/30/06 FRANKLIN GROWTH 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: FKGRX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.27 $39.10 $34.83 -------------------------------------------------------------------------------- Dividend Income $0.0644 -------------------------------------------------------------------------------- CLASS B (SYMBOL: FKGBX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.92 $37.65 $33.73 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRGSX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.89 $37.32 $33.43 -------------------------------------------------------------------------------- CLASS R (SYMBOL: FGSRX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.21 $38.80 $34.59 -------------------------------------------------------------------------------- Dividend Income $0.0013 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$4.28 $39.17 $34.89 -------------------------------------------------------------------------------- Dividend Income $0.1518 -------------------------------------------------------------------------------- Annual Report | 15 Performance Summary (CONTINUED) PERFORMANCE 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 1 +12.46% +42.45% +100.26% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +6.00% +6.07% +6.56% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $10,600 $13,424 $18,877 ------------------------------------------------------------------------------------------------------ CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +11.62% +37.31% +28.79% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +7.62% +6.23% +3.32% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $10,762 $13,531 $12,879 ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +11.60% +37.21% +85.66% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +10.60% +6.53% +6.38% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,060 $13,721 $18,566 ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +12.18% +45.17% +23.15% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +12.18% +13.23% +4.49% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,218 $14,517 $12,315 ------------------------------------------------------------------------------------------------------ ADVISOR CLASS 4 1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +12.73% +44.23% +106.66% ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +12.73% +7.60% +7.53% ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,273 $14,423 $20,666 ------------------------------------------------------------------------------------------------------
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. 16 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 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 index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] DATE FRANKLIN GROWTH FUND S&P 500 5 10/1/1996 $9,426 $10,000 10/31/1996 $9,451 $10,276 11/30/1996 $10,045 $11,052 12/31/1996 $9,843 $10,833 1/31/1997 $10,091 $11,509 2/28/1997 $10,112 $11,600 3/31/1997 $9,860 $11,124 4/30/1997 $10,213 $11,787 5/31/1997 $10,776 $12,504 6/30/1997 $10,978 $13,064 7/31/1997 $11,414 $14,103 8/31/1997 $11,032 $13,314 9/30/1997 $11,381 $14,043 10/31/1997 $11,284 $13,574 11/30/1997 $11,541 $14,202 12/31/1997 $11,675 $14,446 1/31/1998 $11,795 $14,605 2/28/1998 $12,291 $15,658 3/31/1998 $12,558 $16,459 4/30/1998 $12,726 $16,625 5/31/1998 $12,545 $16,339 6/30/1998 $12,782 $17,003 7/31/1998 $12,735 $16,822 8/31/1998 $11,662 $14,392 9/30/1998 $12,317 $15,314 10/31/1998 $13,075 $16,559 11/30/1998 $13,545 $17,562 12/31/1998 $13,837 $18,574 1/31/1999 $14,079 $19,350 2/28/1999 $13,929 $18,749 3/31/1999 $14,308 $19,499 4/30/1999 $14,774 $20,254 5/31/1999 $14,594 $19,776 6/30/1999 $15,205 $20,873 7/31/1999 $14,959 $20,222 8/31/1999 $15,020 $20,122 9/30/1999 $14,611 $19,571 10/31/1999 $14,849 $20,809 11/30/1999 $15,038 $21,232 12/31/1999 $15,523 $22,482 1/31/2000 $15,393 $21,352 2/29/2000 $15,033 $20,948 3/31/2000 $16,341 $22,996 4/30/2000 $16,535 $22,305 5/31/2000 $16,602 $21,848 6/30/2000 $16,836 $22,387 7/31/2000 $16,575 $22,037 8/31/2000 $17,303 $23,405 9/30/2000 $16,589 $22,170 10/31/2000 $16,809 $22,076 11/30/2000 $16,373 $20,337 12/31/2000 $16,692 $20,437 1/31/2001 $17,007 $21,161 2/28/2001 $16,154 $19,233 3/31/2001 $14,958 $18,015 4/30/2001 $16,163 $19,414 5/31/2001 $16,411 $19,544 6/30/2001 $15,658 $19,069 7/31/2001 $15,620 $18,881 8/31/2001 $14,910 $17,700 9/30/2001 $13,252 $16,271 10/31/2001 $13,695 $16,581 11/30/2001 $14,996 $17,853 12/31/2001 $15,112 $18,010 1/31/2002 $14,896 $17,747 2/28/2002 $14,790 $17,405 3/31/2002 $15,303 $18,059 4/30/2002 $14,335 $16,965 5/31/2002 $14,052 $16,840 6/30/2002 $12,992 $15,641 7/31/2002 $11,822 $14,422 8/31/2002 $11,846 $14,517 9/30/2002 $10,556 $12,940 10/31/2002 $11,289 $14,078 11/30/2002 $12,061 $14,906 12/31/2002 $11,432 $14,031 1/31/2003 $10,995 $13,664 2/28/2003 $10,745 $13,459 3/31/2003 $10,745 $13,588 4/30/2003 $11,528 $14,708 5/31/2003 $12,282 $15,482 6/30/2003 $12,647 $15,680 7/31/2003 $13,022 $15,956 8/31/2003 $13,310 $16,267 9/30/2003 $12,906 $16,095 10/31/2003 $13,670 $17,005 11/30/2003 $13,843 $17,154 12/31/2003 $14,636 $18,053 1/31/2004 $14,857 $18,384 2/29/2004 $14,924 $18,640 3/31/2004 $14,578 $18,359 4/30/2004 $14,587 $18,071 5/31/2004 $14,823 $18,318 6/30/2004 $15,429 $18,674 7/31/2004 $14,616 $18,056 8/31/2004 $14,491 $18,129 9/30/2004 $14,703 $18,325 10/31/2004 $14,881 $18,605 11/30/2004 $15,751 $19,358 12/31/2004 $16,289 $20,016 1/31/2005 $15,730 $19,528 2/28/2005 $16,005 $19,939 3/31/2005 $15,986 $19,586 4/30/2005 $15,605 $19,215 5/31/2005 $16,222 $19,826 6/30/2005 $16,044 $19,854 7/31/2005 $16,882 $20,592 8/31/2005 $16,820 $20,405 9/30/2005 $16,786 $20,570 10/31/2005 $16,656 $20,227 11/30/2005 $17,465 $20,991 12/31/2005 $17,651 $20,998 1/31/2006 $17,829 $21,554 2/28/2006 $18,071 $21,613 3/31/2006 $18,495 $21,882 4/30/2006 $18,640 $22,175 5/31/2006 $18,235 $21,538 6/30/2006 $18,128 $21,566 7/31/2006 $17,916 $21,699 8/31/2006 $18,341 $22,215 9/30/2006 $18,877 $22,787 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------------- CLASS A 9/30/06 ---------------------------------------------------- 1-Year +6.00% ---------------------------------------------------- 5-Year +6.07% ---------------------------------------------------- 10-Year +6.56% ---------------------------------------------------- CLASS B (1/1/99-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] DATE FRANKLIN GROWTH FUND S&P 500 5 1/1/1999 $10,000 $10,000 1/31/1999 $10,172 $10,418 2/28/1999 $10,057 $10,094 3/31/1999 $10,324 $10,498 4/30/1999 $10,655 $10,905 5/31/1999 $10,515 $10,647 6/30/1999 $10,951 $11,238 7/31/1999 $10,766 $10,887 8/31/1999 $10,804 $10,834 9/30/1999 $10,502 $10,537 10/31/1999 $10,668 $11,203 11/30/1999 $10,792 $11,431 12/31/1999 $11,134 $12,104 1/31/2000 $11,031 $11,496 2/29/2000 $10,771 $11,279 3/31/2000 $11,698 $12,381 4/30/2000 $11,831 $12,009 5/31/2000 $11,873 $11,763 6/30/2000 $12,031 $12,053 7/31/2000 $11,837 $11,865 8/31/2000 $12,352 $12,601 9/30/2000 $11,834 $11,936 10/31/2000 $11,983 $11,886 11/30/2000 $11,665 $10,949 12/31/2000 $11,883 $11,003 1/31/2001 $12,102 $11,393 2/28/2001 $11,491 $10,355 3/31/2001 $10,630 $9,699 4/30/2001 $11,477 $10,453 5/31/2001 $11,648 $10,523 6/30/2001 $11,108 $10,267 7/31/2001 $11,070 $10,166 8/31/2001 $10,565 $9,530 9/30/2001 $9,380 $8,760 10/31/2001 $9,687 $8,927 11/30/2001 $10,609 $9,612 12/31/2001 $10,683 $9,696 1/31/2002 $10,522 $9,555 2/28/2002 $10,444 $9,371 3/31/2002 $10,796 $9,723 4/30/2002 $10,108 $9,134 5/31/2002 $9,903 $9,067 6/30/2002 $9,147 $8,421 7/31/2002 $8,319 $7,765 8/31/2002 $8,333 $7,816 9/30/2002 $7,420 $6,967 10/31/2002 $7,929 $7,580 11/30/2002 $8,470 $8,025 12/31/2002 $8,018 $7,554 1/31/2003 $7,710 $7,357 2/28/2003 $7,529 $7,246 3/31/2003 $7,526 $7,316 4/30/2003 $8,070 $7,919 5/31/2003 $8,590 $8,335 6/30/2003 $8,839 $8,442 7/31/2003 $9,096 $8,591 8/31/2003 $9,291 $8,758 9/30/2003 $9,003 $8,665 10/31/2003 $9,530 $9,155 11/30/2003 $9,647 $9,236 12/31/2003 $10,190 $9,720 1/31/2004 $10,338 $9,898 2/29/2004 $10,382 $10,036 3/31/2004 $10,132 $9,884 4/30/2004 $10,136 $9,729 5/31/2004 $10,293 $9,863 6/30/2004 $10,707 $10,054 7/31/2004 $10,132 $9,722 8/31/2004 $10,043 $9,761 9/30/2004 $10,184 $9,866 10/31/2004 $10,300 $10,017 11/30/2004 $10,895 $10,422 12/31/2004 $11,258 $10,777 1/31/2005 $10,868 $10,514 2/28/2005 $11,049 $10,735 3/31/2005 $11,032 $10,545 4/30/2005 $10,762 $10,345 5/31/2005 $11,179 $10,674 6/30/2005 $11,049 $10,690 7/31/2005 $11,617 $11,087 8/31/2005 $11,569 $10,986 9/30/2005 $11,538 $11,075 10/31/2005 $11,439 $10,890 11/30/2005 $11,990 $11,301 12/31/2005 $12,109 $11,306 1/31/2006 $12,226 $11,605 2/28/2006 $12,383 $11,636 3/31/2006 $12,667 $11,781 4/30/2006 $12,756 $11,939 5/31/2006 $12,469 $11,596 6/30/2006 $12,393 $11,611 7/31/2006 $12,239 $11,683 8/31/2006 $12,523 $11,960 9/30/2006 $12,879 $12,268 AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------------- CLASS B 9/30/06 ---------------------------------------------------- 1-Year +7.62% ---------------------------------------------------- 5-Year +6.23% ---------------------------------------------------- Since Inception (1/1/99) +3.32% ---------------------------------------------------- Annual Report | 17 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------- CLASS C 9/30/06 -------------------------------------------------- 1-Year +10.60% -------------------------------------------------- 5-Year +6.53% -------------------------------------------------- 10-Year +6.38% -------------------------------------------------- CLASS C (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] DATE FRANKLIN GROWTH FUND S&P 500 5 10/1/1996 $10,000 $10,000 10/31/1996 $10,022 $10,276 11/30/1996 $10,645 $11,052 12/31/1996 $10,423 $10,833 1/31/1997 $10,675 $11,509 2/28/1997 $10,693 $11,600 3/31/1997 $10,419 $11,124 4/30/1997 $10,787 $11,787 5/31/1997 $11,375 $12,504 6/30/1997 $11,577 $13,064 7/31/1997 $12,034 $14,103 8/31/1997 $11,617 $13,314 9/30/1997 $11,980 $14,043 10/31/1997 $11,873 $13,574 11/30/1997 $12,133 $14,202 12/31/1997 $12,266 $14,446 1/31/1998 $12,385 $14,605 2/28/1998 $12,898 $15,658 3/31/1998 $13,168 $16,459 4/30/1998 $13,337 $16,625 5/31/1998 $13,140 $16,339 6/30/1998 $13,378 $17,003 7/31/1998 $13,319 $16,822 8/31/1998 $12,193 $14,392 9/30/1998 $12,865 $15,314 10/31/1998 $13,653 $16,559 11/30/1998 $14,129 $17,562 12/31/1998 $14,428 $18,574 1/31/1999 $14,670 $19,350 2/28/1999 $14,503 $18,749 3/31/1999 $14,884 $19,499 4/30/1999 $15,363 $20,254 5/31/1999 $15,167 $19,776 6/30/1999 $15,795 $20,873 7/31/1999 $15,525 $20,222 8/31/1999 $15,581 $20,122 9/30/1999 $15,144 $19,571 10/31/1999 $15,381 $20,809 11/30/1999 $15,567 $21,232 12/31/1999 $16,064 $22,482 1/31/2000 $15,913 $21,352 2/29/2000 $15,536 $20,948 3/31/2000 $16,875 $22,996 4/30/2000 $17,059 $22,305 5/31/2000 $17,121 $21,848 6/30/2000 $17,352 $22,387 7/31/2000 $17,073 $22,037 8/31/2000 $17,814 $23,405 9/30/2000 $17,069 $22,170 10/31/2000 $17,286 $22,076 11/30/2000 $16,824 $20,337 12/31/2000 $17,143 $20,437 1/31/2001 $17,451 $21,161 2/28/2001 $16,571 $19,233 3/31/2001 $15,330 $18,015 4/30/2001 $16,557 $19,414 5/31/2001 $16,800 $19,544 6/30/2001 $16,020 $19,069 7/31/2001 $15,965 $18,881 8/31/2001 $15,235 $17,700 9/30/2001 $13,531 $16,271 10/31/2001 $13,973 $16,581 11/30/2001 $15,295 $17,853 12/31/2001 $15,402 $18,010 1/31/2002 $15,173 $17,747 2/28/2002 $15,059 $17,405 3/31/2002 $15,566 $18,059 4/30/2002 $14,576 $16,965 5/31/2002 $14,278 $16,840 6/30/2002 $13,193 $15,641 7/31/2002 $11,994 $14,422 8/31/2002 $12,014 $14,517 9/30/2002 $10,701 $12,940 10/31/2002 $11,437 $14,078 11/30/2002 $12,213 $14,906 12/31/2002 $11,566 $14,031 1/31/2003 $11,119 $13,664 2/28/2003 $10,855 $13,459 3/31/2003 $10,850 $13,588 4/30/2003 $11,636 $14,708 5/31/2003 $12,387 $15,482 6/30/2003 $12,745 $15,680 7/31/2003 $13,119 $15,956 8/31/2003 $13,397 $16,267 9/30/2003 $12,984 $16,095 10/31/2003 $13,740 $17,005 11/30/2003 $13,905 $17,154 12/31/2003 $14,696 $18,053 1/31/2004 $14,905 $18,384 2/29/2004 $14,969 $18,640 3/31/2004 $14,611 $18,359 4/30/2004 $14,611 $18,071 5/31/2004 $14,840 $18,318 6/30/2004 $15,437 $18,674 7/31/2004 $14,611 $18,056 8/31/2004 $14,477 $18,129 9/30/2004 $14,681 $18,325 10/31/2004 $14,850 $18,605 11/30/2004 $15,706 $19,358 12/31/2004 $16,233 $20,016 1/31/2005 $15,666 $19,528 2/28/2005 $15,929 $19,939 3/31/2005 $15,904 $19,586 4/30/2005 $15,511 $19,215 5/31/2005 $16,113 $19,826 6/30/2005 $15,929 $19,854 7/31/2005 $16,750 $20,592 8/31/2005 $16,681 $20,405 9/30/2005 $16,636 $20,570 10/31/2005 $16,492 $20,227 11/30/2005 $17,283 $20,991 12/31/2005 $17,457 $20,998 1/31/2006 $17,626 $21,554 2/28/2006 $17,850 $21,613 3/31/2006 $18,263 $21,882 4/30/2006 $18,392 $22,175 5/31/2006 $17,979 $21,538 6/30/2006 $17,865 $21,566 7/31/2006 $17,646 $21,699 8/31/2006 $18,054 $22,215 9/30/2006 $18,566 $22,787 AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------- CLASS R 9/30/06 -------------------------------------------------- 1-Year +12.18% -------------------------------------------------- 3-Year +13.23% -------------------------------------------------- Since Inception (1/1/02) +4.49% -------------------------------------------------- CLASS R (1/1/02-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] DATE FRANKLIN GROWTH FUND S&P 500 5 1/1/2002 $10,000 $10,000 1/31/2002 $9,832 $9,854 2/28/2002 $9,759 $9,664 3/31/2002 $10,098 $10,028 4/30/2002 $9,455 $9,420 5/31/2002 $9,265 $9,351 6/30/2002 $8,566 $8,685 7/31/2002 $7,793 $8,008 8/31/2002 $7,806 $8,061 9/30/2002 $6,957 $7,185 10/31/2002 $7,436 $7,817 11/30/2002 $7,946 $8,277 12/31/2002 $7,528 $7,791 1/31/2003 $7,240 $7,587 2/28/2003 $7,071 $7,473 3/31/2003 $7,071 $7,545 4/30/2003 $7,586 $8,167 5/31/2003 $8,080 $8,596 6/30/2003 $8,318 $8,706 7/31/2003 $8,562 $8,860 8/31/2003 $8,750 $9,032 9/30/2003 $8,483 $8,937 10/31/2003 $8,984 $9,442 11/30/2003 $9,095 $9,525 12/31/2003 $9,613 $10,024 1/31/2004 $9,755 $10,208 2/29/2004 $9,799 $10,350 3/31/2004 $9,571 $10,194 4/30/2004 $9,575 $10,034 5/31/2004 $9,730 $10,171 6/30/2004 $10,123 $10,369 7/31/2004 $9,587 $10,026 8/31/2004 $9,505 $10,066 9/30/2004 $9,640 $10,175 10/31/2004 $9,755 $10,331 11/30/2004 $10,323 $10,749 12/31/2004 $10,674 $11,114 1/31/2005 $10,306 $10,843 2/28/2005 $10,483 $11,071 3/31/2005 $10,467 $10,876 4/30/2005 $10,217 $10,669 5/31/2005 $10,620 $11,009 6/30/2005 $10,499 $11,024 7/31/2005 $11,045 $11,434 8/31/2005 $11,004 $11,330 9/30/2005 $10,978 $11,422 10/31/2005 $10,889 $11,231 11/30/2005 $11,416 $11,655 12/31/2005 $11,534 $11,660 1/31/2006 $11,651 $11,968 2/28/2006 $11,804 $12,001 3/31/2006 $12,083 $12,150 4/30/2006 $12,172 $12,313 5/31/2006 $11,906 $11,959 6/30/2006 $11,836 $11,975 7/31/2006 $11,693 $12,049 8/31/2006 $11,969 $12,335 9/30/2006 $12,315 $12,653 18 | Annual Report Performance Summary (CONTINUED) ADVISOR CLASS (10/1/96-9/30/06) 4 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] DATE FRANKLIN GROWTH FUND S&P 500 5 10/1/1996 $10,000 $10,000 10/31/1996 $10,026 $10,276 11/30/1996 $10,657 $11,052 12/31/1996 $10,442 $10,833 1/31/1997 $10,793 $11,509 2/28/1997 $10,820 $11,600 3/31/1997 $10,555 $11,124 4/30/1997 $10,932 $11,787 5/31/1997 $11,535 $12,504 6/30/1997 $11,751 $13,064 7/31/1997 $12,222 $14,103 8/31/1997 $11,813 $13,314 9/30/1997 $12,190 $14,043 10/31/1997 $12,087 $13,574 11/30/1997 $12,371 $14,202 12/31/1997 $12,512 $14,446 1/31/1998 $12,646 $14,605 2/28/1998 $13,177 $15,658 3/31/1998 $13,469 $16,459 4/30/1998 $13,648 $16,625 5/31/1998 $13,460 $16,339 6/30/1998 $13,714 $17,003 7/31/1998 $13,667 $16,822 8/31/1998 $12,517 $14,392 9/30/1998 $13,224 $15,314 10/31/1998 $14,041 $16,559 11/30/1998 $14,549 $17,562 12/31/1998 $14,867 $18,574 1/31/1999 $15,131 $19,350 2/28/1999 $14,971 $18,749 3/31/1999 $15,377 $19,499 4/30/1999 $15,878 $20,254 5/31/1999 $15,694 $19,776 6/30/1999 $16,355 $20,873 7/31/1999 $16,091 $20,222 8/31/1999 $16,162 $20,122 9/30/1999 $15,722 $19,571 10/31/1999 $15,982 $20,809 11/30/1999 $16,190 $21,232 12/31/1999 $16,717 $22,482 1/31/2000 $16,577 $21,352 2/29/2000 $16,195 $20,948 3/31/2000 $17,607 $22,996 4/30/2000 $17,816 $22,305 5/31/2000 $17,893 $21,848 6/30/2000 $18,155 $22,387 7/31/2000 $17,873 $22,037 8/31/2000 $18,662 $23,405 9/30/2000 $17,898 $22,170 10/31/2000 $18,140 $22,076 11/30/2000 $17,671 $20,337 12/31/2000 $18,017 $20,437 1/31/2001 $18,361 $21,161 2/28/2001 $17,446 $19,233 3/31/2001 $16,154 $18,015 4/30/2001 $17,461 $19,414 5/31/2001 $17,733 $19,544 6/30/2001 $16,921 $19,069 7/31/2001 $16,885 $18,881 8/31/2001 $16,124 $17,700 9/30/2001 $14,329 $16,271 10/31/2001 $14,813 $16,581 11/30/2001 $16,227 $17,853 12/31/2001 $16,353 $18,010 1/31/2002 $16,120 $17,747 2/28/2002 $16,010 $17,405 3/31/2002 $16,571 $18,059 4/30/2002 $15,523 $16,965 5/31/2002 $15,222 $16,840 6/30/2002 $14,075 $15,641 7/31/2002 $12,808 $14,422 8/31/2002 $12,840 $14,517 9/30/2002 $11,444 $12,940 10/31/2002 $12,243 $14,078 11/30/2002 $13,083 $14,906 12/31/2002 $12,401 $14,031 1/31/2003 $11,932 $13,664 2/28/2003 $11,661 $13,459 3/31/2003 $11,666 $13,588 4/30/2003 $12,516 $14,708 5/31/2003 $13,339 $15,482 6/30/2003 $13,735 $15,680 7/31/2003 $14,147 $15,956 8/31/2003 $14,460 $16,267 9/30/2003 $14,027 $16,095 10/31/2003 $14,861 $17,005 11/30/2003 $15,048 $17,154 12/31/2003 $15,919 $18,053 1/31/2004 $16,160 $18,384 2/29/2004 $16,237 $18,640 3/31/2004 $15,861 $18,359 4/30/2004 $15,877 $18,071 5/31/2004 $16,138 $18,318 6/30/2004 $16,797 $18,674 7/31/2004 $15,919 $18,056 8/31/2004 $15,782 $18,129 9/30/2004 $16,018 $18,325 10/31/2004 $16,217 $18,605 11/30/2004 $17,169 $19,358 12/31/2004 $17,755 $20,016 1/31/2005 $17,151 $19,528 2/28/2005 $17,455 $19,939 3/31/2005 $17,439 $19,586 4/30/2005 $17,025 $19,215 5/31/2005 $17,702 $19,826 6/30/2005 $17,513 $19,854 7/31/2005 $18,427 $20,592 8/31/2005 $18,370 $20,405 9/30/2005 $18,332 $20,570 10/31/2005 $18,196 $20,227 11/30/2005 $19,079 $20,991 12/31/2005 $19,290 $20,998 1/31/2006 $19,490 $21,554 2/28/2006 $19,754 $21,613 3/31/2006 $20,229 $21,882 4/30/2006 $20,387 $22,175 5/31/2006 $19,944 $21,538 6/30/2006 $19,838 $21,566 7/31/2006 $19,612 $21,699 8/31/2006 $20,081 $22,215 9/30/2006 $20,666 $22,787 AVERAGE ANNUAL TOTAL RETURN -------------------------------------------------- ADVISOR CLASS 4 9/30/06 -------------------------------------------------- 1-Year +12.73% -------------------------------------------------- 5-Year +7.60% -------------------------------------------------- 10-Year +7.53% -------------------------------------------------- ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. IN ADDITION, THE FUND MAY INVEST UP TO 40% OF ITS NET ASSETS IN STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 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. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Effective 1/2/97, 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 1/2/97, 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 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +97.91% and +7.25%. 5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. Annual Report | 19 Your Fund's Expenses FRANKLIN GROWTH 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. 20 | 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 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06 --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,020.60 $4.56 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.56 $4.56 --------------------------------------------------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.70 $8.39 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.39 --------------------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.60 $8.39 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.39 --------------------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,019.20 $5.87 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87 --------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,021.60 $3.34 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.76 $3.35 ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.90%; B: 1.66%; C: 1.66%; R: 1.16%; and Advisor: 0.66%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. Annual Report | 21 Franklin Income Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of securities. -------------------------------------------------------------------------------- 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 Income Fund covers the fiscal year ended September 30, 2006. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +9.73% cumulative total return for the 12 months under review. The Fund underperformed the equity benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +10.78%; outperformed the fixed income benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which returned +3.67%; and outperformed its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average, which returned +7.33%, for the same period. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 28. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2006, the U.S. economy advanced at a moderate pace. After a slow fourth quarter 2005, gross domestic product grew an annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates of 2.6% in the second quarter and 1.6% in the third quarter. 1. Sources: Standard & Poor's Micropal; Lipper 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 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 Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Mixed-Asset Target Allocation Moderate Funds classification in the Lipper Open-End underlying funds universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined as funds that, by portfolio practice, maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. For the 12-month period ended 9/30/06, there were 400 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these and other factors had been considered. Past performance does not guarantee future results. The indexes are unmanaged and include reinvestment of any income or 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 83. 22 | Annual Report Growth was driven by corporate profits, and consumer and government spending. Export growth picked up some momentum, but a wide trade deficit remained. Employment generally increased and the unemployment rate fell from 5.1% to 4.6%. 2 Although labor costs rose during the reporting period, hiring increased in many industries and personal income grew. Elevated energy and other commodity prices were a primary economic concern. Oil prices were volatile and declined from a record high of $77 per barrel in July to $63 at period-end. Medical and pharmacy costs climbed substantially. Consumer confidence and spending remained strong but could weaken with the impact of higher prices. As home price appreciation slowed, borrowing against home equity flattened and could have a gradual effect on consumer spending. Inflation was also a concern, as the core Consumer Price Index (CPI) rose 2.9% for the 12 months ended September 30, 2006, which was higher than the 2.2% 10-year average. 3 The Federal Reserve Board (Fed) raised the federal funds target rate incrementally from 3.75% to 5.25%. In August and September, the Fed left the rate unchanged, citing moderate economic growth, a cooling housing market, and the lagging effect of prior tightening. The Fed stated that some inflation risk may remain and the extent and timing of any additional interest rate hikes will depend upon incoming data on inflation and economic growth. In this environment, equity markets experienced dramatic rallies late in the period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 4 Telecommunications, materials and financials stocks performed particularly well. 2. Source: Bureau of Labor Statistics. 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. Please see footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Annual Report | 23 DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/05-9/30/06
----------------------------------------------------------------------------------------------------------------- DIVIDEND PER SHARE -------------------------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS ----------------------------------------------------------------------------------------------------------------- October 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents ----------------------------------------------------------------------------------------------------------------- November 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents ----------------------------------------------------------------------------------------------------------------- December 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents ----------------------------------------------------------------------------------------------------------------- January 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents ----------------------------------------------------------------------------------------------------------------- February 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.14 cents 1.23 cents ----------------------------------------------------------------------------------------------------------------- March 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents ----------------------------------------------------------------------------------------------------------------- April 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents ----------------------------------------------------------------------------------------------------------------- May 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents ----------------------------------------------------------------------------------------------------------------- June 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.13 cents 1.23 cents ----------------------------------------------------------------------------------------------------------------- July 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.13 cents 1.23 cents ----------------------------------------------------------------------------------------------------------------- August 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.13 cents 1.23 cents ----------------------------------------------------------------------------------------------------------------- September 1.13 cents 0.96 cents 1.02 cents 1.02 cents 1.06 cents 1.16 cents ----------------------------------------------------------------------------------------------------------------- TOTAL 14.53 CENTS 12.42 CENTS 13.27 CENTS 13.30 CENTS 13.67 CENTS 14.89 CENTS -----------------------------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. INVESTMENT STRATEGY Based on our independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage and earnings. MANAGER'S DISCUSSION During the 12 months under review, the Fund's performance relative to the gains experienced in the overall U.S. equity market can be attributed to several factors. Significant investments in the health care and communications sectors, as well as strong performance from high yield electric utility and finance stocks, aided 24 | Annual Report Fund performance. 5 Our emphasis on high yield corporate bonds helped offset modestly higher long-term interest rates during the period and drove the Fund's favorable performance relative to the overall fixed income market, as measured by the LB U.S. Aggregate Index. At period-end, we had approximately 49% of the Fund's total net assets invested in equity securities including common stocks and convertible preferred stocks, about 48% in fixed income securities, and less than 2% in short-term investments and other net assets. During the Fund's fiscal year, short- and long-term interest rates rose relatively quickly, which provided us an attractive opportunity to increase the Fund's fixed income holdings. At the beginning of the reporting period, the Fund had approximately 53% invested in common stocks and convertible preferred stocks, 41% in fixed income securities, and 5% in short-term investments and other net assets. The Fund held a significant amount of its total net assets in below-investment-grade corporate debt during the period due to our assessment of the attractive risk-reward tradeoff relative to other fixed income asset classes. During the period, higher coupon payments and tightening credit spreads, or yields over benchmark U.S. Treasury securities, contributed to the strong performance of high yield bonds, as represented by the +8.07% total return of the LB U.S. High Yield Index, relative to the +3.67% total return of the LB U.S. Aggregate Index. 6 The spread declined from 3.69 percentage points on September 30, 2005, to 3.52 percentage points at period-end. 6 This decline in average spread, which represents the amount of incremental yield required to compensate investors for credit risk, helped mitigate the effect of rising interest rates on the Fund's investments. A number of significant bond holdings, including Allied Waste North America, Case New Holland and General Motors Acceptance Corp., experienced price appreciation in addition to providing income over the 12-month period. Contributors to Fund performance included health care sector investments, particularly common stock of some major pharmaceutical companies. Despite near-term challenges presented by drug patent disputes and expirations, generic drug competition, and drug liability issues, we found, based on our analysis, that the sector offered an attractive longer-term opportunity given above-average dividend yields, strong investment grade-rated balance sheets, and low valuations relative to historical ranges. During the period, the sector showed early signs of long-term, fundamental improvement from operational restructurings, cost reductions and drug development. Several investments performed well, including 5. The health care sector comprises health technology and health services in the SOI. 6. Sources: Lehman Brothers, Inc.; Standard & Poor's Micropal. The LB High Yield Index covers the universe of fixed rate, noninvestment-grade debt. The index includes both corporate and non-corporate sectors. Please see footnote 1 for a description of the LB U.S. Aggregate Index. TOP 5 EQUITY HOLDINGS Franklin Income Fund 9/30/06 -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS -------------------------------------------------------------------------------- Pfizer Inc. 2.8% HEALTH TECHNOLOGY -------------------------------------------------------------------------------- Merck & Co. Inc. 2.5% HEALTH TECHNOLOGY -------------------------------------------------------------------------------- Bank of America Corp. 2.4% FINANCE -------------------------------------------------------------------------------- Public Service Enterprise Group Inc. 2.2% ELECTRIC UTILITIES -------------------------------------------------------------------------------- FirstEnergy Corp. 1.7% ELECTRIC UTILITIES -------------------------------------------------------------------------------- TOP 5 BOND HOLDINGS* Franklin Income Fund 9/30/06 -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS -------------------------------------------------------------------------------- General Motors Acceptance Corp. 3.8% CONSUMER DURABLES -------------------------------------------------------------------------------- Ford Motor Credit Corp. 3.6% CONSUMER DURABLES -------------------------------------------------------------------------------- Tenet Healthcare Corp. 2.6% HEALTH SERVICES -------------------------------------------------------------------------------- Allied Waste North America Inc. 1.8% INDUSTRIAL SERVICES -------------------------------------------------------------------------------- TXU Corp. 1.7% ELECTRIC UTILITIES -------------------------------------------------------------------------------- * Does not include convertible bonds. Annual Report | 25 PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 9/30/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Corporate Straight Bonds 42.6% Utilities Stocks 17.6% Health Technology Stocks 8.5% Finance Stocks 6.6% Energy Minerals Stocks 4.6% U.S. Government & Agency Securities 3.7% Communications Stocks 3.3% Corporate Convertible Bonds 2.4% Electronic Technology Stocks 2.0% Producer Manufacturing Stocks 1.7% Industrial Services Stocks 1.4% Gas Distributors Stocks 1.3% Other 2.6% Short-Term Investments & Other Net Assets 1.7% Merck, Pfizer and Wyeth. We increased our stake in Johnson & Johnson in light of its leading position in a wide range of health care segments including pharmaceuticals, consumer products, medical devices and diagnostic markets. During the period Johnson & Johnson increased its dividend 13.6%. The Fund's telecommunication services industry exposure helped performance, particularly our investment in BellSouth, which appreciated significantly following its announced merger with AT&T. 7 The telecommunication services industry's strong relative performance can be attributed in part to optimism regarding recent consolidation and resulting prospects for improved financial performance reflecting the benefits of scale and network synergies. A recent initiative to broaden product platforms to include video services offered telecommunications companies the potential to improve and expand their services to consumers, which may ultimately benefit companies' financial performance and the industry's competitive position. Although in its early stages, the initiative may create the opportunity to offer consumers an array of services including local and long-distance telephone, wireless phone, high-speed Internet, and television, which could provide a long-term competitive advantage over other services providers. During the period, the Fund's Verizon Communications position also benefited Fund performance. The Fund's large weighting in the electric utilities sector helped Fund performance during the period. Utilities, as measured by the S&P 500 Utilities Index, returned +6.28% during the 12-month period. 8 Despite pressure from rising long-term interest rates, utility stocks benefited from above-market-average dividend yields and, what were, in our assessment, reasonable valuations relative to prospects for future earnings and dividend growth. One of our major investment themes is seeking utilities we believe can grow their dividends at above-average rates, which can help offset a rise in interest rates. At period-end, 23 of the Fund's 31 utility common stock investments were in companies that increased dividends in the past fiscal year. The remaining eight maintained their dividends. Examples of companies that increased their dividends include FirstEnergy, which paid a $1.78 dividend, up from $1.6125, and Alliant Energy, which distributed $1.125 in dividends, 7.1% more than the previous $1.05 dividend. During the reporting period, these two companies were among the Fund's top performing holdings. The Fund also had several detractors from performance. Despite significant long-term asset value, independent power producer Calpine sought bankruptcy court protection on December 21, 2005, as fundamental conditions failed to improve quickly enough for the company to address a highly leveraged balance 7. Telecommunication services holdings are in the communications sector in the SOI. 8. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index that includes electric utility stocks in the S&P 500. 26 | Annual Report sheet. The default hindered Fund performance as the value of the Fund's investment in Calpine's senior convertible and nonconvertible unsecured notes declined in value, but the decline was partially offset by strength in our second-priority lien-secured notes. By period-end, the value of Calpine debt recovered somewhat from lows reached in late 2005. Energy sector performance was volatile during the period as commodity prices fluctuated following substantial increases at the end of 2005. Last year's hurricane-induced supply disruptions were gradually replaced with increasing supplies and inventories as demand fell below expectations due to a warmer-than-expected winter season. Crude oil prices declined from $66 per barrel at the beginning of the period to $63 per barrel at period-end. Natural gas prices declined from $14 to $4 per million British thermal units (BTUs). Several energy sector holdings underperformed the Fund and overall market, including BP and Royal Dutch Shell, which hindered the Fund's results. Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Edward Perks Edward Perks, CFA [PHOTO OMITTED] /s/ Charles B. Johnson Charles B. Johnson Portfolio Management Team Franklin Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 27 Performance Summary as of 9/30/06 FRANKLIN INCOME 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: FKINX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.07 $2.57 $2.50 -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) -------------------------------------------------------------------------------- Dividend Income $0.1453 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0062 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 -------------------------------------------------------------------------------- TOTAL $0.1605 -------------------------------------------------------------------------------- CLASS B (SYMBOL: FBICX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.07 $2.56 $2.49 -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) -------------------------------------------------------------------------------- Dividend Income $0.1242 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0062 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 -------------------------------------------------------------------------------- TOTAL $0.1394 -------------------------------------------------------------------------------- CLASS B1 (SYMBOL: FICBX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.07 $2.57 $2.50 -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) -------------------------------------------------------------------------------- Dividend Income $0.1327 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0062 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 -------------------------------------------------------------------------------- TOTAL $0.1479 -------------------------------------------------------------------------------- CLASS C (SYMBOL: FCISX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $2.59 $2.51 -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) -------------------------------------------------------------------------------- Dividend Income $0.1330 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0062 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 -------------------------------------------------------------------------------- TOTAL $0.1482 -------------------------------------------------------------------------------- 28 | Annual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) -------------------------------------------------------------------------------- CLASS R (SYMBOL: FISRX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.07 $2.55 $2.48 -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) -------------------------------------------------------------------------------- Dividend Income $0.1367 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0062 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 -------------------------------------------------------------------------------- TOTAL $0.1519 -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 9/30/06 9/30/05 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.07 $2.56 $2.49 -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) -------------------------------------------------------------------------------- Dividend Income $0.1489 -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0062 -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 -------------------------------------------------------------------------------- TOTAL $0.1641 -------------------------------------------------------------------------------- Annual Report | 29 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B/B1: 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 1 +9.73% +71.84% +147.26% --------------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.11% +10.43% +9.01% --------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,511 $16,424 $23,695 --------------------------------------------------------------------------------------------- Distribution Rate 4 5.06% --------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.20% --------------------------------------------------------------------------------------------- CLASS B 1-YEAR 3-YEAR INCEPTION (11/1/01) --------------------------------------------------------------------------------------------- Cumulative Total Return 1 +8.83% +36.63% +63.21% --------------------------------------------------------------------------------------------- Average Annual Total Return 2 +4.83% +10.15% +10.21% --------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,483 $13,363 $16,121 --------------------------------------------------------------------------------------------- Distribution Rate 4 4.50% --------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.59% --------------------------------------------------------------------------------------------- CLASS B1 1-YEAR 5-YEAR INCEPTION (1/1/99) --------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.17% +67.59% +92.04% --------------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.17% +10.61% +8.79% --------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,517 $16,559 $19,204 --------------------------------------------------------------------------------------------- Distribution Rate 4 4.76% --------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.94% --------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR --------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.56% +67.85% +136.32% --------------------------------------------------------------------------------------------- Average Annual Total Return 2 +8.56% +10.91% +8.98% --------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,856 $16,785 $23,632 --------------------------------------------------------------------------------------------- Distribution Rate 4 4.73% --------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.93% --------------------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) --------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.43% +38.92% +62.12% --------------------------------------------------------------------------------------------- Average Annual Total Return 2 +9.43% +11.58% +10.73% --------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,943 $13,892 $16,212 --------------------------------------------------------------------------------------------- Distribution Rate 4 4.99% --------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.08% --------------------------------------------------------------------------------------------- ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR --------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.94% +72.72% +152.70% --------------------------------------------------------------------------------------------- Average Annual Total Return 2 +9.94% +11.55% +9.71% --------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,994 $17,272 $25,270 --------------------------------------------------------------------------------------------- Distribution Rate 4 5.44% --------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.59% ---------------------------------------------------------------------------------------------
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. 30 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 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 (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET INCOME AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7 10/1/1996 $9,583 $10,000 $10,000 $10,000 10/31/1996 $9,772 $10,276 $10,222 $10,220 11/30/1996 $10,004 $11,052 $10,397 $10,665 12/31/1996 $10,068 $10,833 $10,300 $10,597 1/31/1997 $10,218 $11,509 $10,331 $10,861 2/28/1997 $10,326 $11,600 $10,357 $10,914 3/31/1997 $10,087 $11,124 $10,242 $10,650 4/30/1997 $10,152 $11,787 $10,396 $10,886 5/31/1997 $10,482 $12,504 $10,494 $11,324 6/30/1997 $10,682 $13,064 $10,619 $11,643 7/31/1997 $10,971 $14,103 $10,905 $12,213 8/31/1997 $10,904 $13,314 $10,812 $11,916 9/30/1997 $11,243 $14,043 $10,971 $12,374 10/31/1997 $11,083 $13,574 $11,130 $12,173 11/30/1997 $11,425 $14,202 $11,182 $12,356 12/31/1997 $11,764 $14,446 $11,294 $12,548 1/31/1998 $11,647 $14,605 $11,439 $12,605 2/28/1998 $11,811 $15,658 $11,431 $13,059 3/31/1998 $12,167 $16,459 $11,470 $13,417 4/30/1998 $12,000 $16,625 $11,530 $13,476 5/31/1998 $11,880 $16,339 $11,639 $13,371 6/30/1998 $11,904 $17,003 $11,738 $13,525 7/31/1998 $11,685 $16,822 $11,763 $13,357 8/31/1998 $10,929 $14,392 $11,954 $12,260 9/30/1998 $11,493 $15,314 $12,234 $12,683 10/31/1998 $11,518 $16,559 $12,170 $13,104 11/30/1998 $11,891 $17,562 $12,239 $13,546 12/31/1998 $11,876 $18,574 $12,275 $13,943 1/31/1999 $11,699 $19,350 $12,363 $14,106 2/28/1999 $11,367 $18,749 $12,147 $13,760 3/31/1999 $11,547 $19,499 $12,215 $14,027 4/30/1999 $12,141 $20,254 $12,253 $14,479 5/31/1999 $12,219 $19,776 $12,146 $14,291 6/30/1999 $12,193 $20,873 $12,107 $14,615 7/31/1999 $12,061 $20,222 $12,056 $14,406 8/31/1999 $12,088 $20,122 $12,050 $14,256 9/30/1999 $11,955 $19,571 $12,189 $14,100 10/31/1999 $11,928 $20,809 $12,234 $14,439 11/30/1999 $11,739 $21,232 $12,234 $14,624 12/31/1999 $11,788 $22,482 $12,175 $15,088 1/31/2000 $11,872 $21,352 $12,135 $14,724 2/29/2000 $11,678 $20,948 $12,281 $14,796 3/31/2000 $11,873 $22,996 $12,443 $15,462 4/30/2000 $12,296 $22,305 $12,408 $15,188 5/31/2000 $12,494 $21,848 $12,402 $15,044 6/30/2000 $12,580 $22,387 $12,660 $15,347 7/31/2000 $12,723 $22,037 $12,775 $15,274 8/31/2000 $13,447 $23,405 $12,960 $15,910 9/30/2000 $13,709 $22,170 $13,041 $15,588 10/31/2000 $13,504 $22,076 $13,128 $15,482 11/30/2000 $13,414 $20,337 $13,342 $14,886 12/31/2000 $14,215 $20,437 $13,590 $15,296 1/31/2001 $14,187 $21,161 $13,812 $15,614 2/28/2001 $14,460 $19,233 $13,933 $14,997 3/31/2001 $14,245 $18,015 $14,002 $14,495 4/30/2001 $14,524 $19,414 $13,944 $15,093 5/31/2001 $14,803 $19,544 $14,028 $15,172 6/30/2001 $14,459 $19,069 $14,081 $14,973 7/31/2001 $14,301 $18,881 $14,396 $14,924 8/31/2001 $14,460 $17,700 $14,561 $14,560 9/30/2001 $13,789 $16,271 $14,731 $13,791 10/31/2001 $13,885 $16,581 $15,039 $14,065 11/30/2001 $14,176 $17,853 $14,832 $14,549 12/31/2001 $14,308 $18,010 $14,738 $14,651 1/31/2002 $14,406 $17,747 $14,857 $14,522 2/28/2002 $14,506 $17,405 $15,001 $14,409 3/31/2002 $14,940 $18,059 $14,751 $14,714 4/30/2002 $15,028 $16,965 $15,037 $14,480 5/31/2002 $14,980 $16,840 $15,165 $14,443 6/30/2002 $14,046 $15,641 $15,296 $13,866 7/31/2002 $13,381 $14,422 $15,481 $13,202 8/31/2002 $13,817 $14,517 $15,742 $13,336 9/30/2002 $13,212 $12,940 $15,997 $12,630 10/31/2002 $13,303 $14,078 $15,924 $13,047 11/30/2002 $14,028 $14,906 $15,920 $13,507 12/31/2002 $14,156 $14,031 $16,249 $13,244 1/31/2003 $14,247 $13,664 $16,263 $13,080 2/28/2003 $14,053 $13,459 $16,488 $13,012 3/31/2003 $14,364 $13,588 $16,475 $13,069 4/30/2003 $15,262 $14,708 $16,611 $13,720 5/31/2003 $16,092 $15,482 $16,921 $14,291 6/30/2003 $16,409 $15,680 $16,887 $14,412 7/31/2003 $16,208 $15,956 $16,319 $14,408 8/31/2003 $16,455 $16,267 $16,428 $14,621 9/30/2003 $16,928 $16,095 $16,863 $14,707 10/31/2003 $17,404 $17,005 $16,705 $15,134 11/30/2003 $17,655 $17,154 $16,745 $15,287 12/31/2003 $18,539 $18,053 $16,916 $15,785 1/31/2004 $18,793 $18,384 $17,052 $15,987 2/29/2004 $18,817 $18,640 $17,236 $16,176 3/31/2004 $18,840 $18,359 $17,365 $16,138 4/30/2004 $18,549 $18,071 $16,914 $15,777 5/31/2004 $18,493 $18,318 $16,846 $15,824 6/30/2004 $18,756 $18,674 $16,941 $16,043 7/31/2004 $18,860 $18,056 $17,109 $15,786 8/31/2004 $19,285 $18,129 $17,435 $15,928 9/30/2004 $19,552 $18,325 $17,483 $16,111 10/31/2004 $19,819 $18,605 $17,629 $16,314 11/30/2004 $20,252 $19,358 $17,489 $16,722 12/31/2004 $20,796 $20,016 $17,650 $17,108 1/31/2005 $20,407 $19,528 $17,760 $16,896 2/28/2005 $20,928 $19,939 $17,656 $17,119 3/31/2005 $20,529 $19,586 $17,565 $16,890 4/30/2005 $20,214 $19,215 $17,803 $16,726 5/31/2005 $20,658 $19,826 $17,995 $17,047 6/30/2005 $21,275 $19,854 $18,093 $17,190 7/31/2005 $21,723 $20,592 $17,929 $17,529 8/31/2005 $21,659 $20,405 $18,159 $17,566 9/30/2005 $21,594 $20,570 $17,971 $17,636 10/31/2005 $20,921 $20,227 $17,829 $17,354 11/30/2005 $20,856 $20,991 $17,908 $17,706 12/31/2005 $21,181 $20,998 $18,078 $17,857 1/31/2006 $21,823 $21,554 $18,079 $18,282 2/28/2006 $22,019 $21,613 $18,139 $18,291 3/31/2006 $22,126 $21,882 $17,961 $18,435 4/30/2006 $22,414 $22,175 $17,929 $18,625 5/31/2006 $22,342 $21,538 $17,910 $18,256 6/30/2006 $22,542 $21,566 $17,948 $18,264 7/31/2006 $23,108 $21,699 $18,190 $18,379 8/31/2006 $23,493 $22,215 $18,469 $18,678 9/30/2006 $23,695 $22,787 $18,631 $18,923
AVERAGE ANNUAL TOTAL RETURN ----------------------------------------------- CLASS A 9/30/06 ----------------------------------------------- 1-Year +5.11% ----------------------------------------------- 5-Year +10.43% ----------------------------------------------- 10-Year +9.01% ----------------------------------------------- CLASS B (11/1/01-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET INCOME AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7 11/1/2001 $10,000 $10,000 $10,000 $10,000 11/30/2001 $10,186 $10,767 $9,862 $10,344 12/31/2001 $10,229 $10,861 $9,799 $10,416 1/31/2002 $10,344 $10,703 $9,879 $10,325 2/28/2002 $10,411 $10,496 $9,975 $10,244 3/31/2002 $10,671 $10,891 $9,809 $10,461 4/30/2002 $10,774 $10,231 $9,999 $10,295 5/31/2002 $10,731 $10,156 $10,084 $10,268 6/30/2002 $10,006 $9,433 $10,171 $9,859 7/31/2002 $9,571 $8,698 $10,294 $9,386 8/31/2002 $9,875 $8,755 $10,468 $9,481 9/30/2002 $9,437 $7,804 $10,637 $8,980 10/31/2002 $9,445 $8,490 $10,589 $9,276 11/30/2002 $9,955 $8,990 $10,586 $9,603 12/31/2002 $10,091 $8,462 $10,804 $9,416 1/31/2003 $10,098 $8,241 $10,814 $9,299 2/28/2003 $10,004 $8,117 $10,963 $9,251 3/31/2003 $10,167 $8,195 $10,955 $9,292 4/30/2003 $10,851 $8,870 $11,045 $9,754 5/31/2003 $11,382 $9,337 $11,251 $10,160 6/30/2003 $11,653 $9,456 $11,229 $10,247 7/31/2003 $11,502 $9,623 $10,851 $10,243 8/31/2003 $11,671 $9,810 $10,923 $10,395 9/30/2003 $11,944 $9,706 $11,213 $10,456 10/31/2003 $12,273 $10,255 $11,108 $10,760 11/30/2003 $12,496 $10,345 $11,135 $10,868 12/31/2003 $13,057 $10,887 $11,248 $11,223 1/31/2004 $13,228 $11,087 $11,338 $11,366 2/29/2004 $13,290 $11,241 $11,461 $11,500 3/31/2004 $13,242 $11,072 $11,547 $11,474 4/30/2004 $13,082 $10,898 $11,247 $11,217 5/31/2004 $12,979 $11,048 $11,201 $11,251 6/30/2004 $13,210 $11,262 $11,265 $11,406 7/31/2004 $13,219 $10,890 $11,376 $11,223 8/31/2004 $13,508 $10,933 $11,593 $11,324 9/30/2004 $13,687 $11,052 $11,625 $11,455 10/31/2004 $13,866 $11,220 $11,722 $11,599 11/30/2004 $14,160 $11,674 $11,629 $11,889 12/31/2004 $14,531 $12,071 $11,736 $12,164 1/31/2005 $14,306 $11,777 $11,810 $12,013 2/28/2005 $14,602 $12,025 $11,740 $12,171 3/31/2005 $14,313 $11,812 $11,680 $12,008 4/30/2005 $14,082 $11,588 $11,838 $11,892 5/31/2005 $14,381 $11,957 $11,966 $12,120 6/30/2005 $14,803 $11,974 $12,031 $12,222 7/31/2005 $15,107 $12,419 $11,921 $12,463 8/31/2005 $15,053 $12,306 $12,074 $12,489 9/30/2005 $14,996 $12,405 $11,950 $12,539 10/31/2005 $14,516 $12,198 $11,855 $12,338 11/30/2005 $14,459 $12,659 $11,908 $12,589 12/31/2005 $14,675 $12,664 $12,021 $12,696 1/31/2006 $15,111 $12,999 $12,022 $12,998 2/28/2006 $15,236 $13,034 $12,062 $13,004 3/31/2006 $15,300 $13,196 $11,943 $13,107 4/30/2006 $15,488 $13,374 $11,922 $13,242 5/31/2006 $15,427 $12,989 $11,909 $12,980 6/30/2006 $15,555 $13,006 $11,934 $12,985 7/31/2006 $15,936 $13,086 $12,095 $13,067 8/31/2006 $16,191 $13,397 $12,281 $13,280 9/30/2006 $16,121 $13,742 $12,388 $13,454
AVERAGE ANNUAL TOTAL RETURN -------------------------------------------- CLASS B 9/30/06 -------------------------------------------- 1-Year +4.83% -------------------------------------------- 3-Year +10.15% -------------------------------------------- Since Inception (11/1/01) +10.21% -------------------------------------------- Annual Report | 31 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN --------------------------------------------- CLASS B1 9/30/06 --------------------------------------------- 1-Year +5.17% --------------------------------------------- 5-Year +10.61% --------------------------------------------- Since Inception (1/1/99) +8.79% --------------------------------------------- CLASS B1 (1/1/99-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET INCOME AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7 1/1/1999 $10,000 $10,000 $10,000 $10,000 1/31/1999 $9,851 $10,418 $10,071 $10,117 2/28/1999 $9,568 $10,094 $9,896 $9,869 3/31/1999 $9,717 $10,498 $9,950 $10,061 4/30/1999 $10,213 $10,905 $9,982 $10,385 5/31/1999 $10,230 $10,647 $9,894 $10,250 6/30/1999 $10,248 $11,238 $9,863 $10,482 7/31/1999 $10,133 $10,887 $9,821 $10,332 8/31/1999 $10,150 $10,834 $9,816 $10,225 9/30/1999 $10,035 $10,537 $9,930 $10,112 10/31/1999 $10,009 $11,203 $9,967 $10,356 11/30/1999 $9,845 $11,431 $9,966 $10,489 12/31/1999 $9,883 $12,104 $9,918 $10,821 1/31/2000 $9,949 $11,496 $9,885 $10,560 2/29/2000 $9,782 $11,279 $10,005 $10,612 3/31/2000 $9,941 $12,381 $10,137 $11,090 4/30/2000 $10,290 $12,009 $10,108 $10,893 5/31/2000 $10,452 $11,763 $10,103 $10,790 6/30/2000 $10,519 $12,053 $10,313 $11,007 7/31/2000 $10,633 $11,865 $10,407 $10,955 8/31/2000 $11,233 $12,601 $10,558 $11,411 9/30/2000 $11,448 $11,936 $10,624 $11,180 10/31/2000 $11,271 $11,886 $10,694 $11,104 11/30/2000 $11,242 $10,949 $10,869 $10,677 12/31/2000 $11,856 $11,003 $11,071 $10,970 1/31/2001 $11,827 $11,393 $11,252 $11,199 2/28/2001 $12,051 $10,355 $11,350 $10,756 3/31/2001 $11,867 $9,699 $11,407 $10,396 4/30/2001 $12,093 $10,453 $11,360 $10,825 5/31/2001 $12,321 $10,523 $11,428 $10,881 6/30/2001 $12,030 $10,267 $11,471 $10,739 7/31/2001 $11,894 $10,166 $11,728 $10,703 8/31/2001 $12,021 $9,530 $11,862 $10,442 9/30/2001 $11,460 $8,760 $12,000 $9,891 10/31/2001 $11,535 $8,927 $12,251 $10,088 11/30/2001 $11,772 $9,612 $12,082 $10,435 12/31/2001 $11,877 $9,696 $12,006 $10,508 1/31/2002 $11,954 $9,555 $12,103 $10,415 2/28/2002 $12,031 $9,371 $12,220 $10,334 3/31/2002 $12,388 $9,723 $12,017 $10,553 4/30/2002 $12,455 $9,134 $12,250 $10,385 5/31/2002 $12,410 $9,067 $12,354 $10,358 6/30/2002 $11,630 $8,421 $12,461 $9,945 7/31/2002 $11,074 $7,765 $12,611 $9,469 8/31/2002 $11,429 $7,816 $12,824 $9,564 9/30/2002 $10,925 $6,967 $13,032 $9,058 10/31/2002 $10,995 $7,580 $12,972 $9,357 11/30/2002 $11,590 $8,025 $12,969 $9,688 12/31/2002 $11,690 $7,554 $13,237 $9,499 1/31/2003 $11,762 $7,357 $13,248 $9,381 2/28/2003 $11,597 $7,246 $13,431 $9,332 3/31/2003 $11,849 $7,316 $13,421 $9,373 4/30/2003 $12,583 $7,919 $13,532 $9,840 5/31/2003 $13,261 $8,335 $13,784 $10,249 6/30/2003 $13,517 $8,442 $13,757 $10,337 7/31/2003 $13,347 $8,591 $13,294 $10,333 8/31/2003 $13,546 $8,758 $13,383 $10,486 9/30/2003 $13,929 $8,665 $13,737 $10,548 10/31/2003 $14,314 $9,155 $13,609 $10,854 11/30/2003 $14,514 $9,236 $13,641 $10,964 12/31/2003 $15,234 $9,720 $13,780 $11,321 1/31/2004 $15,437 $9,898 $13,891 $11,466 2/29/2004 $15,514 $10,036 $14,041 $11,601 3/31/2004 $15,461 $9,884 $14,147 $11,575 4/30/2004 $15,215 $9,729 $13,778 $11,315 5/31/2004 $15,162 $9,863 $13,723 $11,349 6/30/2004 $15,371 $10,054 $13,801 $11,506 7/31/2004 $15,450 $9,722 $13,938 $11,322 8/31/2004 $15,793 $9,761 $14,203 $11,424 9/30/2004 $16,004 $9,866 $14,242 $11,555 10/31/2004 $16,217 $10,017 $14,361 $11,701 11/30/2004 $16,564 $10,422 $14,247 $11,993 12/31/2004 $17,001 $10,777 $14,378 $12,270 1/31/2005 $16,743 $10,514 $14,468 $12,118 2/28/2005 $17,093 $10,735 $14,383 $12,278 3/31/2005 $16,761 $10,545 $14,309 $12,114 4/30/2005 $16,497 $10,345 $14,503 $11,996 5/31/2005 $16,851 $10,674 $14,660 $12,226 6/30/2005 $17,347 $10,690 $14,739 $12,329 7/31/2005 $17,706 $11,087 $14,605 $12,572 8/31/2005 $17,647 $10,986 $14,793 $12,598 9/30/2005 $17,587 $11,075 $14,640 $12,649 10/31/2005 $17,032 $10,890 $14,524 $12,446 11/30/2005 $16,970 $11,301 $14,589 $12,699 12/31/2005 $17,228 $11,306 $14,727 $12,807 1/31/2006 $17,743 $11,605 $14,728 $13,112 2/28/2006 $17,896 $11,636 $14,777 $13,118 3/31/2006 $17,975 $11,781 $14,632 $13,222 4/30/2006 $18,201 $11,939 $14,605 $13,358 5/31/2006 $18,134 $11,596 $14,590 $13,094 6/30/2006 $18,288 $11,611 $14,621 $13,099 7/31/2006 $18,740 $11,683 $14,818 $13,181 8/31/2006 $19,045 $11,960 $15,045 $13,396 9/30/2006 $19,204 $12,268 $15,177 $13,572
AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- CLASS C 9/30/06 ---------------------------------------------- 1-Year +8.56% ---------------------------------------------- 5-Year +10.91% ---------------------------------------------- 10-Year +8.98% ---------------------------------------------- CLASS C (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET INCOME AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7 10/1/1996 $10,000 $10,000 $10,000 $10,000 10/31/1996 $10,192 $10,276 $10,222 $10,220 11/30/1996 $10,474 $11,052 $10,397 $10,665 12/31/1996 $10,492 $10,833 $10,300 $10,597 1/31/1997 $10,644 $11,509 $10,331 $10,861 2/28/1997 $10,797 $11,600 $10,357 $10,914 3/31/1997 $10,544 $11,124 $10,242 $10,650 4/30/1997 $10,561 $11,787 $10,396 $10,886 5/31/1997 $10,900 $12,504 $10,494 $11,324 6/30/1997 $11,148 $13,064 $10,619 $11,643 7/31/1997 $11,444 $14,103 $10,905 $12,213 8/31/1997 $11,370 $13,314 $10,812 $11,916 9/30/1997 $11,672 $14,043 $10,971 $12,374 10/31/1997 $11,549 $13,574 $11,130 $12,173 11/30/1997 $11,852 $14,202 $11,182 $12,356 12/31/1997 $12,197 $14,446 $11,294 $12,548 1/31/1998 $12,071 $14,605 $11,439 $12,605 2/28/1998 $12,236 $15,658 $11,431 $13,059 3/31/1998 $12,598 $16,459 $11,470 $13,417 4/30/1998 $12,470 $16,625 $11,530 $13,476 5/31/1998 $12,292 $16,339 $11,639 $13,371 6/30/1998 $12,361 $17,003 $11,738 $13,525 7/31/1998 $12,130 $16,822 $11,763 $13,357 8/31/1998 $11,343 $14,392 $11,954 $12,260 9/30/1998 $11,871 $15,314 $12,234 $12,683 10/31/1998 $11,943 $16,559 $12,170 $13,104 11/30/1998 $12,322 $17,562 $12,239 $13,546 12/31/1998 $12,250 $18,574 $12,275 $13,943 1/31/1999 $12,114 $19,350 $12,363 $14,106 2/28/1999 $11,767 $18,749 $12,147 $13,760 3/31/1999 $11,947 $19,499 $12,215 $14,027 4/30/1999 $12,553 $20,254 $12,253 $14,479 5/31/1999 $12,574 $19,776 $12,146 $14,291 6/30/1999 $12,596 $20,873 $12,107 $14,615 7/31/1999 $12,456 $20,222 $12,056 $14,406 8/31/1999 $12,424 $20,122 $12,050 $14,256 9/30/1999 $12,282 $19,571 $12,189 $14,100 10/31/1999 $12,304 $20,809 $12,234 $14,439 11/30/1999 $12,105 $21,232 $12,234 $14,624 12/31/1999 $12,150 $22,482 $12,175 $15,088 1/31/2000 $12,174 $21,352 $12,135 $14,724 2/29/2000 $12,026 $20,948 $12,281 $14,796 3/31/2000 $12,221 $22,996 $12,443 $15,462 4/30/2000 $12,649 $22,305 $12,408 $15,188 5/31/2000 $12,788 $21,848 $12,402 $15,044 6/30/2000 $12,870 $22,387 $12,660 $15,347 7/31/2000 $13,070 $22,037 $12,775 $15,274 8/31/2000 $13,805 $23,405 $12,960 $15,910 9/30/2000 $14,068 $22,170 $13,041 $15,588 10/31/2000 $13,852 $22,076 $13,128 $15,482 11/30/2000 $13,756 $20,337 $13,342 $14,886 12/31/2000 $14,567 $20,437 $13,590 $15,296 1/31/2001 $14,531 $21,161 $13,812 $15,614 2/28/2001 $14,805 $19,233 $13,933 $14,997 3/31/2001 $14,579 $18,015 $14,002 $14,495 4/30/2001 $14,856 $19,414 $13,944 $15,093 5/31/2001 $15,134 $19,544 $14,028 $15,172 6/30/2001 $14,779 $19,069 $14,081 $14,973 7/31/2001 $14,612 $18,881 $14,396 $14,924 8/31/2001 $14,768 $17,700 $14,561 $14,560 9/30/2001 $14,080 $16,271 $14,731 $13,791 10/31/2001 $14,171 $16,581 $15,039 $14,065 11/30/2001 $14,460 $17,853 $14,832 $14,549 12/31/2001 $14,587 $18,010 $14,738 $14,651 1/31/2002 $14,681 $17,747 $14,857 $14,522 2/28/2002 $14,776 $17,405 $15,001 $14,409 3/31/2002 $15,211 $18,059 $14,751 $14,714 4/30/2002 $15,294 $16,965 $15,037 $14,480 5/31/2002 $15,239 $16,840 $15,165 $14,443 6/30/2002 $14,288 $15,641 $15,296 $13,866 7/31/2002 $13,608 $14,422 $15,481 $13,202 8/31/2002 $14,042 $14,517 $15,742 $13,336 9/30/2002 $13,426 $12,940 $15,997 $12,630 10/31/2002 $13,512 $14,078 $15,924 $13,047 11/30/2002 $14,239 $14,906 $15,920 $13,507 12/31/2002 $14,363 $14,031 $16,249 $13,244 1/31/2003 $14,379 $13,664 $16,263 $13,080 2/28/2003 $14,251 $13,459 $16,488 $13,012 3/31/2003 $14,558 $13,588 $16,475 $13,069 4/30/2003 $15,456 $14,708 $16,611 $13,720 5/31/2003 $16,286 $15,482 $16,921 $14,291 6/30/2003 $16,599 $15,680 $16,887 $14,412 7/31/2003 $16,390 $15,956 $16,319 $14,408 8/31/2003 $16,632 $16,267 $16,428 $14,621 9/30/2003 $17,100 $16,095 $16,863 $14,707 10/31/2003 $17,571 $17,005 $16,705 $15,134 11/30/2003 $17,815 $17,154 $16,745 $15,287 12/31/2003 $18,695 $18,053 $16,916 $15,785 1/31/2004 $18,944 $18,384 $17,052 $15,987 2/29/2004 $19,038 $18,640 $17,236 $16,176 3/31/2004 $18,975 $18,359 $17,365 $16,138 4/30/2004 $18,753 $18,071 $16,914 $15,777 5/31/2004 $18,610 $18,318 $16,846 $15,824 6/30/2004 $18,945 $18,674 $16,941 $16,043 7/31/2004 $18,962 $18,056 $17,109 $15,786 8/31/2004 $19,381 $18,129 $17,435 $15,928 9/30/2004 $19,639 $18,325 $17,483 $16,111 10/31/2004 $19,899 $18,605 $17,629 $16,314 11/30/2004 $20,323 $19,358 $17,489 $16,722 12/31/2004 $20,857 $20,016 $17,650 $17,108 1/31/2005 $20,542 $19,528 $17,760 $16,896 2/28/2005 $20,970 $19,939 $17,656 $17,119 3/31/2005 $20,564 $19,586 $17,565 $16,890 4/30/2005 $20,240 $19,215 $17,803 $16,726 5/31/2005 $20,674 $19,826 $17,995 $17,047 6/30/2005 $21,365 $19,854 $18,093 $17,190 7/31/2005 $21,718 $20,592 $17,929 $17,529 8/31/2005 $21,645 $20,405 $18,159 $17,566 9/30/2005 $21,571 $20,570 $17,971 $17,636 10/31/2005 $20,892 $20,227 $17,829 $17,354 11/30/2005 $20,818 $20,991 $17,908 $17,706 12/31/2005 $21,132 $20,998 $18,078 $17,857 1/31/2006 $21,760 $21,554 $18,079 $18,282 2/28/2006 $21,945 $21,613 $18,139 $18,291 3/31/2006 $22,043 $21,882 $17,961 $18,435 4/30/2006 $22,319 $22,175 $17,929 $18,625 5/31/2006 $22,239 $21,538 $17,910 $18,256 6/30/2006 $22,427 $21,566 $17,948 $18,264 7/31/2006 $23,069 $21,699 $18,190 $18,379 8/31/2006 $23,442 $22,215 $18,469 $18,678 9/30/2006 $23,632 $22,787 $18,631 $18,923
32 | Annual Report Performance Summary (CONTINUED) CLASS R (1/1/02-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET INCOME AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,069 $9,854 $10,081 $9,912 2/28/2002 $10,136 $9,664 $10,179 $9,835 3/31/2002 $10,390 $10,028 $10,009 $10,043 4/30/2002 $10,448 $9,420 $10,203 $9,883 5/31/2002 $10,412 $9,351 $10,290 $9,858 6/30/2002 $9,709 $8,685 $10,379 $9,464 7/31/2002 $9,289 $8,008 $10,504 $9,011 8/31/2002 $9,590 $8,061 $10,682 $9,102 9/30/2002 $9,166 $7,185 $10,855 $8,621 10/31/2002 $9,178 $7,817 $10,805 $8,905 11/30/2002 $9,681 $8,277 $10,802 $9,219 12/31/2002 $9,817 $7,791 $11,025 $9,040 1/31/2003 $9,829 $7,587 $11,035 $8,928 2/28/2003 $9,741 $7,473 $11,188 $8,881 3/31/2003 $9,905 $7,545 $11,179 $8,920 4/30/2003 $10,577 $8,167 $11,271 $9,364 5/31/2003 $11,102 $8,596 $11,481 $9,754 6/30/2003 $11,319 $8,706 $11,459 $9,837 7/31/2003 $11,227 $8,860 $11,073 $9,834 8/31/2003 $11,344 $9,032 $11,147 $9,980 9/30/2003 $11,670 $8,937 $11,442 $10,038 10/31/2003 $11,997 $9,442 $11,335 $10,330 11/30/2003 $12,168 $9,525 $11,362 $10,434 12/31/2003 $12,779 $10,024 $11,478 $10,774 1/31/2004 $12,953 $10,208 $11,570 $10,912 2/29/2004 $12,966 $10,350 $11,696 $11,041 3/31/2004 $12,978 $10,194 $11,783 $11,015 4/30/2004 $12,772 $10,034 $11,477 $10,769 5/31/2004 $12,730 $10,171 $11,431 $10,801 6/30/2004 $12,908 $10,369 $11,495 $10,950 7/31/2004 $12,977 $10,026 $11,609 $10,775 8/31/2004 $13,268 $10,066 $11,831 $10,872 9/30/2004 $13,449 $10,175 $11,863 $10,997 10/31/2004 $13,631 $10,331 $11,962 $11,135 11/30/2004 $13,927 $10,749 $11,867 $11,414 12/31/2004 $14,299 $11,114 $11,976 $11,677 1/31/2005 $14,026 $10,843 $12,051 $11,532 2/28/2005 $14,383 $11,071 $11,980 $11,685 3/31/2005 $14,102 $10,876 $11,919 $11,528 4/30/2005 $13,879 $10,669 $12,080 $11,416 5/31/2005 $14,182 $11,009 $12,211 $11,636 6/30/2005 $14,605 $11,024 $12,277 $11,733 7/31/2005 $14,912 $11,434 $12,165 $11,964 8/31/2005 $14,864 $11,330 $12,321 $11,990 9/30/2005 $14,814 $11,422 $12,194 $12,037 10/31/2005 $14,344 $11,231 $12,098 $11,845 11/30/2005 $14,295 $11,655 $12,151 $12,085 12/31/2005 $14,516 $11,660 $12,267 $12,188 1/31/2006 $14,955 $11,968 $12,268 $12,478 2/28/2006 $15,087 $12,001 $12,308 $12,484 3/31/2006 $15,156 $12,150 $12,188 $12,583 4/30/2006 $15,350 $12,313 $12,165 $12,713 5/31/2006 $15,233 $11,959 $12,152 $12,461 6/30/2006 $15,366 $11,975 $12,178 $12,466 7/31/2006 $15,815 $12,049 $12,343 $12,544 8/31/2006 $16,077 $12,335 $12,532 $12,749 9/30/2006 $16,212 $12,653 $12,642 $12,916
AVERAGE ANNUAL TOTAL RETURN ----------------------------------------------- CLASS R 9/30/06 ----------------------------------------------- 1-Year +9.43% ----------------------------------------------- 3-Year +11.58% ----------------------------------------------- Since Inception (1/1/02) +10.73% ----------------------------------------------- ADVISOR CLASS (10/1/96-9/30/06) 6 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET INCOME AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7 10/1/1996 $10,000 $10,000 $10,000 $10,000 10/31/1996 $10,197 $10,276 $10,222 $10,220 11/30/1996 $10,439 $11,052 $10,397 $10,665 12/31/1996 $10,505 $10,833 $10,300 $10,597 1/31/1997 $10,708 $11,509 $10,331 $10,861 2/28/1997 $10,868 $11,600 $10,357 $10,914 3/31/1997 $10,618 $11,124 $10,242 $10,650 4/30/1997 $10,689 $11,787 $10,396 $10,886 5/31/1997 $10,991 $12,504 $10,494 $11,324 6/30/1997 $11,249 $13,064 $10,619 $11,643 7/31/1997 $11,556 $14,103 $10,905 $12,213 8/31/1997 $11,487 $13,314 $10,812 $11,916 9/30/1997 $11,797 $14,043 $10,971 $12,374 10/31/1997 $11,679 $13,574 $11,130 $12,173 11/30/1997 $11,993 $14,202 $11,182 $12,356 12/31/1997 $12,400 $14,446 $11,294 $12,548 1/31/1998 $12,230 $14,605 $11,439 $12,605 2/28/1998 $12,404 $15,658 $11,431 $13,059 3/31/1998 $12,780 $16,459 $11,470 $13,417 4/30/1998 $12,656 $16,625 $11,530 $13,476 5/31/1998 $12,481 $16,339 $11,639 $13,371 6/30/1998 $12,558 $17,003 $11,738 $13,525 7/31/1998 $12,329 $16,822 $11,763 $13,357 8/31/1998 $11,533 $14,392 $11,954 $12,260 9/30/1998 $12,130 $15,314 $12,234 $12,683 10/31/1998 $12,158 $16,559 $12,170 $13,104 11/30/1998 $12,553 $17,562 $12,239 $13,546 12/31/1998 $12,539 $18,574 $12,275 $13,943 1/31/1999 $12,354 $19,350 $12,363 $14,106 2/28/1999 $12,005 $18,749 $12,147 $13,760 3/31/1999 $12,196 $19,499 $12,215 $14,027 4/30/1999 $12,825 $20,254 $12,253 $14,479 5/31/1999 $12,855 $19,776 $12,146 $14,291 6/30/1999 $12,884 $20,873 $12,107 $14,615 7/31/1999 $12,746 $20,222 $12,056 $14,406 8/31/1999 $12,720 $20,122 $12,050 $14,256 9/30/1999 $12,580 $19,571 $12,189 $14,100 10/31/1999 $12,611 $20,809 $12,234 $14,439 11/30/1999 $12,412 $21,232 $12,234 $14,624 12/31/1999 $12,466 $22,482 $12,175 $15,088 1/31/2000 $12,499 $21,352 $12,135 $14,724 2/29/2000 $12,353 $20,948 $12,281 $14,796 3/31/2000 $12,561 $22,996 $12,443 $15,462 4/30/2000 $12,951 $22,305 $12,408 $15,188 5/31/2000 $13,161 $21,848 $12,402 $15,044 6/30/2000 $13,254 $22,387 $12,660 $15,347 7/31/2000 $13,407 $22,037 $12,775 $15,274 8/31/2000 $14,175 $23,405 $12,960 $15,910 9/30/2000 $14,454 $22,170 $13,041 $15,588 10/31/2000 $14,238 $22,076 $13,128 $15,482 11/30/2000 $14,208 $20,337 $13,342 $14,886 12/31/2000 $14,996 $20,437 $13,590 $15,296 1/31/2001 $15,032 $21,161 $13,812 $15,614 2/28/2001 $15,324 $19,233 $13,933 $14,997 3/31/2001 $15,034 $18,015 $14,002 $14,495 4/30/2001 $15,396 $19,414 $13,944 $15,093 5/31/2001 $15,629 $19,544 $14,028 $15,172 6/30/2001 $15,266 $19,069 $14,081 $14,973 7/31/2001 $15,101 $18,881 $14,396 $14,924 8/31/2001 $15,270 $17,700 $14,561 $14,560 9/30/2001 $14,629 $16,271 $14,731 $13,791 10/31/2001 $14,665 $16,581 $15,039 $14,065 11/30/2001 $14,976 $17,853 $14,832 $14,549 12/31/2001 $15,117 $18,010 $14,738 $14,651 1/31/2002 $15,293 $17,747 $14,857 $14,522 2/28/2002 $15,401 $17,405 $15,001 $14,409 3/31/2002 $15,793 $18,059 $14,751 $14,714 4/30/2002 $15,961 $16,965 $15,037 $14,480 5/31/2002 $15,912 $16,840 $15,165 $14,443 6/30/2002 $14,850 $15,641 $15,296 $13,866 7/31/2002 $14,218 $14,422 $15,481 $13,202 8/31/2002 $14,610 $14,517 $15,742 $13,336 9/30/2002 $13,969 $12,940 $15,997 $12,630 10/31/2002 $14,067 $14,078 $15,924 $13,047 11/30/2002 $14,839 $14,906 $15,920 $13,507 12/31/2002 $14,977 $14,031 $16,249 $13,244 1/31/2003 $15,076 $13,664 $16,263 $13,080 2/28/2003 $14,948 $13,459 $16,488 $13,012 3/31/2003 $15,204 $13,588 $16,475 $13,069 4/30/2003 $16,160 $14,708 $16,611 $13,720 5/31/2003 $17,046 $15,482 $16,921 $14,291 6/30/2003 $17,386 $15,680 $16,887 $14,412 7/31/2003 $17,174 $15,956 $16,319 $14,408 8/31/2003 $17,440 $16,267 $16,428 $14,621 9/30/2003 $17,945 $16,095 $16,863 $14,707 10/31/2003 $18,455 $17,005 $16,705 $15,134 11/30/2003 $18,724 $17,154 $16,745 $15,287 12/31/2003 $19,668 $18,053 $16,916 $15,785 1/31/2004 $19,941 $18,384 $17,052 $15,987 2/29/2004 $20,052 $18,640 $17,236 $16,176 3/31/2004 $19,996 $18,359 $17,365 $16,138 4/30/2004 $19,688 $18,071 $16,914 $15,777 5/31/2004 $19,632 $18,318 $16,846 $15,824 6/30/2004 $19,914 $18,674 $16,941 $16,043 7/31/2004 $20,027 $18,056 $17,109 $15,786 8/31/2004 $20,484 $18,129 $17,435 $15,928 9/30/2004 $20,770 $18,325 $17,483 $16,111 10/31/2004 $21,059 $18,605 $17,629 $16,314 11/30/2004 $21,523 $19,358 $17,489 $16,722 12/31/2004 $22,105 $20,016 $17,650 $17,108 1/31/2005 $21,694 $19,528 $17,760 $16,896 2/28/2005 $22,251 $19,939 $17,656 $17,119 3/31/2005 $21,830 $19,586 $17,565 $16,890 4/30/2005 $21,495 $19,215 $17,803 $16,726 5/31/2005 $21,972 $19,826 $17,995 $17,047 6/30/2005 $22,634 $19,854 $18,093 $17,190 7/31/2005 $23,116 $20,592 $17,929 $17,529 8/31/2005 $23,050 $20,405 $18,159 $17,566 9/30/2005 $22,983 $20,570 $17,971 $17,636 10/31/2005 $22,267 $20,227 $17,829 $17,354 11/30/2005 $22,200 $20,991 $17,908 $17,706 12/31/2005 $22,551 $20,998 $18,078 $17,857 1/31/2006 $23,240 $21,554 $18,079 $18,282 2/28/2006 $23,453 $21,613 $18,139 $18,291 3/31/2006 $23,571 $21,882 $17,961 $18,435 4/30/2006 $23,881 $22,175 $17,929 $18,625 5/31/2006 $23,710 $21,538 $17,910 $18,256 6/30/2006 $23,927 $21,566 $17,948 $18,264 7/31/2006 $24,632 $21,699 $18,190 $18,379 8/31/2006 $25,048 $22,215 $18,469 $18,678 9/30/2006 $25,270 $22,787 $18,631 $18,923
AVERAGE ANNUAL TOTAL RETURN ----------------------------------------------- ADVISOR CLASS 6 9/30/06 ----------------------------------------------- 1-Year +9.94% ----------------------------------------------- 5-Year +11.55% ----------------------------------------------- 10-Year +9.71% ----------------------------------------------- Annual Report | 33 Performance Summary (CONTINUED) ENDNOTES THE FUND'S PORTFOLIO INCLUDES A SUBSTANTIAL PORTION OF HIGHER-YIELDING, LOWER-RATED CORPORATE BONDS BECAUSE OF THE RELATIVELY HIGHER YIELDS THEY OFFER. THESE SECURITIES CARRY A GREATER DEGREE OF CREDIT RISK RELATIVE TO INVESTMENT GRADE SECURITIES. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. 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 B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. 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. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Distribution rate is based on an annualization of the respective class's September dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 9/30/06. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/06. 6. Effective 1/2/97, 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 1/2/97, 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 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +140.54% and +9.42%. 7. Sources: Standard & Poor's Micropal; Lipper 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 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 Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Mixed-Asset Target Allocation Moderate Funds classification in the Lipper Open-End underlying funds universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined as funds that, by portfolio practice, maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. For the 12-month period ended 9/30/06, there were 400 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. 34 | Annual Report Your Fund's Expenses FRANKLIN INCOME 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 | 35 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 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06 --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,070.90 $3.32 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.86 $3.24 --------------------------------------------------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,066.70 $7.72 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.60 $7.54 --------------------------------------------------------------------------------------------------------------------------- CLASS B1 --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,068.20 $5.91 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.35 $5.77 --------------------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,072.10 $5.87 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.72 --------------------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,069.70 $5.14 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.10 $5.01 --------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,072.00 $2.55 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.61 $2.48 ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.64%; B: 1.49%; B1: 1.14%; C: 1.13%; R: 0.99%; and Advisor: 0.49%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 36 | Annual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks high, current income by investing at least 80% of its net assets in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). -------------------------------------------------------------------------------- Since 1983, the Fund has invested predominantly in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal. 1 Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 9/30/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] GNMA ............................................................ 98.6% Short-Term Investments & Other Net Assets ....................... 1.4% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 U.S. Government Securities Fund covers the fiscal year ended September 30, 2006. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +3.40% cumulative total return for the 12 months under review. The Fund performed comparably to the Lehman Brothers (LB) U.S. Government: Intermediate Index, which returned +3.54%. 2 In comparison, the Lipper GNMA Funds Classification Average 1. Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. 2. Source: Standard & Poor's Micropal. The LB U.S. Government: Intermediate Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. The index is unmanaged and includes reinvestment of any income or 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 98. Annual Report | 37 FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A VS. COMPARABLE INVESTMENTS* Risk vs. Return (10/01-9/06) [THE FOLLOWING TABLE WAS REPRESENTED AS A PLOTTED CHART IN THE PRINTED MATERIAL.] SERIES NAME RISK RETURN ------------------------------------------------------------------ P&R US TNote 1 Yr $TR 0.631833% 2.140505% P&R US TNote 10 Yr $TR 8.076611% 4.270923% P&R US TNote 30 Yr $TR 13.166289% 6.975728% Franklin US Govt Sec 2.650596% 3.836954% THE CHART DOES NOT INCLUDE THE FUND'S CURRENT, MAXIMUM 4.25% INITIAL SALES CHARGE. IF SALES CHARGES WERE INCLUDED, THE RETURNS WOULD HAVE BEEN LOWER. * Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged. Investors cannot invest directly in an index. Average annual total return represents the average annual change in value of an investment over the period indicated. These figures assume reinvestment of distributions and do not include sales charges. Risk is measured by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the volatility. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. The Fund's investment return and share price will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. The figures do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Past performance does not guarantee future results. returned +3.22% for the same period. 3 The Fund's return reflects the effect of management fees and expenses, while the LB U.S. Government: Intermediate Index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 42. ECONOMIC AND MARKET OVERVIEW The U.S. economy continued to grow during the year under review, although the pace in the second and third quarters of 2006 slowed from the first quarter's 3. Source: Lipper Inc. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in Government National Mortgage Association securities. For the 12-month period ended 9/30/06, there were 62 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. Past performance does not guarantee future results. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 38 | Annual Report 5.6% annualized rate. Overall, several factors contributed to real growth. During most of the reporting period, labor markets improved, indicated by nonfarm payroll data and the unemployment rate. Rising personal income also helped support consumer spending increases. However, the economy experienced rising inflation pressures, largely due to high energy prices and increasing labor costs. In addition, productivity growth and the pace of business spending slowed. Oil prices reached a historical high during the year, which contributed to the rise in headline, or overall, inflation. Core inflation, which excludes food and energy costs, remained contained but nonetheless began to experience some upward pressure. For example, while September's headline Consumer Price Index (CPI) reported a 12-month rise of 2.1%, core CPI increased 2.9%. 4 Oil prices fell in the latter part of the reporting period, partly due to ample supply and easing demand. This price drop, in conjunction with relatively stable inflation, contributed to declining interest rates. Several times during the period the Federal Reserve Board (Fed) acknowledged the economy's strength as well as the potential inflationary pressure from high energy prices. The Fed raised the federal funds target rate from 3.75% to 5.25%, and then suspended its rate hikes in August. The Fed indicated its future decisions would be highly dependent on forthcoming economic data. The 10-year Treasury note yield rose from 4.34% at the beginning of the period to a high of 5.25% on June 28, 2006, and then fell to 4.64% on September 30, 2006. The decline reflected some concerns about the slowing housing market and its potential effect on the economy. INVESTMENT STRATEGY We seek to invest predominantly in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments include short-term government securities and cash or cash equivalents. YIELD COMPARISON 9/30/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Franklin U.S Government Securities Fund - Class A* 4.52% 10-Year Treasury Note* 4.64% Lipper GNMA Funds Average* 4.54% Lipper Money Market Funds Average* 3.76% 4. Source: Bureau of Labor Statistics. * Sources: Federal Reserve H15 Report; Lipper Inc. Franklin U.S. Government Securities Fund - Class A shares' yield, calculated as required by the SEC, is based on earnings of the Fund's portfolio for the 30 days ended 9/30/06. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. Money funds attempt to maintain a stable net asset value of $1.00 per share, while shares of Franklin U.S. Government Securities Fund will fluctuate with market conditions. The Lipper GNMA Funds Classification Average is an average of the monthly SEC yields of 62 funds in the Lipper GNMA Funds classification for the 30 days ended 9/30/06. The Lipper Money Market Funds Classification Average is an average of the monthly SEC yields of 356 funds in the Lipper Money Market Funds classification for the 30 days ended 9/30/06. Lipper averages do not include sales charges or expense subsidization by a fund's manager. Annual Report | 39 DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/05-9/30/06
---------------------------------------------------------------------------------------------------------------------- DIVIDEND PER SHARE ---------------------------------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS ---------------------------------------------------------------------------------------------------------------------- October 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.66 cents ---------------------------------------------------------------------------------------------------------------------- November 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.67 cents ---------------------------------------------------------------------------------------------------------------------- December 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents ---------------------------------------------------------------------------------------------------------------------- January 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents ---------------------------------------------------------------------------------------------------------------------- February 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.66 cents ---------------------------------------------------------------------------------------------------------------------- March 2.60 cents 2.32 cents 2.32 cents 2.39 cents 2.67 cents ---------------------------------------------------------------------------------------------------------------------- April 2.60 cents 2.32 cents 2.32 cents 2.39 cents 2.67 cents ---------------------------------------------------------------------------------------------------------------------- May 2.63 cents 2.35 cents 2.35 cents 2.42 cents 2.69 cents ---------------------------------------------------------------------------------------------------------------------- June 2.63 cents 2.36 cents 2.37 cents 2.43 cents 2.71 cents ---------------------------------------------------------------------------------------------------------------------- July 2.63 cents 2.36 cents 2.37 cents 2.43 cents 2.69 cents ---------------------------------------------------------------------------------------------------------------------- August 2.63 cents 2.36 cents 2.37 cents 2.43 cents 2.70 cents ---------------------------------------------------------------------------------------------------------------------- September 2.63 cents 2.37 cents 2.37 cents 2.44 cents 2.71 cents ---------------------------------------------------------------------------------------------------------------------- TOTAL 31.35 CENTS 28.02 CENTS 28.02 CENTS 28.88 CENTS 32.17 CENTS ----------------------------------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. MANAGER'S DISCUSSION Our research shows that over the past 5-, 10- and 15-year time periods, GNMAs have offered attractive risk-adjusted returns when compared with a variety of asset classes including U.S. Treasuries, agency debentures, investment grade and high yield corporate bonds, and large- and small-capitalization stocks. These time periods include various credit, prepayment, economic and interest rate cycles. As the mortgage-backed securities (MBS) market has evolved, we believe technical research tools have increased in importance. In the GNMA sector, we applied our proprietary research models seeking to uncover areas of the markets where we believed prepayment risk may have offered value. We continued to evaluate the price difference between securities in the GNMA I and GNMA II programs using our proprietary models. We concluded that, for certain coupons, valuations for GNMA II securities moved closer to those of their GNMA I counterparts. In the second half of the Fund's fiscal year, we slightly reduced our exposure to GNMA II securities, partly due to the recent strong relative performance of certain of these securities. 40 | Annual Report Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OMITTED] /s/ Jack Lemein Jack Lemein [PHOTO OMITTED] /s/ Roger A. Bayston Roger A. Bayston, CFA Portfolio Management Team Franklin U.S. Government Securities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 41 Performance Summary as of 9/30/06 FRANKLIN U.S. GOVERNMENT SECURITIES 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: FKUSX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.43 $6.53 ------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ------------------------------------------------------------------------------- Dividend Income $0.3135 ------------------------------------------------------------------------------- CLASS B (SYMBOL: FUGBX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.42 $6.52 ------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ------------------------------------------------------------------------------- Dividend Income $0.2802 ------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUGX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.40 $6.50 ------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ------------------------------------------------------------------------------- Dividend Income $0.2802 ------------------------------------------------------------------------------- CLASS R (SYMBOL: FUSRX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.43 $6.53 ------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ------------------------------------------------------------------------------- Dividend Income $0.2888 ------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 9/30/06 9/30/05 ------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.10 $6.45 $6.55 ------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ------------------------------------------------------------------------------- Dividend Income $0.3217 ------------------------------------------------------------------------------- 42 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN INCLUDES MAXIMUM SALES CHARGES. CLASS A: 4.25% 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 1 +3.40% +20.72% +73.57% -------------------------------------------------------------------------------------- Average Annual Total Return 2 -0.99% +2.93% +5.21% -------------------------------------------------------------------------------------- Distribution Rate 3 4.70% -------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.52% -------------------------------------------------------------------------------------- CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) -------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.87% +17.46% +38.94% -------------------------------------------------------------------------------------- Average Annual Total Return 2 -1.07% +2.94% +4.34% -------------------------------------------------------------------------------------- Distribution Rate 3 4.43% -------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.22% -------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.88% +17.50% +64.56% -------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.89% +3.28% +5.11% -------------------------------------------------------------------------------------- Distribution Rate 3 4.44% -------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.24% -------------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) -------------------------------------------------------------------------------------- Cumulative Total Return 1 +3.01% +8.61% +18.92% -------------------------------------------------------------------------------------- Average Annual Total Return 2 +3.01% +2.79% +3.72% -------------------------------------------------------------------------------------- Distribution Rate 3 4.55% -------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.37% -------------------------------------------------------------------------------------- ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------------- Cumulative Total Return 1 +3.53% +21.61% +76.43% -------------------------------------------------------------------------------------- Average Annual Total Return 2 +3.53% +3.99% +5.84% -------------------------------------------------------------------------------------- Distribution Rate 3 5.04% -------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.87% --------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 43 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 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. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS A 9/30/06 ------------------------------------------ 1-Year -0.99% ------------------------------------------ 5-Year +2.93% ------------------------------------------ 10-Year +5.21% ------------------------------------------ CLASS A (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6 10/1/1996 $9,573 $10,000 $10,000 $10,000 10/31/1996 $9,746 $10,164 $10,032 $10,202 11/30/1996 $9,892 $10,287 $10,051 $10,357 12/31/1996 $9,835 $10,231 $10,051 $10,285 1/31/1997 $9,895 $10,271 $10,082 $10,350 2/28/1997 $9,925 $10,287 $10,114 $10,371 3/31/1997 $9,897 $10,229 $10,139 $10,265 4/30/1997 $10,047 $10,344 $10,152 $10,422 5/31/1997 $10,135 $10,425 $10,146 $10,517 6/30/1997 $10,254 $10,514 $10,158 $10,638 7/31/1997 $10,449 $10,708 $10,171 $10,857 8/31/1997 $10,417 $10,667 $10,190 $10,816 9/30/1997 $10,538 $10,783 $10,215 $10,960 10/31/1997 $10,644 $10,908 $10,241 $11,071 11/30/1997 $10,658 $10,932 $10,234 $11,097 12/31/1997 $10,765 $11,021 $10,222 $11,204 1/31/1998 $10,873 $11,165 $10,241 $11,317 2/28/1998 $10,871 $11,153 $10,260 $11,329 3/31/1998 $10,917 $11,188 $10,279 $11,368 4/30/1998 $10,995 $11,242 $10,298 $11,428 5/31/1998 $11,070 $11,319 $10,317 $11,516 6/30/1998 $11,114 $11,395 $10,330 $11,568 7/31/1998 $11,173 $11,439 $10,342 $11,614 8/31/1998 $11,282 $11,655 $10,355 $11,730 9/30/1998 $11,424 $11,927 $10,368 $11,882 10/31/1998 $11,370 $11,947 $10,393 $11,823 11/30/1998 $11,431 $11,910 $10,393 $11,890 12/31/1998 $11,476 $11,957 $10,387 $11,932 1/31/1999 $11,555 $12,010 $10,412 $12,002 2/28/1999 $11,482 $11,845 $10,425 $11,907 3/31/1999 $11,545 $11,924 $10,456 $11,982 4/30/1999 $11,591 $11,956 $10,532 $12,027 5/31/1999 $11,500 $11,883 $10,532 $11,946 6/30/1999 $11,444 $11,900 $10,532 $11,880 7/31/1999 $11,353 $11,902 $10,564 $11,809 8/31/1999 $11,361 $11,918 $10,589 $11,792 9/30/1999 $11,544 $12,021 $10,640 $11,976 10/31/1999 $11,606 $12,044 $10,659 $12,017 11/30/1999 $11,615 $12,053 $10,665 $12,025 12/31/1999 $11,571 $12,015 $10,665 $11,966 1/31/2000 $11,473 $11,975 $10,697 $11,872 2/29/2000 $11,607 $12,074 $10,760 $12,009 3/31/2000 $11,778 $12,211 $10,849 $12,191 4/30/2000 $11,751 $12,207 $10,856 $12,170 5/31/2000 $11,798 $12,239 $10,868 $12,211 6/30/2000 $11,992 $12,434 $10,925 $12,425 7/31/2000 $12,058 $12,516 $10,951 $12,475 8/31/2000 $12,236 $12,656 $10,951 $12,652 9/30/2000 $12,341 $12,767 $11,008 $12,762 10/31/2000 $12,428 $12,855 $11,027 $12,839 11/30/2000 $12,610 $13,043 $11,033 $13,029 12/31/2000 $12,793 $13,273 $11,027 $13,218 1/31/2001 $12,976 $13,450 $11,096 $13,421 2/28/2001 $13,046 $13,573 $11,141 $13,504 3/31/2001 $13,116 $13,672 $11,166 $13,583 4/30/2001 $13,128 $13,629 $11,210 $13,557 5/31/2001 $13,219 $13,685 $11,261 $13,645 6/30/2001 $13,251 $13,729 $11,280 $13,691 7/31/2001 $13,499 $13,985 $11,248 $13,957 8/31/2001 $13,591 $14,109 $11,248 $14,062 9/30/2001 $13,763 $14,410 $11,299 $14,261 10/31/2001 $13,953 $14,635 $11,261 $14,455 11/30/2001 $13,824 $14,460 $11,242 $14,302 12/31/2001 $13,774 $14,390 $11,198 $14,225 1/31/2002 $13,883 $14,453 $11,223 $14,361 2/28/2002 $14,053 $14,572 $11,267 $14,514 3/31/2002 $13,877 $14,352 $11,331 $14,332 4/30/2002 $14,132 $14,621 $11,394 $14,602 5/31/2002 $14,222 $14,723 $11,394 $14,698 6/30/2002 $14,334 $14,907 $11,401 $14,820 7/31/2002 $14,488 $15,188 $11,413 $14,993 8/31/2002 $14,622 $15,361 $11,451 $15,116 9/30/2002 $14,735 $15,625 $11,470 $15,254 10/31/2002 $14,786 $15,615 $11,489 $15,271 11/30/2002 $14,785 $15,491 $11,489 $15,261 12/31/2002 $14,956 $15,778 $11,464 $15,429 1/31/2003 $14,998 $15,743 $11,515 $15,460 2/28/2003 $15,063 $15,920 $11,603 $15,551 3/31/2003 $15,062 $15,924 $11,673 $15,541 4/30/2003 $15,105 $15,968 $11,648 $15,578 5/31/2003 $15,105 $16,219 $11,629 $15,618 6/30/2003 $15,148 $16,193 $11,641 $15,648 7/31/2003 $14,795 $15,800 $11,654 $15,310 8/31/2003 $14,906 $15,828 $11,698 $15,411 9/30/2003 $15,128 $16,171 $11,736 $15,668 10/31/2003 $15,060 $16,012 $11,724 $15,590 11/30/2003 $15,127 $16,014 $11,692 $15,637 12/31/2003 $15,222 $16,138 $11,679 $15,745 1/31/2004 $15,312 $16,226 $11,736 $15,822 2/29/2004 $15,403 $16,381 $11,800 $15,925 3/31/2004 $15,448 $16,495 $11,876 $15,977 4/30/2004 $15,195 $16,126 $11,914 $15,709 5/31/2004 $15,167 $16,074 $11,984 $15,665 6/30/2004 $15,301 $16,115 $12,022 $15,782 7/31/2004 $15,435 $16,232 $12,003 $15,902 8/31/2004 $15,640 $16,473 $12,009 $16,111 9/30/2004 $15,650 $16,479 $12,034 $16,117 10/31/2004 $15,763 $16,580 $12,098 $16,220 11/30/2004 $15,734 $16,426 $12,104 $16,167 12/31/2004 $15,800 $16,515 $12,060 $16,248 1/31/2005 $15,890 $16,536 $12,085 $16,327 2/28/2005 $15,837 $16,444 $12,155 $16,270 3/31/2005 $15,808 $16,403 $12,250 $16,231 4/30/2005 $15,947 $16,595 $12,332 $16,380 5/31/2005 $16,058 $16,727 $12,319 $16,475 6/30/2005 $16,073 $16,782 $12,326 $16,512 7/31/2005 $16,014 $16,639 $12,383 $16,442 8/31/2005 $16,152 $16,824 $12,446 $16,572 9/30/2005 $16,068 $16,694 $12,598 $16,484 10/31/2005 $16,009 $16,624 $12,624 $16,400 11/30/2005 $16,049 $16,692 $12,522 $16,443 12/31/2005 $16,238 $16,793 $12,471 $16,619 1/31/2006 $16,278 $16,792 $12,567 $16,654 2/28/2006 $16,293 $16,795 $12,592 $16,680 3/31/2006 $16,182 $16,743 $12,662 $16,577 4/30/2006 $16,122 $16,759 $12,769 $16,520 5/31/2006 $16,062 $16,764 $12,833 $16,474 6/30/2006 $16,078 $16,794 $12,858 $16,471 7/31/2006 $16,273 $16,970 $12,896 $16,680 8/31/2006 $16,495 $17,161 $12,921 $16,910 9/30/2006 $16,615 $17,285 $12,858 $17,020
AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ CLASS B 9/30/06 ------------------------------------------ 1-Year -1.07% ------------------------------------------ 5-Year +2.94% ------------------------------------------ Since Inception (1/1/99) +4.34% ------------------------------------------ CLASS B (1/1/99-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6 1/1/1999 $10,000 $10,000 $10,000 $10,000 1/31/1999 $10,068 $10,045 $10,024 $10,058 2/28/1999 $9,986 $9,907 $10,037 $9,979 3/31/1999 $10,051 $9,973 $10,067 $10,041 4/30/1999 $10,087 $10,000 $10,140 $10,080 5/31/1999 $10,005 $9,938 $10,140 $10,011 6/30/1999 $9,936 $9,953 $10,140 $9,956 7/31/1999 $9,868 $9,954 $10,171 $9,896 8/31/1999 $9,856 $9,968 $10,195 $9,882 9/30/1999 $10,025 $10,053 $10,244 $10,037 10/31/1999 $10,074 $10,073 $10,262 $10,071 11/30/1999 $10,062 $10,080 $10,268 $10,078 12/31/1999 $10,019 $10,049 $10,268 $10,028 1/31/2000 $9,946 $10,015 $10,299 $9,949 2/29/2000 $10,042 $10,098 $10,360 $10,065 3/31/2000 $10,186 $10,213 $10,445 $10,216 4/30/2000 $10,174 $10,209 $10,451 $10,199 5/31/2000 $10,210 $10,236 $10,464 $10,234 6/30/2000 $10,373 $10,399 $10,519 $10,413 7/31/2000 $10,410 $10,468 $10,543 $10,455 8/31/2000 $10,560 $10,585 $10,543 $10,603 9/30/2000 $10,662 $10,678 $10,598 $10,695 10/31/2000 $10,717 $10,751 $10,616 $10,759 11/30/2000 $10,869 $10,909 $10,622 $10,919 12/31/2000 $11,021 $11,101 $10,616 $11,077 1/31/2001 $11,191 $11,249 $10,683 $11,248 2/28/2001 $11,230 $11,352 $10,726 $11,317 3/31/2001 $11,302 $11,434 $10,750 $11,383 4/30/2001 $11,291 $11,398 $10,793 $11,361 5/31/2001 $11,364 $11,446 $10,842 $11,435 6/30/2001 $11,403 $11,482 $10,860 $11,474 7/31/2001 $11,595 $11,696 $10,830 $11,697 8/31/2001 $11,669 $11,800 $10,830 $11,784 9/30/2001 $11,829 $12,052 $10,879 $11,952 10/31/2001 $11,970 $12,240 $10,842 $12,114 11/30/2001 $11,871 $12,094 $10,824 $11,986 12/31/2001 $11,806 $12,035 $10,781 $11,921 1/31/2002 $11,912 $12,087 $10,805 $12,036 2/28/2002 $12,035 $12,187 $10,848 $12,163 3/31/2002 $11,879 $12,004 $10,909 $12,011 4/30/2002 $12,092 $12,228 $10,970 $12,237 5/31/2002 $12,164 $12,314 $10,970 $12,318 6/30/2002 $12,254 $12,468 $10,976 $12,420 7/31/2002 $12,381 $12,703 $10,988 $12,565 8/31/2002 $12,490 $12,848 $11,025 $12,668 9/30/2002 $12,582 $13,068 $11,043 $12,784 10/31/2002 $12,620 $13,059 $11,062 $12,798 11/30/2002 $12,614 $12,956 $11,062 $12,790 12/31/2002 $12,754 $13,196 $11,037 $12,931 1/31/2003 $12,785 $13,166 $11,086 $12,956 2/28/2003 $12,834 $13,315 $11,171 $13,033 3/31/2003 $12,828 $13,318 $11,239 $13,024 4/30/2003 $12,859 $13,355 $11,214 $13,055 5/31/2003 $12,871 $13,565 $11,196 $13,089 6/30/2003 $12,884 $13,543 $11,208 $13,114 7/31/2003 $12,578 $13,214 $11,220 $12,831 8/31/2003 $12,667 $13,238 $11,263 $12,915 9/30/2003 $12,850 $13,525 $11,300 $13,131 10/31/2003 $12,788 $13,392 $11,287 $13,065 11/30/2003 $12,839 $13,393 $11,257 $13,104 12/31/2003 $12,914 $13,497 $11,245 $13,195 1/31/2004 $12,985 $13,571 $11,300 $13,260 2/29/2004 $13,056 $13,700 $11,361 $13,346 3/31/2004 $13,089 $13,795 $11,434 $13,390 4/30/2004 $12,868 $13,487 $11,470 $13,165 5/31/2004 $12,839 $13,444 $11,538 $13,128 6/30/2004 $12,946 $13,478 $11,574 $13,226 7/31/2004 $13,054 $13,575 $11,556 $13,327 8/31/2004 $13,222 $13,777 $11,562 $13,502 9/30/2004 $13,225 $13,782 $11,586 $13,507 10/31/2004 $13,315 $13,867 $11,647 $13,593 11/30/2004 $13,285 $13,738 $11,653 $13,549 12/31/2004 $13,334 $13,812 $11,611 $13,616 1/31/2005 $13,404 $13,830 $11,635 $13,683 2/28/2005 $13,354 $13,753 $11,702 $13,635 3/31/2005 $13,323 $13,719 $11,794 $13,602 4/30/2005 $13,435 $13,879 $11,873 $13,728 5/31/2005 $13,523 $13,990 $11,861 $13,807 6/30/2005 $13,549 $14,036 $11,867 $13,838 7/31/2005 $13,474 $13,916 $11,922 $13,779 8/31/2005 $13,583 $14,070 $11,983 $13,888 9/30/2005 $13,507 $13,962 $12,129 $13,815 10/31/2005 $13,451 $13,904 $12,154 $13,744 11/30/2005 $13,478 $13,961 $12,056 $13,780 12/31/2005 $13,632 $14,045 $12,007 $13,927 1/31/2006 $13,659 $14,044 $12,099 $13,957 2/28/2006 $13,666 $14,047 $12,123 $13,979 3/31/2006 $13,567 $14,003 $12,190 $13,892 4/30/2006 $13,510 $14,016 $12,294 $13,845 5/31/2006 $13,454 $14,021 $12,355 $13,806 6/30/2006 $13,462 $14,046 $12,379 $13,804 7/31/2006 $13,620 $14,193 $12,416 $13,979 8/31/2006 $13,800 $14,352 $12,441 $14,172 9/30/2006 $13,894 $14,456 $12,379 $14,264
44 | Annual Report Performance Summary (CONTINUED) CLASS C (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6 10/1/1996 $10,000 $10,000 $10,000 $10,000 10/31/1996 $10,177 $10,164 $10,032 $10,202 11/30/1996 $10,339 $10,287 $10,051 $10,357 12/31/1996 $10,260 $10,231 $10,051 $10,285 1/31/1997 $10,333 $10,271 $10,082 $10,350 2/28/1997 $10,345 $10,287 $10,114 $10,371 3/31/1997 $10,310 $10,229 $10,139 $10,265 4/30/1997 $10,461 $10,344 $10,152 $10,422 5/31/1997 $10,564 $10,425 $10,146 $10,517 6/30/1997 $10,682 $10,514 $10,158 $10,638 7/31/1997 $10,880 $10,708 $10,171 $10,857 8/31/1997 $10,826 $10,667 $10,190 $10,816 9/30/1997 $10,948 $10,783 $10,215 $10,960 10/31/1997 $11,053 $10,908 $10,241 $11,071 11/30/1997 $11,063 $10,932 $10,234 $11,097 12/31/1997 $11,169 $11,021 $10,222 $11,204 1/31/1998 $11,276 $11,165 $10,241 $11,317 2/28/1998 $11,269 $11,153 $10,260 $11,329 3/31/1998 $11,312 $11,188 $10,279 $11,368 4/30/1998 $11,387 $11,242 $10,298 $11,428 5/31/1998 $11,460 $11,319 $10,317 $11,516 6/30/1998 $11,500 $11,395 $10,330 $11,568 7/31/1998 $11,557 $11,439 $10,342 $11,614 8/31/1998 $11,665 $11,655 $10,355 $11,730 9/30/1998 $11,807 $11,927 $10,368 $11,882 10/31/1998 $11,728 $11,947 $10,393 $11,823 11/30/1998 $11,804 $11,910 $10,393 $11,890 12/31/1998 $11,844 $11,957 $10,387 $11,932 1/31/1999 $11,920 $12,010 $10,412 $12,002 2/28/1999 $11,840 $11,845 $10,425 $11,907 3/31/1999 $11,899 $11,924 $10,456 $11,982 4/30/1999 $11,941 $11,956 $10,532 $12,027 5/31/1999 $11,842 $11,883 $10,532 $11,946 6/30/1999 $11,779 $11,900 $10,532 $11,880 7/31/1999 $11,680 $11,902 $10,564 $11,809 8/31/1999 $11,683 $11,918 $10,589 $11,792 9/30/1999 $11,867 $12,021 $10,640 $11,976 10/31/1999 $11,925 $12,044 $10,659 $12,017 11/30/1999 $11,928 $12,053 $10,665 $12,025 12/31/1999 $11,878 $12,015 $10,665 $11,966 1/31/2000 $11,772 $11,975 $10,697 $11,872 2/29/2000 $11,905 $12,074 $10,760 $12,009 3/31/2000 $12,075 $12,211 $10,849 $12,191 4/30/2000 $12,042 $12,207 $10,856 $12,170 5/31/2000 $12,085 $12,239 $10,868 $12,211 6/30/2000 $12,279 $12,434 $10,925 $12,425 7/31/2000 $12,322 $12,516 $10,951 $12,475 8/31/2000 $12,500 $12,656 $10,951 $12,652 9/30/2000 $12,621 $12,767 $11,008 $12,762 10/31/2000 $12,705 $12,855 $11,027 $12,839 11/30/2000 $12,865 $13,043 $11,033 $13,029 12/31/2000 $13,047 $13,273 $11,027 $13,218 1/31/2001 $13,248 $13,450 $11,096 $13,421 2/28/2001 $13,294 $13,573 $11,141 $13,504 3/31/2001 $13,380 $13,672 $11,166 $13,583 4/30/2001 $13,387 $13,629 $11,210 $13,557 5/31/2001 $13,453 $13,685 $11,261 $13,645 6/30/2001 $13,500 $13,729 $11,280 $13,691 7/31/2001 $13,728 $13,985 $11,248 $13,957 8/31/2001 $13,815 $14,109 $11,248 $14,062 9/30/2001 $14,005 $14,410 $11,299 $14,261 10/31/2001 $14,173 $14,635 $11,261 $14,455 11/30/2001 $14,055 $14,460 $11,242 $14,302 12/31/2001 $13,977 $14,390 $11,198 $14,225 1/31/2002 $14,102 $14,453 $11,223 $14,361 2/28/2002 $14,249 $14,572 $11,267 $14,514 3/31/2002 $14,063 $14,352 $11,331 $14,332 4/30/2002 $14,316 $14,621 $11,394 $14,602 5/31/2002 $14,402 $14,723 $11,394 $14,698 6/30/2002 $14,509 $14,907 $11,401 $14,820 7/31/2002 $14,660 $15,188 $11,413 $14,993 8/31/2002 $14,789 $15,361 $11,451 $15,116 9/30/2002 $14,920 $15,625 $11,470 $15,254 10/31/2002 $14,943 $15,615 $11,489 $15,271 11/30/2002 $14,937 $15,491 $11,489 $15,261 12/31/2002 $15,103 $15,778 $11,464 $15,429 1/31/2003 $15,140 $15,743 $11,515 $15,460 2/28/2003 $15,220 $15,920 $11,603 $15,551 3/31/2003 $15,192 $15,924 $11,673 $15,541 4/30/2003 $15,229 $15,968 $11,648 $15,578 5/31/2003 $15,223 $16,219 $11,629 $15,618 6/30/2003 $15,260 $16,193 $11,641 $15,648 7/31/2003 $14,896 $15,800 $11,654 $15,310 8/31/2003 $15,000 $15,828 $11,698 $15,411 9/30/2003 $15,217 $16,171 $11,736 $15,668 10/31/2003 $15,142 $16,012 $11,724 $15,590 11/30/2003 $15,203 $16,014 $11,692 $15,637 12/31/2003 $15,292 $16,138 $11,679 $15,745 1/31/2004 $15,376 $16,226 $11,736 $15,822 2/29/2004 $15,461 $16,381 $11,800 $15,925 3/31/2004 $15,500 $16,495 $11,876 $15,977 4/30/2004 $15,238 $16,126 $11,914 $15,709 5/31/2004 $15,202 $16,074 $11,984 $15,665 6/30/2004 $15,353 $16,115 $12,022 $15,782 7/31/2004 $15,458 $16,232 $12,003 $15,902 8/31/2004 $15,658 $16,473 $12,009 $16,111 9/30/2004 $15,661 $16,479 $12,034 $16,117 10/31/2004 $15,767 $16,580 $12,098 $16,220 11/30/2004 $15,731 $16,426 $12,104 $16,167 12/31/2004 $15,790 $16,515 $12,060 $16,248 1/31/2005 $15,874 $16,536 $12,085 $16,327 2/28/2005 $15,813 $16,444 $12,155 $16,270 3/31/2005 $15,777 $16,403 $12,250 $16,231 4/30/2005 $15,909 $16,595 $12,332 $16,380 5/31/2005 $16,014 $16,727 $12,319 $16,475 6/30/2005 $16,046 $16,782 $12,326 $16,512 7/31/2005 $15,956 $16,639 $12,383 $16,442 8/31/2005 $16,087 $16,824 $12,446 $16,572 9/30/2005 $15,996 $16,694 $12,598 $16,484 10/31/2005 $15,929 $16,624 $12,624 $16,400 11/30/2005 $15,962 $16,692 $12,522 $16,443 12/31/2005 $16,144 $16,793 $12,471 $16,619 1/31/2006 $16,176 $16,792 $12,567 $16,654 2/28/2006 $16,184 $16,795 $12,592 $16,680 3/31/2006 $16,067 $16,743 $12,662 $16,577 4/30/2006 $15,999 $16,759 $12,769 $16,520 5/31/2006 $15,932 $16,764 $12,833 $16,474 6/30/2006 $15,942 $16,794 $12,858 $16,471 7/31/2006 $16,130 $16,970 $12,896 $16,680 8/31/2006 $16,344 $17,161 $12,921 $16,910 9/30/2006 $16,456 $17,285 $12,858 $17,020
AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------------- CLASS C 9/30/06 ---------------------------------------------------- 1-Year +1.89% ---------------------------------------------------- 5-Year +3.28% ---------------------------------------------------- 10-Year +5.11% ---------------------------------------------------- CLASS R (1/1/02-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,109 $10,043 $10,023 $10,096 2/28/2002 $10,215 $10,126 $10,062 $10,203 3/31/2002 $10,098 $9,974 $10,119 $10,075 4/30/2002 $10,281 $10,160 $10,175 $10,265 5/31/2002 $10,343 $10,231 $10,175 $10,333 6/30/2002 $10,421 $10,359 $10,181 $10,418 7/31/2002 $10,530 $10,554 $10,192 $10,540 8/31/2002 $10,625 $10,675 $10,226 $10,627 9/30/2002 $10,704 $10,858 $10,243 $10,723 10/31/2002 $10,722 $10,851 $10,260 $10,735 11/30/2002 $10,733 $10,765 $10,260 $10,729 12/31/2002 $10,854 $10,964 $10,238 $10,847 1/31/2003 $10,866 $10,940 $10,283 $10,869 2/28/2003 $10,924 $11,063 $10,362 $10,933 3/31/2003 $10,921 $11,066 $10,424 $10,925 4/30/2003 $10,948 $11,097 $10,402 $10,951 5/31/2003 $10,945 $11,271 $10,385 $10,980 6/30/2003 $10,958 $11,252 $10,396 $11,001 7/31/2003 $10,715 $10,979 $10,407 $10,763 8/31/2003 $10,791 $10,999 $10,447 $10,834 9/30/2003 $10,948 $11,237 $10,481 $11,015 10/31/2003 $10,897 $11,127 $10,470 $10,960 11/30/2003 $10,926 $11,128 $10,441 $10,993 12/31/2003 $11,008 $11,215 $10,430 $11,069 1/31/2004 $11,053 $11,276 $10,481 $11,123 2/29/2004 $11,115 $11,383 $10,538 $11,195 3/31/2004 $11,160 $11,462 $10,606 $11,232 4/30/2004 $10,975 $11,206 $10,640 $11,043 5/31/2004 $10,950 $11,170 $10,702 $11,012 6/30/2004 $11,044 $11,198 $10,736 $11,095 7/31/2004 $11,121 $11,280 $10,719 $11,179 8/31/2004 $11,265 $11,447 $10,724 $11,326 9/30/2004 $11,286 $11,452 $10,747 $11,330 10/31/2004 $11,364 $11,522 $10,804 $11,403 11/30/2004 $11,323 $11,414 $10,809 $11,365 12/31/2004 $11,384 $11,476 $10,770 $11,422 1/31/2005 $11,445 $11,491 $10,792 $11,478 2/28/2005 $11,386 $11,427 $10,855 $11,438 3/31/2005 $11,361 $11,399 $10,939 $11,410 4/30/2005 $11,475 $11,532 $11,013 $11,515 5/31/2005 $11,534 $11,624 $11,002 $11,582 6/30/2005 $11,559 $11,662 $11,007 $11,608 7/31/2005 $11,513 $11,562 $11,058 $11,559 8/31/2005 $11,590 $11,691 $11,115 $11,650 9/30/2005 $11,544 $11,601 $11,251 $11,588 10/31/2005 $11,481 $11,552 $11,273 $11,529 11/30/2005 $11,505 $11,599 $11,183 $11,559 12/31/2005 $11,638 $11,670 $11,138 $11,683 1/31/2006 $11,663 $11,669 $11,222 $11,707 2/28/2006 $11,670 $11,671 $11,245 $11,726 3/31/2006 $11,604 $11,635 $11,307 $11,654 4/30/2006 $11,539 $11,646 $11,404 $11,614 5/31/2006 $11,510 $11,649 $11,460 $11,581 6/30/2006 $11,500 $11,670 $11,483 $11,579 7/31/2006 $11,655 $11,793 $11,517 $11,726 8/31/2006 $11,810 $11,925 $11,539 $11,888 9/30/2006 $11,892 $12,011 $11,483 $11,965
AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------------- CLASS R 9/30/06 ---------------------------------------------------- 1-Year +3.01% ---------------------------------------------------- 3-Year +2.79% ---------------------------------------------------- Since Inception (1/1/02) +3.72% ---------------------------------------------------- Annual Report | 45 Performance Summary (CONTINUED) ADVISOR CLASS (10/1/96-9/30/06) 5 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------ ADVISOR CLASS 5 9/30/06 ------------------------------------------------ 1-Year +3.53% ------------------------------------------------ 5-Year +3.99% ------------------------------------------------ 10-Year +5.84% ------------------------------------------------
FRANKLIN U.S. LB U.S. LIPPER GNMA GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6 10/1/1996 $10,000 $10,000 $10,000 $10,000 10/31/1996 $10,181 $10,164 $10,032 $10,202 11/30/1996 $10,333 $10,287 $10,051 $10,357 12/31/1996 $10,274 $10,231 $10,051 $10,285 1/31/1997 $10,383 $10,271 $10,082 $10,350 2/28/1997 $10,400 $10,287 $10,114 $10,371 3/31/1997 $10,371 $10,229 $10,139 $10,265 4/30/1997 $10,545 $10,344 $10,152 $10,422 5/31/1997 $10,638 $10,425 $10,146 $10,517 6/30/1997 $10,763 $10,514 $10,158 $10,638 7/31/1997 $10,969 $10,708 $10,171 $10,857 8/31/1997 $10,921 $10,667 $10,190 $10,816 9/30/1997 $11,063 $10,783 $10,215 $10,960 10/31/1997 $11,159 $10,908 $10,241 $11,071 11/30/1997 $11,191 $10,932 $10,234 $11,097 12/31/1997 $11,305 $11,021 $10,222 $11,204 1/31/1998 $11,402 $11,165 $10,241 $11,317 2/28/1998 $11,418 $11,153 $10,260 $11,329 3/31/1998 $11,467 $11,188 $10,279 $11,368 4/30/1998 $11,533 $11,242 $10,298 $11,428 5/31/1998 $11,630 $11,319 $10,317 $11,516 6/30/1998 $11,676 $11,395 $10,330 $11,568 7/31/1998 $11,723 $11,439 $10,342 $11,614 8/31/1998 $11,837 $11,655 $10,355 $11,730 9/30/1998 $12,005 $11,927 $10,368 $11,882 10/31/1998 $11,932 $11,947 $10,393 $11,823 11/30/1998 $12,014 $11,910 $10,393 $11,890 12/31/1998 $12,062 $11,957 $10,387 $11,932 1/31/1999 $12,146 $12,010 $10,412 $12,002 2/28/1999 $12,054 $11,845 $10,425 $11,907 3/31/1999 $12,120 $11,924 $10,456 $11,982 4/30/1999 $12,187 $11,956 $10,532 $12,027 5/31/1999 $12,094 $11,883 $10,532 $11,946 6/30/1999 $12,018 $11,900 $10,532 $11,880 7/31/1999 $11,941 $11,902 $10,564 $11,809 8/31/1999 $11,933 $11,918 $10,589 $11,792 9/30/1999 $12,144 $12,021 $10,640 $11,976 10/31/1999 $12,210 $12,044 $10,659 $12,017 11/30/1999 $12,202 $12,053 $10,665 $12,025 12/31/1999 $12,157 $12,015 $10,665 $11,966 1/31/2000 $12,074 $11,975 $10,697 $11,872 2/29/2000 $12,197 $12,074 $10,760 $12,009 3/31/2000 $12,378 $12,211 $10,849 $12,191 4/30/2000 $12,370 $12,207 $10,856 $12,170 5/31/2000 $12,421 $12,239 $10,868 $12,211 6/30/2000 $12,626 $12,434 $10,925 $12,425 7/31/2000 $12,677 $12,516 $10,951 $12,475 8/31/2000 $12,866 $12,656 $10,951 $12,652 9/30/2000 $12,997 $12,767 $11,008 $12,762 10/31/2000 $13,089 $12,855 $11,027 $12,839 11/30/2000 $13,261 $13,043 $11,033 $13,029 12/31/2000 $13,475 $13,273 $11,027 $13,218 1/31/2001 $13,670 $13,450 $11,096 $13,421 2/28/2001 $13,724 $13,573 $11,141 $13,504 3/31/2001 $13,819 $13,672 $11,166 $13,583 4/30/2001 $13,833 $13,629 $11,210 $13,557 5/31/2001 $13,908 $13,685 $11,261 $13,645 6/30/2001 $13,983 $13,729 $11,280 $13,691 7/31/2001 $14,225 $13,985 $11,248 $13,957 8/31/2001 $14,323 $14,109 $11,248 $14,062 9/30/2001 $14,505 $14,410 $11,299 $14,261 10/31/2001 $14,707 $14,635 $11,261 $14,455 11/30/2001 $14,593 $14,460 $11,242 $14,302 12/31/2001 $14,521 $14,390 $11,198 $14,225 1/31/2002 $14,638 $14,453 $11,223 $14,361 2/28/2002 $14,818 $14,572 $11,267 $14,514 3/31/2002 $14,634 $14,352 $11,331 $14,332 4/30/2002 $14,903 $14,621 $11,394 $14,602 5/31/2002 $15,000 $14,723 $11,394 $14,698 6/30/2002 $15,120 $14,907 $11,401 $14,820 7/31/2002 $15,283 $15,188 $11,413 $14,993 8/31/2002 $15,425 $15,361 $11,451 $15,116 9/30/2002 $15,568 $15,625 $11,470 $15,254 10/31/2002 $15,600 $15,615 $11,489 $15,271 11/30/2002 $15,602 $15,491 $11,489 $15,261 12/31/2002 $15,784 $15,778 $11,464 $15,429 1/31/2003 $15,830 $15,743 $11,515 $15,460 2/28/2003 $15,922 $15,920 $11,603 $15,551 3/31/2003 $15,923 $15,924 $11,673 $15,541 4/30/2003 $15,947 $15,968 $11,648 $15,578 5/31/2003 $15,972 $16,219 $11,629 $15,618 6/30/2003 $15,997 $16,193 $11,641 $15,648 7/31/2003 $15,626 $15,800 $11,654 $15,310 8/31/2003 $15,744 $15,828 $11,698 $15,411 9/30/2003 $16,003 $16,171 $11,736 $15,668 10/31/2003 $15,933 $16,012 $11,724 $15,590 11/30/2003 $15,983 $16,014 $11,692 $15,637 12/31/2003 $16,084 $16,138 $11,679 $15,745 1/31/2004 $16,181 $16,226 $11,736 $15,822 2/29/2004 $16,278 $16,381 $11,800 $15,925 3/31/2004 $16,328 $16,495 $11,876 $15,977 4/30/2004 $16,063 $16,126 $11,914 $15,709 5/31/2004 $16,059 $16,074 $11,984 $15,665 6/30/2004 $16,201 $16,115 $12,022 $15,782 7/31/2004 $16,321 $16,232 $12,003 $15,902 8/31/2004 $16,538 $16,473 $12,009 $16,111 9/30/2004 $16,550 $16,479 $12,034 $16,117 10/31/2004 $16,696 $16,580 $12,098 $16,220 11/30/2004 $16,643 $16,426 $12,104 $16,167 12/31/2004 $16,739 $16,515 $12,060 $16,248 1/31/2005 $16,836 $16,536 $12,085 $16,327 2/28/2005 $16,756 $16,444 $12,155 $16,270 3/31/2005 $16,727 $16,403 $12,250 $16,231 4/30/2005 $16,875 $16,595 $12,332 $16,380 5/31/2005 $17,000 $16,727 $12,319 $16,475 6/30/2005 $17,043 $16,782 $12,326 $16,512 7/31/2005 $16,983 $16,639 $12,383 $16,442 8/31/2005 $17,104 $16,824 $12,446 $16,572 9/30/2005 $17,043 $16,694 $12,598 $16,484 10/31/2005 $16,955 $16,624 $12,624 $16,400 11/30/2005 $17,000 $16,692 $12,522 $16,443 12/31/2005 $17,202 $16,793 $12,471 $16,619 1/31/2006 $17,245 $16,792 $12,567 $16,654 2/28/2006 $17,263 $16,795 $12,592 $16,680 3/31/2006 $17,148 $16,743 $12,662 $16,577 4/30/2006 $17,086 $16,759 $12,769 $16,520 5/31/2006 $17,051 $16,764 $12,833 $16,474 6/30/2006 $17,043 $16,794 $12,858 $16,471 7/31/2006 $17,278 $16,970 $12,896 $16,680 8/31/2006 $17,516 $17,161 $12,921 $16,910 9/30/2006 $17,643 $17,285 $12,858 $17,020
46 | Annual Report Performance Summary (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. 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. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 3. Distribution rate is based on an annualization of the respective class's September dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 9/30/06. 4. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/06. 5. Effective 1/2/97, 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 1/2/97, 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 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +71.72% and +5.70%. 6. Sources: Standard & Poor's Micropal; Lipper Inc. The LB U.S. Government: Intermediate Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in Government National Mortgage Association securities. For the 12-month period ended 9/30/06, there were 62 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. Annual Report | 47 Your Fund's Expenses FRANKLIN U.S. GOVERNMENT SECURITIES 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. 48 | 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 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06 --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,026.70 $3.61 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.51 $3.60 --------------------------------------------------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,024.10 $6.24 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.23 --------------------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,024.20 $6.24 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.23 --------------------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,024.80 $5.48 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.65 $5.47 --------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,028.90 $2.95 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.16 $2.94 ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.71%; B: 1.23%; C: 1.23%; R: 1.08%; and Advisor: 0.58%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. Annual Report | 49 Franklin Utilities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility company securities. -------------------------------------------------------------------------------- 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 Utilities Fund covers the fiscal year ended September 30, 2006. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Utilities Fund - Class A posted a +6.69% cumulative total return. The Fund underperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +10.78% for the same period. 1 The Fund outperformed its narrow benchmark, the S&P 500 Utilities Index, which returned +4.77%. 2 You can find the Fund's long-term performance data in the Performance Summary beginning on page 54. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2006, the U.S. economy advanced at a moderate pace. After a slow fourth quarter 2005, gross domestic product grew an annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates of 2.6% in the second quarter and 1.6% in the third quarter. Growth was driven by corporate profits, and consumer and government spending. Export growth picked up some momentum, but a wide trade deficit remained. Employment generally increased and the unemployment rate fell from 5.1% to 4.6%. 3 Although labor costs rose during the reporting period, hiring increased in many industries and personal income grew. 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 indexes are unmanaged and includes reinvested dividends. 2. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500 Index. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 3. Source: Bureau of Labor Statistics. 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 105. 50 | Annual Report Elevated energy and other commodity prices were a primary economic concern. Oil prices were volatile and declined from a record high of $77 per barrel in July to $63 at period-end. Medical and pharmacy costs climbed substantially. Consumer confidence and spending remained strong but could weaken with the impact of higher prices. As home price appreciation slowed, borrowing against home equity flattened and could have a gradual effect on consumer spending. Inflation was also a concern, as the core Consumer Price Index (CPI) rose 2.9% for the 12 months ended September 30, 2006, which was higher than the 2.2% 10-year average. 4 The Federal Reserve Board (Fed) raised the federal funds target rate incrementally from 3.75% to 5.25%. In August and September, the Fed left the rate unchanged, citing moderate economic growth, a cooling housing market, and the lagging effect of prior tightening. The Fed stated that some inflation risk may remain and the extent and timing of any additional interest rate hikes will depend upon incoming data on inflation and economic growth. In this environment, equity markets experienced dramatic rallies late in the period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 5 Telecommunications, materials and financials stocks performed particularly well. INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. 4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 5. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 9/30/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electric Utilities 85.5% Gas Distributors 8.8% Diversified Telecommunication Services 3.5% Oil, Gas & Consumable Fuels 1.8% Short-Term Investments & Other Net Assets 0.4% Annual Report | 51 TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 9/30/06 ------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS ------------------------------------------------------------------------------- Entergy Corp. 5.3% ELECTRIC UTILITIES ------------------------------------------------------------------------------- Exelon Corp. 5.2% ELECTRIC UTILITIES ------------------------------------------------------------------------------- Duke Energy Corp. 5.1% ELECTRIC UTILITIES ------------------------------------------------------------------------------- Dominion Resources Inc. 4.7% ELECTRIC UTILITIES ------------------------------------------------------------------------------- FirstEnergy Corp. 4.5% ELECTRIC UTILITIES ------------------------------------------------------------------------------- FPL Group Inc. 4.0% ELECTRIC UTILITIES ------------------------------------------------------------------------------- Edison International 3.5% ELECTRIC UTILITIES ------------------------------------------------------------------------------- The Southern Co. 3.3% ELECTRIC UTILITIES ------------------------------------------------------------------------------- Public Service Enterprise Group Inc. 3.1% ELECTRIC UTILITIES ------------------------------------------------------------------------------- PG&E Corp. 3.1% ELECTRIC UTILITIES ------------------------------------------------------------------------------- MANAGER'S DISCUSSION In general, investments in networks and other infrastructure projects drove operating performance for many of the Fund's utilities holdings during the 12-month reporting period. As we have pointed out in past reports, many utilities companies continued to exit non-core diversified businesses to strengthen their balance sheets and refocus on their core regulated businesses. Two significant Fund holdings, Alliant Energy (+27%) and Northeast Utilities (+21%), benefited from company decisions to exit non-core operations and invest in regional infrastructure opportunities. Alliant Energy regained some investor confidence by completing the sale of non-core divisions operating in China and Brazil and using a portion of the proceeds to repay corporate debt. With improved earnings and financial health, Alliant also raised its dividend 9.5% during the year under review. In its core utility businesses in Wisconsin and Iowa, Alliant is finding increased investment opportunities. As part of our investment strategy, we look for utilities with significant opportunities for investment in their own service territories because we think the companies' managers know these areas best. We held Northeast Utilities shares because the company has spent a significant amount of capital improving the electric transmission grid in Connecticut. During the reporting period, Northeast also announced its intention to divest its non-core competitive businesses. According to our analysis, this action means management is focused on the regulated business opportunity. Although a relatively small component of the total portfolio, the Fund's telecommunications holdings performed well during the year under review. 6 Earnings stabilized for AT&T and Verizon, which rose 43% and 19% in value during the year under review. Holdings that detracted from the Fund's 12-month performance included American Electric Power (-5%) and Edison International (-10%). We continued to like these two holdings, but recognize their high reliance on coal as fuel for generating electricity. With increased attention over the past few years on carbon dioxide emissions and the effect on global warming, it is possible that investors have shied away from coal-burning utilities. We do support the industry's efforts to invest in emission-control equipment at generating plants to reduce the amount of byproducts released into the atmosphere. Because of carbon dioxide concerns, we also are positive toward the nuclear power industry, and maintain significant stakes in Exelon and Entergy, the two largest U.S. nuclear plant operators. 6. The Fund's telecommunication holdings are in diversified telecommunication services in the SOI. 52 | Annual Report Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 53 Performance Summary as of 9/30/06 FRANKLIN UTILITIES 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: FKUTX) CHANGE 9/30/06 9/30/05 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$0.30 $12.89 $12.59 ----------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ----------------------------------------------------------------------------- Dividend Income $0.4123 ----------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 ----------------------------------------------------------------------------- TOTAL $0.5037 ----------------------------------------------------------------------------- CLASS B (SYMBOL: FRUBX) CHANGE 9/30/06 9/30/05 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$0.31 $12.88 $12.57 ----------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ----------------------------------------------------------------------------- Dividend Income $0.3503 ----------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 ----------------------------------------------------------------------------- TOTAL $0.4417 ----------------------------------------------------------------------------- CLASS C (SYMBOL: FRUSX) CHANGE 9/30/06 9/30/05 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$0.30 $12.85 $12.55 ----------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ----------------------------------------------------------------------------- Dividend Income $0.3521 ----------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 ----------------------------------------------------------------------------- TOTAL $0.4435 ----------------------------------------------------------------------------- CLASS R (SYMBOL: FRURX) CHANGE 9/30/06 9/30/05 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$0.29 $12.86 $12.57 ----------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ----------------------------------------------------------------------------- Dividend Income $0.3733 ----------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 ----------------------------------------------------------------------------- TOTAL $0.4647 ----------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 9/30/06 9/30/05 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$0.31 $12.95 $12.64 ----------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-9/30/06) ----------------------------------------------------------------------------- Dividend Income $0.4274 ----------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 ----------------------------------------------------------------------------- TOTAL $0.5188 ----------------------------------------------------------------------------- 54 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% 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 1 +6.69% +68.53% +154.42% --------------------------------------------------------------------------------------- Average Annual Total Return 2 +2.15% +10.05% +9.31% --------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,215 $16,144 $24,365 --------------------------------------------------------------------------------------- Distribution Rate 4 3.00% --------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.91% --------------------------------------------------------------------------------------- CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) --------------------------------------------------------------------------------------- Cumulative Total Return 1 +6.25% +64.50% +74.15% --------------------------------------------------------------------------------------- Average Annual Total Return 2 +2.25% +10.20% +7.42% --------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,225 $16,250 $17,415 --------------------------------------------------------------------------------------- Distribution Rate 4 2.62% --------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.54% --------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR --------------------------------------------------------------------------------------- Cumulative Total Return 1 +6.19% +64.36% +141.93% --------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.19% +10.45% +9.24% --------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,519 $16,436 $24,193 --------------------------------------------------------------------------------------- Distribution Rate 4 2.63% --------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.54% --------------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) --------------------------------------------------------------------------------------- Cumulative Total Return 1 +6.29% +63.73% +59.46% --------------------------------------------------------------------------------------- Average Annual Total Return 2 +6.29% +17.86% +10.34% --------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,629 $16,373 $15,946 --------------------------------------------------------------------------------------- Distribution Rate 4 2.79% --------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.69% --------------------------------------------------------------------------------------- ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR --------------------------------------------------------------------------------------- Cumulative Total Return 1 +6.88% +69.84% +160.89% --------------------------------------------------------------------------------------- Average Annual Total Return 2 +6.88% +11.18% +10.06% --------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,688 $16,984 $26,089 --------------------------------------------------------------------------------------- Distribution Rate 4 3.17% --------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 3.18% ---------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 55 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 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 9/30/06 --------------------------------------- 1-Year +2.15% --------------------------------------- 5-Year +10.05% --------------------------------------- 10-Year +9.31% --------------------------------------- CLASS A (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN S&P 500 UTILITIES UTILITIES DATE FUND S&P 500 7 INDEX 7 10/1/1996 $9,577 $10,000 $10,000 10/31/1996 $9,892 $10,276 $10,500 11/30/1996 $10,030 $11,052 $10,712 12/31/1996 $10,029 $10,833 $10,642 1/31/1997 $10,081 $11,509 $10,698 2/28/1997 $10,165 $11,600 $10,621 3/31/1997 $9,881 $11,124 $10,277 4/30/1997 $9,807 $11,787 $10,103 5/31/1997 $10,113 $12,504 $10,551 6/30/1997 $10,446 $13,064 $10,869 7/31/1997 $10,692 $14,103 $11,107 8/31/1997 $10,457 $13,314 $10,897 9/30/1997 $10,891 $14,043 $11,361 10/31/1997 $10,945 $13,574 $11,469 11/30/1997 $11,672 $14,202 $12,331 12/31/1997 $12,527 $14,446 $13,266 1/31/1998 $12,043 $14,605 $12,727 2/28/1998 $12,234 $15,658 $13,158 3/31/1998 $12,998 $16,459 $14,015 4/30/1998 $12,531 $16,625 $13,691 5/31/1998 $12,372 $16,339 $13,641 6/30/1998 $12,669 $17,003 $14,162 7/31/1998 $12,208 $16,822 $13,446 8/31/1998 $12,623 $14,392 $13,761 9/30/1998 $13,255 $15,314 $14,851 10/31/1998 $13,010 $16,559 $14,566 11/30/1998 $13,150 $17,562 $14,782 12/31/1998 $13,475 $18,574 $15,234 1/31/1999 $12,758 $19,350 $14,567 2/28/1999 $12,150 $18,749 $14,012 3/31/1999 $11,942 $19,499 $13,790 4/30/1999 $12,694 $20,254 $14,970 5/31/1999 $13,273 $19,776 $15,916 6/30/1999 $12,802 $20,873 $15,357 7/31/1999 $12,615 $20,222 $15,169 8/31/1999 $12,590 $20,122 $15,325 9/30/1999 $12,123 $19,571 $14,588 10/31/1999 $12,338 $20,809 $14,798 11/30/1999 $11,617 $21,232 $13,700 12/31/1999 $11,453 $22,482 $13,835 1/31/2000 $12,107 $21,352 $15,336 2/29/2000 $11,213 $20,948 $14,390 3/31/2000 $11,595 $22,996 $14,869 4/30/2000 $12,284 $22,305 $16,026 5/31/2000 $12,446 $21,848 $16,727 6/30/2000 $11,887 $22,387 $15,732 7/31/2000 $12,380 $22,037 $16,847 8/31/2000 $13,693 $23,405 $19,153 9/30/2000 $15,065 $22,170 $20,912 10/31/2000 $14,995 $22,076 $20,106 11/30/2000 $15,535 $20,337 $19,876 12/31/2000 $16,220 $20,437 $21,747 1/31/2001 $14,554 $21,161 $19,634 2/28/2001 $15,408 $19,233 $20,347 3/31/2001 $15,608 $18,015 $20,211 4/30/2001 $16,258 $19,414 $21,387 5/31/2001 $16,343 $19,544 $20,705 6/30/2001 $15,519 $19,069 $19,055 7/31/2001 $14,977 $18,881 $18,176 8/31/2001 $15,177 $17,700 $17,682 9/30/2001 $14,457 $16,271 $15,635 10/31/2001 $14,472 $16,581 $15,579 11/30/2001 $14,342 $17,853 $14,742 12/31/2001 $14,908 $18,010 $15,127 1/31/2002 $14,724 $17,747 $14,256 2/28/2002 $14,678 $17,405 $13,942 3/31/2002 $15,516 $18,059 $15,639 4/30/2002 $15,408 $16,965 $15,348 5/31/2002 $15,036 $16,840 $13,986 6/30/2002 $14,368 $15,641 $12,992 7/31/2002 $13,128 $14,422 $11,176 8/31/2002 $13,646 $14,517 $11,596 9/30/2002 $12,652 $12,940 $10,098 10/31/2002 $12,652 $14,078 $9,914 11/30/2002 $12,906 $14,906 $10,176 12/31/2002 $13,346 $14,031 $10,590 1/31/2003 $12,798 $13,664 $10,266 2/28/2003 $12,443 $13,459 $9,779 3/31/2003 $12,887 $13,588 $10,258 4/30/2003 $13,590 $14,708 $11,146 5/31/2003 $14,784 $15,482 $12,309 6/30/2003 $14,834 $15,680 $12,448 7/31/2003 $14,156 $15,956 $11,636 8/31/2003 $14,173 $16,267 $11,858 9/30/2003 $14,724 $16,095 $12,386 10/31/2003 $14,992 $17,005 $12,517 11/30/2003 $15,143 $17,154 $12,530 12/31/2003 $15,922 $18,053 $13,371 1/31/2004 $16,192 $18,384 $13,654 2/29/2004 $16,615 $18,640 $13,922 3/31/2004 $16,735 $18,359 $14,060 4/30/2004 $16,239 $18,071 $13,543 5/31/2004 $16,427 $18,318 $13,668 6/30/2004 $16,689 $18,674 $13,879 7/31/2004 $16,861 $18,056 $14,107 8/31/2004 $17,535 $18,129 $14,686 9/30/2004 $17,728 $18,325 $14,813 10/31/2004 $18,461 $18,605 $15,536 11/30/2004 $18,985 $19,358 $16,191 12/31/2004 $19,606 $20,016 $16,618 1/31/2005 $19,783 $19,528 $16,957 2/28/2005 $19,942 $19,939 $17,323 3/31/2005 $19,996 $19,586 $17,519 4/30/2005 $20,442 $19,215 $18,066 5/31/2005 $20,817 $19,826 $18,096 6/30/2005 $21,735 $19,854 $19,150 7/31/2005 $22,077 $20,592 $19,579 8/31/2005 $22,274 $20,405 $19,754 9/30/2005 $22,837 $20,570 $20,542 10/31/2005 $21,531 $20,227 $19,242 11/30/2005 $21,585 $20,991 $19,202 12/31/2005 $21,713 $20,998 $19,416 1/31/2006 $22,285 $21,554 $19,893 2/28/2006 $22,654 $21,613 $20,115 3/31/2006 $21,930 $21,882 $19,192 4/30/2006 $22,172 $22,175 $19,496 5/31/2006 $22,433 $21,538 $19,806 6/30/2006 $22,920 $21,566 $20,284 7/31/2006 $23,952 $21,699 $21,280 8/31/2006 $24,571 $22,215 $21,885 9/30/2006 $24,365 $22,787 $21,522 AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------ CLASS B 9/30/06 ------------------------------------------------ 1-Year +2.25% ------------------------------------------------ 5-Year +10.20% ------------------------------------------------ Since Inception (1/1/99) +7.42% ------------------------------------------------ CLASS B (1/1/99-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN S&P 500 UTILITIES UTILITIES FUND S&P 500 7 INDEX 7 1/1/1999 $10,000 $10,000 $10,000 1/31/1999 $9,468 $10,418 $9,562 2/28/1999 $9,016 $10,094 $9,198 3/31/1999 $8,859 $10,498 $9,052 4/30/1999 $9,416 $10,905 $9,827 5/31/1999 $9,845 $10,647 $10,448 6/30/1999 $9,487 $11,238 $10,081 7/31/1999 $9,339 $10,887 $9,958 8/31/1999 $9,321 $10,834 $10,060 9/30/1999 $8,964 $10,537 $9,576 10/31/1999 $9,133 $11,203 $9,714 11/30/1999 $8,600 $11,431 $8,993 12/31/1999 $8,479 $12,104 $9,082 1/31/2000 $8,961 $11,496 $10,067 2/29/2000 $8,282 $11,279 $9,446 3/31/2000 $8,572 $12,381 $9,760 4/30/2000 $9,071 $12,009 $10,520 5/31/2000 $9,190 $11,763 $10,981 6/30/2000 $8,768 $12,053 $10,327 7/31/2000 $9,131 $11,865 $11,059 8/31/2000 $10,088 $12,601 $12,573 9/30/2000 $11,097 $11,936 $13,727 10/31/2000 $11,035 $11,886 $13,199 11/30/2000 $11,433 $10,949 $13,047 12/31/2000 $11,932 $11,003 $14,276 1/31/2001 $10,708 $11,393 $12,888 2/28/2001 $11,325 $10,355 $13,357 3/31/2001 $11,468 $9,699 $13,267 4/30/2001 $11,936 $10,453 $14,039 5/31/2001 $11,998 $10,523 $13,591 6/30/2001 $11,390 $10,267 $12,508 7/31/2001 $10,982 $10,166 $11,932 8/31/2001 $11,128 $9,530 $11,607 9/30/2001 $10,588 $8,760 $10,263 10/31/2001 $10,599 $8,927 $10,227 11/30/2001 $10,504 $9,612 $9,677 12/31/2001 $10,916 $9,696 $9,930 1/31/2002 $10,770 $9,555 $9,358 2/28/2002 $10,737 $9,371 $9,152 3/31/2002 $11,336 $9,723 $10,266 4/30/2002 $11,257 $9,134 $10,075 5/31/2002 $10,985 $9,067 $9,181 6/30/2002 $10,498 $8,421 $8,529 7/31/2002 $9,570 $7,765 $7,336 8/31/2002 $9,948 $7,816 $7,612 9/30/2002 $9,225 $6,967 $6,629 10/31/2002 $9,225 $7,580 $6,508 11/30/2002 $9,410 $8,025 $6,680 12/31/2002 $9,719 $7,554 $6,952 1/31/2003 $9,320 $7,357 $6,739 2/28/2003 $9,062 $7,246 $6,420 3/31/2003 $9,375 $7,316 $6,734 4/30/2003 $9,875 $7,919 $7,317 5/31/2003 $10,743 $8,335 $8,080 6/30/2003 $10,782 $8,442 $8,172 7/31/2003 $10,289 $8,591 $7,638 8/31/2003 $10,289 $8,758 $7,784 9/30/2003 $10,690 $8,665 $8,131 10/31/2003 $10,873 $9,155 $8,217 11/30/2003 $10,982 $9,236 $8,225 12/31/2003 $11,533 $9,720 $8,777 1/31/2004 $11,730 $9,898 $8,963 2/29/2004 $12,036 $10,036 $9,139 3/31/2004 $12,122 $9,884 $9,230 4/30/2004 $11,750 $9,729 $8,890 5/31/2004 $11,874 $9,863 $8,972 6/30/2004 $12,061 $10,054 $9,111 7/31/2004 $12,186 $9,722 $9,261 8/31/2004 $12,674 $9,761 $9,641 9/30/2004 $12,798 $9,866 $9,724 10/31/2004 $13,327 $10,017 $10,198 11/30/2004 $13,693 $10,422 $10,628 12/31/2004 $14,146 $10,777 $10,908 1/31/2005 $14,261 $10,514 $11,131 2/28/2005 $14,375 $10,735 $11,371 3/31/2005 $14,408 $10,545 $11,500 4/30/2005 $14,716 $10,345 $11,860 5/31/2005 $14,973 $10,674 $11,879 6/30/2005 $15,635 $10,690 $12,571 7/31/2005 $15,881 $11,087 $12,853 8/31/2005 $16,010 $10,986 $12,967 9/30/2005 $16,395 $11,075 $13,484 10/31/2005 $15,469 $10,890 $12,631 11/30/2005 $15,495 $11,301 $12,605 12/31/2005 $15,580 $11,306 $12,746 1/31/2006 $15,991 $11,605 $13,059 2/28/2006 $16,243 $11,636 $13,204 3/31/2006 $15,717 $11,781 $12,598 4/30/2006 $15,890 $11,939 $12,798 5/31/2006 $16,063 $11,596 $13,002 6/30/2006 $16,393 $11,611 $13,315 7/31/2006 $17,132 $11,683 $13,969 8/31/2006 $17,575 $11,960 $14,366 9/30/2006 $17,415 $12,268 $14,128 56 | Annual Report Performance Summary (CONTINUED) CLASS C (10/1/96-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN S&P 500 UTILITIES UTILITIES DATE FUND S&P 500 7 INDEX 7 10/1/1996 $10,000 $10,000 $10,000 10/31/1996 $10,319 $10,276 $10,500 11/30/1996 $10,463 $11,052 $10,712 12/31/1996 $10,460 $10,833 $10,642 1/31/1997 $10,514 $11,509 $10,698 2/28/1997 $10,590 $11,600 $10,621 3/31/1997 $10,284 $11,124 $10,277 4/30/1997 $10,207 $11,787 $10,103 5/31/1997 $10,515 $12,504 $10,551 6/30/1997 $10,860 $13,064 $10,869 7/31/1997 $11,116 $14,103 $11,107 8/31/1997 $10,860 $13,314 $10,897 9/30/1997 $11,306 $14,043 $11,361 10/31/1997 $11,363 $13,574 $11,469 11/30/1997 $12,107 $14,202 $12,331 12/31/1997 $12,993 $14,446 $13,266 1/31/1998 $12,490 $14,605 $12,727 2/28/1998 $12,677 $15,658 $13,158 3/31/1998 $13,464 $16,459 $14,015 4/30/1998 $12,980 $16,625 $13,691 5/31/1998 $12,803 $16,339 $13,641 6/30/1998 $13,106 $17,003 $14,162 7/31/1998 $12,629 $16,822 $13,446 8/31/1998 $13,047 $14,392 $13,761 9/30/1998 $13,708 $15,314 $14,851 10/31/1998 $13,442 $16,559 $14,566 11/30/1998 $13,575 $17,562 $14,782 12/31/1998 $13,907 $18,574 $15,234 1/31/1999 $13,166 $19,350 $14,567 2/28/1999 $12,538 $18,749 $14,012 3/31/1999 $12,322 $19,499 $13,790 4/30/1999 $13,085 $20,254 $14,970 5/31/1999 $13,682 $19,776 $15,916 6/30/1999 $13,181 $20,873 $15,357 7/31/1999 $12,976 $20,222 $15,169 8/31/1999 $12,950 $20,122 $15,325 9/30/1999 $12,465 $19,571 $14,588 10/31/1999 $12,686 $20,809 $14,798 11/30/1999 $11,932 $21,232 $13,700 12/31/1999 $11,759 $22,482 $13,835 1/31/2000 $12,431 $21,352 $15,336 2/29/2000 $11,499 $20,948 $14,390 3/31/2000 $11,902 $22,996 $14,869 4/30/2000 $12,595 $22,305 $16,026 5/31/2000 $12,762 $21,848 $16,727 6/30/2000 $12,173 $22,387 $15,732 7/31/2000 $12,678 $22,037 $16,847 8/31/2000 $14,011 $23,405 $19,153 9/30/2000 $15,413 $22,170 $20,912 10/31/2000 $15,328 $22,076 $20,106 11/30/2000 $15,881 $20,337 $19,876 12/31/2000 $16,575 $20,437 $21,747 1/31/2001 $14,871 $21,161 $19,634 2/28/2001 $15,730 $19,233 $20,347 3/31/2001 $15,930 $18,015 $20,211 4/30/2001 $16,580 $19,414 $21,387 5/31/2001 $16,667 $19,544 $20,705 6/30/2001 $15,821 $19,069 $19,055 7/31/2001 $15,252 $18,881 $18,176 8/31/2001 $15,456 $17,700 $17,682 9/30/2001 $14,720 $16,271 $15,635 10/31/2001 $14,735 $16,581 $15,579 11/30/2001 $14,587 $17,853 $14,742 12/31/2001 $15,160 $18,010 $15,127 1/31/2002 $14,973 $17,747 $14,256 2/28/2002 $14,926 $17,405 $13,942 3/31/2002 $15,760 $18,059 $15,639 4/30/2002 $15,634 $16,965 $15,348 5/31/2002 $15,255 $16,840 $13,986 6/30/2002 $14,577 $15,641 $12,992 7/31/2002 $13,302 $14,422 $11,176 8/31/2002 $13,828 $14,517 $11,596 9/30/2002 $12,821 $12,940 $10,098 10/31/2002 $12,805 $14,078 $9,914 11/30/2002 $13,079 $14,906 $10,176 12/31/2002 $13,509 $14,031 $10,590 1/31/2003 $12,954 $13,664 $10,266 2/28/2003 $12,594 $13,459 $9,779 3/31/2003 $13,032 $13,588 $10,258 4/30/2003 $13,727 $14,708 $11,146 5/31/2003 $14,936 $15,482 $12,309 6/30/2003 $14,975 $15,680 $12,448 7/31/2003 $14,289 $15,956 $11,636 8/31/2003 $14,306 $16,267 $11,858 9/30/2003 $14,844 $16,095 $12,386 10/31/2003 $15,098 $17,005 $12,517 11/30/2003 $15,267 $17,154 $12,530 12/31/2003 $16,017 $18,053 $13,371 1/31/2004 $16,291 $18,384 $13,654 2/29/2004 $16,717 $18,640 $13,922 3/31/2004 $16,837 $18,359 $14,060 4/30/2004 $16,337 $18,071 $13,543 5/31/2004 $16,492 $18,318 $13,668 6/30/2004 $16,752 $18,674 $13,879 7/31/2004 $16,926 $18,056 $14,107 8/31/2004 $17,605 $18,129 $14,686 9/30/2004 $17,777 $18,325 $14,813 10/31/2004 $18,514 $18,605 $15,536 11/30/2004 $19,023 $19,358 $16,191 12/31/2004 $19,654 $20,016 $16,618 1/31/2005 $19,813 $19,528 $16,957 2/28/2005 $19,973 $19,939 $17,323 3/31/2005 $20,018 $19,586 $17,519 4/30/2005 $20,447 $19,215 $18,066 5/31/2005 $20,805 $19,826 $18,096 6/30/2005 $21,725 $19,854 $19,150 7/31/2005 $22,050 $20,592 $19,579 8/31/2005 $22,248 $20,405 $19,754 9/30/2005 $22,784 $20,570 $20,542 10/31/2005 $21,477 $20,227 $19,242 11/30/2005 $21,531 $20,991 $19,202 12/31/2005 $21,652 $20,998 $19,416 1/31/2006 $22,205 $21,554 $19,893 2/28/2006 $22,574 $21,613 $20,115 3/31/2006 $21,842 $21,882 $19,192 4/30/2006 $22,083 $22,175 $19,496 5/31/2006 $22,306 $21,538 $19,806 6/30/2006 $22,785 $21,566 $20,284 7/31/2006 $23,814 $21,699 $21,280 8/31/2006 $24,412 $22,215 $21,885 9/30/2006 $24,193 $22,787 $21,522 AVERAGE ANNUAL TOTAL RETURN --------------------------------------------- CLASS C 9/30/06 --------------------------------------------- 1-Year +5.19% --------------------------------------------- 5-Year +10.45% --------------------------------------------- 10-Year +9.24% --------------------------------------------- CLASS R (1/1/02-9/30/06) [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN S&P 500 UTILITIES UTILITIES DATE FUND S&P 500 7 INDEX 7 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $9,796 $9,854 $9,424 2/28/2002 $9,766 $9,664 $9,216 3/31/2002 $10,304 $10,028 $10,338 4/30/2002 $10,231 $9,420 $10,146 5/31/2002 $9,984 $9,351 $9,245 6/30/2002 $9,543 $8,685 $8,589 7/31/2002 $8,720 $8,008 $7,388 8/31/2002 $9,053 $8,061 $7,666 9/30/2002 $8,399 $7,185 $6,675 10/31/2002 $8,399 $7,817 $6,554 11/30/2002 $8,568 $8,277 $6,727 12/31/2002 $8,852 $7,791 $7,001 1/31/2003 $8,489 $7,587 $6,786 2/28/2003 $8,254 $7,473 $6,465 3/31/2003 $8,546 $7,545 $6,781 4/30/2003 $9,001 $8,167 $7,368 5/31/2003 $9,794 $8,596 $8,137 6/30/2003 $9,819 $8,706 $8,229 7/31/2003 $9,369 $8,860 $7,692 8/31/2003 $9,380 $9,032 $7,839 9/30/2003 $9,739 $8,937 $8,188 10/31/2003 $9,917 $9,442 $8,275 11/30/2003 $10,017 $9,525 $8,283 12/31/2003 $10,524 $10,024 $8,839 1/31/2004 $10,692 $10,208 $9,026 2/29/2004 $10,971 $10,350 $9,203 3/31/2004 $11,053 $10,194 $9,295 4/30/2004 $10,725 $10,034 $8,952 5/31/2004 $10,838 $10,171 $9,035 6/30/2004 $11,013 $10,369 $9,175 7/31/2004 $11,127 $10,026 $9,326 8/31/2004 $11,572 $10,066 $9,708 9/30/2004 $11,690 $10,175 $9,792 10/31/2004 $12,174 $10,331 $10,270 11/30/2004 $12,508 $10,749 $10,703 12/31/2004 $12,922 $11,114 $10,985 1/31/2005 $13,028 $10,843 $11,209 2/28/2005 $13,133 $11,071 $11,451 3/31/2005 $13,163 $10,876 $11,581 4/30/2005 $13,458 $10,669 $11,943 5/31/2005 $13,693 $11,009 $11,962 6/30/2005 $14,300 $11,024 $12,659 7/31/2005 $14,513 $11,434 $12,943 8/31/2005 $14,644 $11,330 $13,058 9/30/2005 $15,003 $11,422 $13,579 10/31/2005 $14,144 $11,231 $12,720 11/30/2005 $14,168 $11,655 $12,694 12/31/2005 $14,254 $11,660 $12,835 1/31/2006 $14,618 $11,968 $13,150 2/28/2006 $14,861 $12,001 $13,297 3/31/2006 $14,387 $12,150 $12,687 4/30/2006 $14,545 $12,313 $12,888 5/31/2006 $14,704 $11,959 $13,093 6/30/2006 $15,012 $11,975 $13,408 7/31/2006 $15,690 $12,049 $14,067 8/31/2006 $16,084 $12,335 $14,467 9/30/2006 $15,946 $12,653 $14,227 AVERAGE ANNUAL TOTAL RETURN -------------------------------------------- CLASS R 9/30/06 -------------------------------------------- 1-Year +6.29% -------------------------------------------- 3-Year +17.86% -------------------------------------------- Since Inception (1/1/02) +10.34% -------------------------------------------- Annual Report | 57 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN --------------------------------------------------- ADVISOR CLASS 6 9/30/06 --------------------------------------------------- 1-Year +6.88% --------------------------------------------------- 5-Year +11.18% --------------------------------------------------- 10-Year +10.06% --------------------------------------------------- ADVISOR CLASS (10/1/96-9/30/06) 6 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] FRANKLIN S&P 500 UTILITIES UTILITIES DATE FUND S&P 500 7 INDEX 7 10/1/1996 $10,000 $10,000 $10,000 10/31/1996 $10,329 $10,276 $10,500 11/30/1996 $10,473 $11,052 $10,712 12/31/1996 $10,473 $10,833 $10,642 1/31/1997 $10,615 $11,509 $10,698 2/28/1997 $10,703 $11,600 $10,621 3/31/1997 $10,408 $11,124 $10,277 4/30/1997 $10,330 $11,787 $10,103 5/31/1997 $10,652 $12,504 $10,551 6/30/1997 $11,007 $13,064 $10,869 7/31/1997 $11,266 $14,103 $11,107 8/31/1997 $11,007 $13,314 $10,897 9/30/1997 $11,479 $14,043 $11,361 10/31/1997 $11,525 $13,574 $11,469 11/30/1997 $12,290 $14,202 $12,331 12/31/1997 $13,208 $14,446 $13,266 1/31/1998 $12,698 $14,605 $12,727 2/28/1998 $12,899 $15,658 $13,158 3/31/1998 $13,710 $16,459 $14,015 4/30/1998 $13,229 $16,625 $13,691 5/31/1998 $13,049 $16,339 $13,641 6/30/1998 $13,367 $17,003 $14,162 7/31/1998 $12,881 $16,822 $13,446 8/31/1998 $13,307 $14,392 $13,761 9/30/1998 $14,027 $15,314 $14,851 10/31/1998 $13,769 $16,559 $14,566 11/30/1998 $13,916 $17,562 $14,782 12/31/1998 $14,252 $18,574 $15,234 1/31/1999 $13,508 $19,350 $14,567 2/28/1999 $12,865 $18,749 $14,012 3/31/1999 $12,650 $19,499 $13,790 4/30/1999 $13,445 $20,254 $14,970 5/31/1999 $14,056 $19,776 $15,916 6/30/1999 $13,563 $20,873 $15,357 7/31/1999 $13,352 $20,222 $15,169 8/31/1999 $13,339 $20,122 $15,325 9/30/1999 $12,837 $19,571 $14,588 10/31/1999 $13,078 $20,809 $14,798 11/30/1999 $12,303 $21,232 $13,700 12/31/1999 $12,148 $22,482 $13,835 1/31/2000 $12,839 $21,352 $15,336 2/29/2000 $11,881 $20,948 $14,390 3/31/2000 $12,302 $22,996 $14,869 4/30/2000 $13,032 $22,305 $16,026 5/31/2000 $13,203 $21,848 $16,727 6/30/2000 $12,602 $22,387 $15,732 7/31/2000 $13,137 $22,037 $16,847 8/31/2000 $14,526 $23,405 $19,153 9/30/2000 $15,982 $22,170 $20,912 10/31/2000 $15,909 $22,076 $20,106 11/30/2000 $16,494 $20,337 $19,876 12/31/2000 $17,209 $20,437 $21,747 1/31/2001 $15,448 $21,161 $19,634 2/28/2001 $16,351 $19,233 $20,347 3/31/2001 $16,568 $18,015 $20,211 4/30/2001 $17,257 $19,414 $21,387 5/31/2001 $17,362 $19,544 $20,705 6/30/2001 $16,480 $19,069 $19,055 7/31/2001 $15,906 $18,881 $18,176 8/31/2001 $16,117 $17,700 $17,682 9/30/2001 $15,361 $16,271 $15,635 10/31/2001 $15,376 $16,581 $15,579 11/30/2001 $15,239 $17,853 $14,742 12/31/2001 $15,844 $18,010 $15,127 1/31/2002 $15,649 $17,747 $14,256 2/28/2002 $15,617 $17,405 $13,942 3/31/2002 $16,494 $18,059 $15,639 4/30/2002 $16,379 $16,965 $15,348 5/31/2002 $16,001 $16,840 $13,986 6/30/2002 $15,282 $15,641 $12,992 7/31/2002 $13,952 $14,422 $11,176 8/31/2002 $14,518 $14,517 $11,596 9/30/2002 $13,468 $12,940 $10,098 10/31/2002 $13,468 $14,078 $9,914 11/30/2002 $13,755 $14,906 $10,176 12/31/2002 $14,209 $14,031 $10,590 1/31/2003 $13,628 $13,664 $10,266 2/28/2003 $13,251 $13,459 $9,779 3/31/2003 $13,727 $13,588 $10,258 4/30/2003 $14,474 $14,708 $11,146 5/31/2003 $15,758 $15,482 $12,309 6/30/2003 $15,816 $15,680 $12,448 7/31/2003 $15,096 $15,956 $11,636 8/31/2003 $15,113 $16,267 $11,858 9/30/2003 $15,705 $16,095 $12,386 10/31/2003 $15,972 $17,005 $12,517 11/30/2003 $16,150 $17,154 $12,530 12/31/2003 $16,964 $18,053 $13,371 1/31/2004 $17,252 $18,384 $13,654 2/29/2004 $17,720 $18,640 $13,922 3/31/2004 $17,853 $18,359 $14,060 4/30/2004 $17,326 $18,071 $13,543 5/31/2004 $17,508 $18,318 $13,668 6/30/2004 $17,791 $18,674 $13,879 7/31/2004 $17,994 $18,056 $14,107 8/31/2004 $18,710 $18,129 $14,686 9/30/2004 $18,922 $18,325 $14,813 10/31/2004 $19,701 $18,605 $15,536 11/30/2004 $20,257 $19,358 $16,191 12/31/2004 $20,932 $20,016 $16,618 1/31/2005 $21,121 $19,528 $16,957 2/28/2005 $21,309 $19,939 $17,323 3/31/2005 $21,355 $19,586 $17,519 4/30/2005 $21,849 $19,215 $18,066 5/31/2005 $22,228 $19,826 $18,096 6/30/2005 $23,233 $19,854 $19,150 7/31/2005 $23,597 $20,592 $19,579 8/31/2005 $23,807 $20,405 $19,754 9/30/2005 $24,409 $20,570 $20,542 10/31/2005 $23,019 $20,227 $19,242 11/30/2005 $23,077 $20,991 $19,202 12/31/2005 $23,222 $20,998 $19,416 1/31/2006 $23,832 $21,554 $19,893 2/28/2006 $24,225 $21,613 $20,115 3/31/2006 $23,462 $21,882 $19,192 4/30/2006 $23,720 $22,175 $19,496 5/31/2006 $23,997 $21,538 $19,806 6/30/2006 $24,526 $21,566 $20,284 7/31/2006 $25,625 $21,699 $21,280 8/31/2006 $26,305 $22,215 $21,885 9/30/2006 $26,089 $22,787 $21,522 ENDNOTES IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES, AND THUS A UTILITIES FUND'S SHARE PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. 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. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Distribution rate is based on an annualization of the respective class's most recent quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 9/30/06. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/06. 6. Effective 1/2/97, 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 1/2/97, 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 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +149.12% and +9.82%. 7. 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 S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500 Index. 58 | Annual Report Your Fund's Expenses FRANKLIN UTILITIES 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 | 59 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 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06 --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,111.00 $3.97 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.31 $3.80 --------------------------------------------------------------------------------------------------------------------------- CLASS B --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,108.30 $6.61 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.33 --------------------------------------------------------------------------------------------------------------------------- CLASS C --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,107.70 $6.55 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.28 --------------------------------------------------------------------------------------------------------------------------- CLASS R --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,108.50 $5.87 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.62 --------------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS --------------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,111.90 $3.18 --------------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.06 $3.04 ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.75%; B: 1.25%; C: 1.24%; R: 1.11%; and Advisor: 0.60%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 60 | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
------------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, CLASS A 2006 2005 2004 2003 2002 ------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76 ------------------------------------------------------------------ Income from investment operations a: Net investment income (loss) b ................. (0.05) (0.01) (0.09) (0.06) 0.03 Net realized and unrealized gains (losses) ..... 0.87 2.98 1.93 4.86 (3.11) ------------------------------------------------------------------ Total from investment operations ................ 0.82 2.97 1.84 4.80 (3.08) ------------------------------------------------------------------ Less distributions from: Net investment income .......................... -- -- -- -- (0.29) Tax return of capital .......................... -- -- -- -- (0.02) ------------------------------------------------------------------ Total distributions ............................. -- -- -- -- (0.31) ------------------------------------------------------------------ Redemption fees ................................. -- d -- d -- d -- -- ------------------------------------------------------------------ Net asset value, end of year .................... $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37 ================================================================== Total return c .................................. 3.28% 13.49% 9.12% 31.23% (16.83)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $590,633 $628,732 $640,120 $558,687 $413,309 Ratios to average net assets: Expenses ....................................... 0.97% e 1.00% e 0.97% 1.04% 1.00% Net investment income (loss) ................... (0.20)% (0.02)% (0.41)% (0.40)% 0.13% Portfolio turnover rate ......................... 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 61 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
----------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2006 2005 2004 2003 2002 ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57 ----------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b .................... (0.23) (0.18) (0.25) (0.25) (0.12) Net realized and unrealized gains (losses) ........ 0.83 2.90 1.89 4.84 (3.08) ----------------------------------------------------------------- Total from investment operations ................... 0.60 2.72 1.64 4.59 (3.20) ----------------------------------------------------------------- Less distributions from: Net investment income ............................. -- -- -- -- (0.16) Tax return of capital ............................. -- -- -- -- (0.01) ----------------------------------------------------------------- Total distributions ................................ -- -- -- -- (0.17) ----------------------------------------------------------------- Redemption fees .................................... -- d -- d -- d -- -- ----------------------------------------------------------------- Net asset value, end of year ....................... $ 24.75 $ 24.15 $ 21.43 $ 19.79 $15.20 ================================================================= Total return c ..................................... 2.48% 12.69% 8.29% 30.20% (17.51)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $18,718 $19,497 $18,824 $10,406 $5,066 Ratios to average net assets: Expenses .......................................... 1.72% e 1.74% e 1.72% 1.79% 1.75% Net investment income (loss) ...................... (0.95)% (0.76)% (1.16)% (1.15)% (0.62)% Portfolio turnover rate ............................ 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. 62 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
----------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2006 2005 2004 2003 2002 ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34 ----------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b .................... (0.23) (0.17) (0.25) (0.25) (0.11) Net realized and unrealized gains (losses) ........ 0.83 2.86 1.87 4.80 (3.05) ----------------------------------------------------------------- Total from investment operations ................... 0.60 2.69 1.62 4.55 (3.16) ----------------------------------------------------------------- Less distributions from: Net investment income ............................. -- -- -- -- (0.13) Tax return of capital ............................. -- -- -- -- (0.01) ----------------------------------------------------------------- Total distributions ................................ -- -- -- -- (0.14) ----------------------------------------------------------------- Redemption fees .................................... -- d -- d -- d -- -- ----------------------------------------------------------------- Net asset value, end of year ....................... $ 24.50 $ 23.90 $ 21.21 $ 19.59 $15.04 ================================================================= Total return c ..................................... 2.51% 12.68% 8.27% 30.25% (17.48)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $69,069 $73,587 $75,642 $66,952 $51,809 Ratios to average net assets: Expenses .......................................... 1.71% e 1.74% e 1.72% 1.79% 1.74% Net investment income (loss) ...................... (0.94)% (0.76)% (1.16)% (1.15)% (0.61)% Portfolio turnover rate ............................ 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 63 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
-------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE -------------------------------------------------------------------------------------------- COMMON STOCKS 99.8% AIR FREIGHT/COURIERS 3.5% C.H. Robinson Worldwide Inc. .................. United States 300,000 $13,374,000 United Parcel Service Inc., B ................. United States 140,000 10,071,600 ----------- 23,445,600 ----------- BIOTECHNOLOGY 9.4% a Amgen Inc. .................................... United States 200,000 14,306,000 a Biogen Idec Inc. .............................. United States 100,000 4,468,000 a Celgene Corp. ................................. United States 100,000 4,330,000 a Genentech Inc. ................................ United States 275,000 22,742,500 a Gilead Sciences Inc. .......................... United States 150,000 10,305,000 a Invitrogen Corp. .............................. United States 125,000 7,926,250 ----------- 64,077,750 ----------- CABLE/SATELLITE TELEVISION 0.8% a Comcast Corp., A .............................. United States 150,000 5,521,500 ----------- CASINOS/GAMING 1.5% International Game Technology ................. United States 250,000 10,375,000 ----------- CHEMICALS: SPECIALTY 1.4% Sigma-Aldrich Corp. ........................... United States 125,000 9,458,750 ----------- COMPUTER COMMUNICATIONS 1.7% a Cisco Systems Inc. ............................ United States 500,000 11,500,000 ----------- COMPUTER PROCESSING HARDWARE 4.4% a Apple Computer Inc. ........................... United States 210,000 16,176,300 Hewlett-Packard Co. ........................... United States 380,000 13,942,200 ----------- 30,118,500 ----------- DATA PROCESSING SERVICES 1.6% Paychex Inc. .................................. United States 300,000 11,055,000 ----------- ELECTRONIC EQUIPMENT/INSTRUMENTS 3.4% a Agilent Technologies Inc. ..................... United States 300,000 9,807,000 a Dolby Laboratories Inc., A .................... United States 100,000 1,985,000 Rockwell Automation Inc. ...................... United States 150,000 8,715,000 a SunPower Corp., A ............................. United States 100,000 2,774,000 ----------- 23,281,000 ----------- ELECTRONIC PRODUCTION EQUIPMENT 4.0% Applied Materials Inc. ........................ United States 350,000 6,205,500 KLA-Tencor Corp. .............................. United States 200,000 8,894,000 a Lam Research Corp. ............................ United States 150,000 6,799,500 a Varian Semiconductor Equipment Associates Inc. United States 150,000 5,505,000 ----------- 27,404,000 ----------- ELECTRONICS/APPLIANCE STORES 1.5% Best Buy Co. Inc. ............................. United States 187,500 10,042,500 ----------- ELECTRONICS/APPLIANCES 0.4% Sony Corp., ADR ............................... Japan 60,000 2,421,600 -----------
64 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
-------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE -------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) FINANCIAL PUBLISHING/SERVICES 1.5% Moody's Corp. ................................. United States 150,000 $ 9,807,000 ----------- FOOD RETAIL 0.4% Whole Foods Market Inc. ....................... United States 40,000 2,377,200 ----------- INFORMATION TECHNOLOGY SERVICES 4.0% a Amdocs Ltd. ................................... United States 200,000 7,920,000 a Cognizant Technology Solutions Corp., A ....... United States 140,000 10,368,400 Infosys Technologies Ltd., ADR ................ India 180,000 8,591,400 ----------- 26,879,800 ----------- INTERNET SOFTWARE/SERVICES 5.0% a Akamai Technologies Inc. ...................... United States 75,000 3,749,250 a Google Inc., A ................................ United States 50,000 20,095,000 a Yahoo! Inc. ................................... United States 400,000 10,112,000 ----------- 33,956,250 ----------- INVESTMENT BANKS/BROKERS 0.7% The Goldman Sachs Group Inc. .................. United States 20,000 3,383,400 a Nasdaq Stock Market Inc. ...................... United States 40,000 1,209,600 ----------- 4,593,000 ----------- MAJOR PHARMACEUTICALS 2.7% Johnson & Johnson ............................. United States 150,000 9,741,000 Pfizer Inc. ................................... United States 300,000 8,508,000 ----------- 18,249,000 ----------- MANAGED HEALTH CARE 1.7% Caremark Rx Inc. .............................. United States 200,000 11,334,000 ----------- MEDICAL SPECIALTIES 8.7% Alcon Inc. .................................... Switzerland 100,000 11,450,000 Medtronic Inc. ................................ United States 275,000 12,771,000 a Mindray Medical International Ltd., ADR ....... China 30,000 500,700 Stryker Corp. ................................. United States 200,000 9,918,000 a Varian Medical Systems Inc. ................... United States 165,000 8,809,350 a Waters Corp. .................................. United States 200,000 9,056,000 a Zimmer Holdings Inc. .......................... United States 100,000 6,750,000 ----------- 59,255,050 ----------- MEDICAL/NURSING SERVICES 1.7% a VCA Antech Inc. ............................... United States 325,000 11,719,500 ----------- MISCELLANEOUS COMMERCIAL SERVICES 1.1% Corporate Executive Board Co. ................. United States 85,000 7,642,350 ----------- OILFIELD SERVICES/EQUIPMENT 3.2% a FMC Technologies Inc. ......................... United States 120,000 6,444,000 Halliburton Co. ............................... United States 100,000 2,845,000 Schlumberger Ltd. ............................. United States 200,000 12,406,000 ----------- 21,695,000 -----------
Annual Report | 65 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
-------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE -------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) OTHER CONSUMER SERVICES 0.1% a Shutterfly Inc. ............................... United States 40,000 $ 622,000 ----------- OTHER PHARMACEUTICALS 2.8% Allergan Inc. ................................. United States 80,000 9,008,800 Teva Pharmaceutical Industries Ltd., ADR ...... Israel 300,000 10,227,000 ----------- 19,235,800 ----------- PACKAGED SOFTWARE 9.0% Adobe Systems Inc. ............................ United States 475,000 17,788,750 Autodesk Inc. ................................. United States 200,000 6,956,000 a Commvault Systems Inc. ........................ United States 20,000 360,000 Microsoft Corp. ............................... United States 950,000 25,963,500 a Salesforce.com Inc. ........................... United States 50,000 1,794,000 SAP AG, ADR ................................... Germany 170,000 8,415,000 ----------- 61,277,250 ----------- RECREATIONAL PRODUCTS 2.1% a Electronic Arts Inc. .......................... United States 250,000 13,920,000 ----------- SEMICONDUCTORS 10.3% Analog Devices Inc. ........................... United States 310,000 9,110,900 a Broadcom Corp., A ............................. United States 140,000 4,247,600 Intel Corp. ................................... United States 1,150,000 23,655,500 Linear Technology Corp. ....................... United States 400,000 12,448,000 a Marvell Technology Group Ltd. ................. Bermuda 420,000 8,135,400 Microchip Technology Inc. ..................... United States 210,000 6,808,200 a NVIDIA Corp. .................................. United States 175,000 5,178,250 ----------- 69,583,850 ----------- SERVICES TO THE HEALTH INDUSTRY 2.5% a Cerner Corp. .................................. United States 40,000 1,816,000 Pharmaceutical Product Development Inc. ....... United States 350,000 12,491,500 a WebMD Health Corp., A ......................... United States 85,000 2,918,900 ----------- 17,226,400 ----------- SPECIALTY TELECOMMUNICATIONS 1.1% a American Tower Corp., A ....................... United States 200,000 7,300,000 ----------- TELECOMMUNICATIONS EQUIPMENT 6.0% a Corning Inc. .................................. United States 200,000 4,882,000 Garmin Ltd. ................................... Cayman Islands 80,000 3,902,400 Motorola Inc. ................................. United States 680,750 17,018,750 Nokia Corp., ADR .............................. Finland 315,000 6,202,350 QUALCOMM Inc. ................................. United States 235,000 8,542,250 ----------- 40,547,750 -----------
66 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
-------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE -------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) WIRELESS COMMUNICATIONS 1.6% America Movil SA de CV, L, ADR ...................................... Mexico 220,000 $ 8,661,400 a NII Holdings Inc. ................................................... United States 40,000 2,486,400 ------------- 11,147,800 ------------- TOTAL COMMON STOCKS (COST $417,723,494) ............................. 677,070,200 ------------- SHORT TERM INVESTMENT (COST $4,719,412) 0.7% MONEY MARKET FUND 0.7% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% United States 4,719,412 4,719,412 ------------- TOTAL INVESTMENTS (COST $422,442,906) 100.5% ........................ 681,789,612 OTHER ASSETS, LESS LIABILITIES (0.5)% ............................... (3,370,175) ------------- NET ASSETS 100.0% ................................................... $ 678,419,437 =============
See Selected Portfolio Abbreviations on page 107. a Non-income producing for the twelve months ended September 30, 2006. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. 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. | 67 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
--------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2006 2005 2004 2003 2002 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ......... $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81 --------------------------------------------------------------------------- Income from investment operations a: Net investment income b ................... 0.12 0.13 0.06 0.08 0.07 Net realized and unrealized gains (losses) 4.21 4.20 3.68 4.81 (5.65) --------------------------------------------------------------------------- Total from investment operations ........... 4.33 4.33 3.74 4.89 (5.58) --------------------------------------------------------------------------- Less distributions from: Net investment income ..................... (0.06) (0.08) (0.03) (0.04) (0.16) Net realized gains ........................ -- -- -- -- (0.05) --------------------------------------------------------------------------- Total distributions ........................ (0.06) (0.08) (0.03) (0.04) (0.21) --------------------------------------------------------------------------- Redemption fees ............................ -- d -- d -- d -- -- --------------------------------------------------------------------------- Net asset value, end of year ............... $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02 =========================================================================== Total return c ............................. 12.46% 14.17% 13.92% 22.27% (20.35)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............ $1,695,802 $1,567,675 $1,531,871 $1,433,742 $1,249,745 Ratios to average net assets: Expenses .................................. 0.91% e 0.94% e 0.98% 1.06% 0.96% Net investment income ..................... 0.34% 0.40% 0.20% 0.31% 0.24% Portfolio turnover rate .................... 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges,if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. 68 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2006 2005 2004 2003 2002 ------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46 ------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b ................... (0.15) (0.11) (0.16) (0.11) (0.14) Net realized and unrealized gains (losses) ....... 4.07 4.07 3.61 4.73 (5.57) ------------------------------------------------------------------- Total from investment operations .................. 3.92 3.96 3.45 4.62 (5.71) ------------------------------------------------------------------- Less distributions from net realized gains ........ -- -- -- -- (0.05) ------------------------------------------------------------------- Redemption fees ................................... -- d -- d -- d -- -- ------------------------------------------------------------------- Net asset value, end of year ...................... $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70 =================================================================== Total return c .................................... 11.62% 13.30% 13.11% 21.29% (20.90)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $122,871 $123,926 $121,986 $103,499 $75,141 Ratios to average net assets: Expenses ......................................... 1.67% e 1.69% e 1.73% 1.81% 1.71% Net investment income (loss) ..................... (0.42)% (0.35)% (0.55)% (0.44)% (0.51)% Portfolio turnover rate ........................... 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 69 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
------------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, CLASS C 2006 2005 2004 2003 2002 ------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................. $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24 ------------------------------------------------------------------ Income from investment operations a: Net investment income (loss) b ..................... (0.15) (0.11) (0.16) (0.11) (0.14) Net realized and unrealized gains (losses) ......... 4.04 4.03 3.58 4.69 (5.54) ------------------------------------------------------------------ Total from investment operations .................... 3.89 3.92 3.42 4.58 (5.68) ------------------------------------------------------------------ Less distributions from net realized gains .......... -- -- -- -- (0.05) ------------------------------------------------------------------ Redemption fees ..................................... -- d -- d -- d -- -- ------------------------------------------------------------------ Net asset value, end of year ........................ $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51 ================================================================== Total return c ...................................... 11.60% 13.32% 13.11% 21.29% (20.92)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ..................... $273,512 $270,538 $270,131 $259,169 $232,307 Ratios to average net assets: Expenses ........................................... 1.66% e 1.69% e 1.73% 1.82% 1.70% Net investment income (loss) ....................... (0.41)% (0.35)% (0.55)% (0.45)% (0.51)% Portfolio turnover rate ............................. 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. 70 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
---------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2006 2005 2004 2003 2002 g ---------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 34.59 $ 30.39 $ 26.74 $ 21.98 $ 31.59 ---------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b ...................... 0.02 0.05 (0.02) -- -- Net realized and unrealized gains (losses) .......... 4.19 4.16 3.67 4.81 (9.61) ---------------------------------------------------------------- Total from investment operations ..................... 4.21 4.21 3.65 4.81 (9.61) ---------------------------------------------------------------- Less distributions from net investment income ........ -- d (0.01) -- (0.05) -- ---------------------------------------------------------------- Redemption fees ...................................... -- e -- e -- e -- -- ---------------------------------------------------------------- Net asset value, end of year ......................... $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98 ================================================================ Total return c ....................................... 12.18% 13.87% 13.65% 21.92% (30.42)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $37,804 $27,818 $20,060 $14,755 $ 2,788 Ratios to average net assets: Expenses ............................................ 1.17% f 1.19% f 1.23% 1.31% 1.21% h Net investment income (loss) ........................ 0.08% 0.15% (0.05)% 0.06% 0.02% h Portfolio turnover rate .............................. 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d The fund made an income distribution of $0.001. e Amount rounds to less than $0.01 per share. f Benefit of expense reduction rounds to less than 0.01%. g For the period January 1, 2002 (effective date) to September 30, 2002. h Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 71 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
-------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2006 2005 2004 2003 2002 -------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86 -------------------------------------------------------------------- Income from investment operations a: Net investment income b ........................... 0.22 0.21 0.14 0.14 0.14 Net realized and unrealized gains (losses) ........ 4.21 4.21 3.67 4.82 (5.65) -------------------------------------------------------------------- Total from investment operations ................... 4.43 4.42 3.81 4.96 (5.51) -------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.15) (0.16) (0.09) (0.11) (0.24) Net realized gains ................................ -- -- -- -- (0.05) -------------------------------------------------------------------- Total distributions ................................ (0.15) (0.16) (0.09) (0.11) (0.29) -------------------------------------------------------------------- Redemption fees .................................... -- c -- c -- c -- -- -------------------------------------------------------------------- Net asset value, end of year ....................... $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06 ==================================================================== Total return ....................................... 12.73% 14.45% 14.19% 22.58% (20.14)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $274,603 $221,752 $133,332 $41,216 $27,431 Ratios to average net assets: Expenses .......................................... 0.67% d 0.69% d 0.73% 0.81% 0.71% Net investment income ............................. 0.58% 0.65% 0.45% 0.56% 0.49% Portfolio turnover rate ............................ 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investment of the Fund. b Based on average daily shares outstanding. c Amount rounds to less than $0.01 per share. d Benefit of expense reduction rounds to less than 0.01%. 72 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
-------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE -------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS 99.3% COMMERCIAL SERVICES 2.8% a Dun & Bradstreet Corp. ................. United States 122,000 $ 9,148,780 Equifax Inc. ........................... United States 400,000 14,684,000 Moody's Corp. .......................... United States 488,000 31,905,440 Robert Half International Inc. ......... United States 300,000 10,191,000 ------------- 65,929,220 ------------- CONSUMER DURABLES 2.2% Ford Motor Co. ......................... United States 1,100,000 8,899,000 General Motors Corp. ................... United States 400,000 13,304,000 Harley-Davidson Inc. ................... United States 500,000 31,375,000 ------------- 53,578,000 ------------- CONSUMER NON-DURABLES 2.7% The Hershey Co. ........................ United States 516,400 27,601,580 Tootsie Roll Industries Inc. ........... United States 23,161 678,849 VF Corp. ............................... United States 500,000 36,475,000 ------------- 64,755,429 ------------- CONSUMER SERVICES 4.6% Carnival Corp. ......................... United States 500,000 23,515,000 CBS Corp., A ........................... United States 100,000 2,822,000 CBS Corp., B ........................... United States 50,000 1,408,500 Clear Channel Communications Inc. ...... United States 500,000 14,425,000 a Expedia Inc. ........................... United States 300,100 4,705,568 a Live Nation Inc. ....................... United States 62,500 1,276,250 Time Warner Inc. ....................... United States 1,350,000 24,610,500 a Viacom Inc., A ......................... United States 100,000 3,730,000 a Viacom Inc., B ......................... United States 50,000 1,859,000 The Walt Disney Co. .................... United States 1,000,000 30,910,000 ------------- 109,261,818 ------------- DISTRIBUTION SERVICES 3.0% Cardinal Health Inc. ................... United States 300,000 19,722,000 Genuine Parts Co. ...................... United States 375,400 16,191,002 W.W. Grainger Inc. ..................... United States 550,000 36,861,000 ------------- 72,774,002 ------------- ELECTRONIC TECHNOLOGY 22.5% a Agilent Technologies Inc. .............. United States 400,000 13,076,000 a Apple Computer Inc. .................... United States 1,000,000 77,030,000 The Boeing Co. ......................... United States 1,000,000 78,850,000 a Cisco Systems Inc. ..................... United States 1,350,000 31,050,000 a Dell Inc. .............................. United States 500,000 11,420,000 a Dionex Corp. ........................... United States 250,000 12,735,000 a EMC Corp. .............................. United States 1,000,000 11,980,000 a Entegris Inc. .......................... United States 376,307 4,105,509 a Gateway Inc. ........................... United States 300,000 567,000 General Dynamics Corp. ................. United States 1,000,000 71,670,000 Hewlett-Packard Co. .................... United States 1,116,250 40,955,213
Annual Report | 73 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
----------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE ----------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) ELECTRONIC TECHNOLOGY (CONTINUED) Intel Corp. ............................ United States 800,000 $ 16,456,000 Lockheed Martin Corp. .................. United States 500,000 43,030,000 a Micrel Inc. ............................ United States 25,000 239,750 a Mindspeed Technologies Inc. ............ United States 100,000 173,000 Northrop Grumman Corp. ................. United States 1,000,000 68,070,000 Raytheon Co. ........................... United States 600,000 28,806,000 Rockwell Collins Inc. .................. United States 100,000 5,484,000 a Sun Microsystems Inc. .................. United States 1,600,000 7,952,000 Texas Instruments Inc. ................. United States 515,000 17,123,750 ------------- 540,773,222 ------------- ENERGY MINERALS 1.6% BP PLC, ADR ............................ United Kingdom 295,200 19,359,216 Royal Dutch Shell PLC, A, ADR .......... United Kingdom 280,000 18,508,000 ------------- 37,867,216 ------------- FINANCE 0.2% a ChoicePoint Inc. ....................... United States 160,000 5,728,000 ------------- HEALTH SERVICES 2.1% Caremark Rx Inc. ....................... United States 75,625 4,285,669 IMS Health Inc. ........................ United States 500,000 13,320,000 a Medco Health Solutions Inc. ............ United States 48,240 2,899,706 Quest Diagnostics Inc. ................. United States 500,000 30,580,000 ------------- 51,085,375 ------------- HEALTH TECHNOLOGY 21.6% Abbott Laboratories .................... United States 400,000 19,424,000 a Advanced Medical Optics Inc. ........... United States 88,888 3,515,520 Allergan Inc. .......................... United States 400,000 45,044,000 a Amgen Inc. ............................. United States 932,000 66,665,960 Baxter International Inc. .............. United States 400,000 18,184,000 a Biogen Idec Inc. ....................... United States 400,000 17,872,000 a Edwards Lifesciences Corp. ............. United States 50,000 2,329,500 Eli Lilly and Co. ...................... United States 400,000 22,800,000 a Genentech Inc. ......................... United States 1,000,000 82,700,000 a Hospira Inc. ........................... United States 40,000 1,530,800 Johnson & Johnson ...................... United States 996,000 64,680,240 Merck & Co. Inc. ....................... United States 500,000 20,950,000 a Millipore Corp. ........................ United States 400,000 24,520,000 Pall Corp. ............................. United States 500,000 15,405,000 Pfizer Inc. ............................ United States 2,000,000 56,720,000 a Waters Corp. ........................... United States 500,000 22,640,000 Wyeth .................................. United States 600,000 30,504,000 a Zimmer Holdings Inc. ................... United States 64,000 4,320,000 ------------- 519,805,020 -------------
74 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) PROCESS INDUSTRIES 2.0% Air Products and Chemicals Inc. .................... United States 500,000 $ 33,185,000 Sigma-Aldrich Corp. ................................ United States 200,000 15,134,000 ------------- 48,319,000 ------------- PRODUCER MANUFACTURING 18.9% 3M Co. ............................................. United States 800,000 59,536,000 American Power Conversion Corp. .................... United States 500,000 10,980,000 Avery Dennison Corp. ............................... United States 462,000 27,798,540 Emerson Electric Co. ............................... United States 500,000 41,930,000 Illinois Tool Works Inc. ........................... United States 1,000,000 44,900,000 Ingersoll-Rand Co. Ltd., A ......................... United States 1,002,000 38,055,960 Johnson Controls Inc. .............................. United States 400,000 28,696,000 Molex Inc. ......................................... United States 146,483 5,708,443 Molex Inc., A ...................................... United States 146,483 4,820,756 Teleflex Inc. ...................................... United States 500,000 27,820,000 Textron Inc. ....................................... United States 525,000 45,937,500 a Thomas & Betts Corp. ............................... United States 500,000 23,855,000 Tyco International Ltd. ............................ United States 1,550,052 43,385,955 United Technologies Corp. .......................... United States 800,000 50,680,000 ------------- 454,104,154 ------------- RETAIL TRADE 0.4% a InterActiveCorp .................................... United States 300,100 8,630,876 ------------- TECHNOLOGY SERVICES 8.7% Automatic Data Processing Inc. ..................... United States 800,000 37,872,000 a Computer Sciences Corp. ............................ United States 1,000,000 49,120,000 International Business Machines Corp. .............. United States 560,000 45,886,400 Microsoft Corp. .................................... United States 1,000,000 27,330,000 a Oracle Corp. ....................................... United States 500,000 8,870,000 a Yahoo! Inc. ........................................ United States 1,600,000 40,448,000 ------------- 209,526,400 ------------- TRANSPORTATION 6.0% Air France-KLM, ADR ................................ France 550,000 16,676,000 a Air France-KLM, ADR, wts., 11/05/07 ................ France 500,000 2,030,000 a Alaska Air Group Inc. .............................. United States 500,000 19,020,000 a AMR Corp. .......................................... United States 1,080,000 24,991,200 a British Airways PLC, ADR ........................... United Kingdom 500,000 40,010,000 a Continental Airlines Inc., B ....................... United States 500,000 14,155,000 Southwest Airlines Co. ............................. United States 65,200 1,086,232 Union Pacific Corp. ................................ United States 300,000 26,400,000 ------------- 144,368,432 ------------- TOTAL COMMON STOCKS AND WARRANTS (COST $904,689,198) 2,386,506,164 -------------
Annual Report | 75 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
----------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE ----------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENT (COST $20,082,694) 0.8% MONEY MARKET FUND 0.8% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% United States 20,082,694 $ 20,082,694 ---------------- TOTAL INVESTMENTS (COST $924,771,892) 100.1% ........................ 2,406,588,858 OTHER ASSETS, LESS LIABILITIES (0.1)% ............................... (1,996,200) ---------------- NET ASSETS 100.0% ................................................... $ 2,404,592,658 ================
See Selected Portfolio Abbreviations on page 107. a Non-income producing for the twelve months ended September 30, 2006. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 76 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
---------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.14 0.14 0.12 0.14 0.14 Net realized and unrealized gains (losses) . 0.09 0.10 0.22 0.38 (0.21) ---------------------------------------------------------------------------- Total from investment operations ............ 0.23 0.24 0.34 0.52 (0.07) ---------------------------------------------------------------------------- Less distributions from: Net investment income ...................... (0.15) (0.15) (0.16) (0.16) (0.17) Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02) ---------------------------------------------------------------------------- Total distributions ......................... (0.16) (0.16) (0.17) (0.17) (0.19) ---------------------------------------------------------------------------- Redemption fees ............................. -- d -- d -- d -- -- ---------------------------------------------------------------------------- Net asset value, end of year ................ $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 ============================================================================ Total return c .............................. 9.73% 10.45% 15.50% 28.12% (4.18)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $26,641,398 $21,934,575 $14,743,190 $9,640,156 $6,001,117 Ratios to average net assets: Expenses ................................... 0.64% e 0.65% e 0.68% 0.73% 0.72% Net investment income ...................... 5.61% 5.54% 5.11% 6.63% 6.67% Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 77 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
----------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2006 2005 2004 2003 2002 f ----------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 2.49 $ 2.41 $ 2.24 $ 1.90 $ 2.15 ----------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.12 0.11 0.10 0.12 0.11 Net realized and unrealized gains (losses) . 0.08 0.11 0.22 0.37 (0.21) ----------------------------------------------------------------------------- Total from investment operations ............ 0.20 0.22 0.32 0.49 (0.10) ----------------------------------------------------------------------------- Less distributions from: Net investment income ...................... (0.12) (0.13) (0.14) (0.14) (0.13) Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02) ----------------------------------------------------------------------------- Total distributions ......................... (0.13) (0.14) (0.15) (0.15) (0.15) ----------------------------------------------------------------------------- Redemption fees ............................. -- d -- d -- d -- -- ----------------------------------------------------------------------------- Net asset value, end of year ................ $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90 ============================================================================= Total return c .............................. 8.83% 9.57% 14.59% 26.58% (5.63)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $ 3,743,374 $ 3,922,396 $ 3,486,880 $ 2,083,783 $ 558,580 Ratios to average net assets: Expenses ................................... 1.49% e 1.50% e 1.53% 1.58% 1.57% g Net investment income ...................... 4.76% 4.69% 4.26% 5.78% 6.01% g Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. f For the period November 1, 2001 (effective date) to September 30, 2002. g Annualized. 78 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
----------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B1 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17 ----------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.13 0.12 0.11 0.13 0.13 Net realized and unrealized gains (losses) . 0.08 0.11 0.21 0.38 (0.22) ----------------------------------------------------------------------------- Total from investment operations ............ 0.21 0.23 0.32 0.51 (0.09) ----------------------------------------------------------------------------- Less distributions from: Net investment income ...................... (0.13) (0.14) (0.14) (0.15) (0.16) Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02) ----------------------------------------------------------------------------- Total distributions ......................... (0.14) (0.15) (0.15) (0.16) (0.18) ----------------------------------------------------------------------------- Redemption fees ............................. -- d -- d -- d -- -- ----------------------------------------------------------------------------- Net asset value, end of year ................ $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 ============================================================================= Total return c .............................. 9.17% 9.90% 14.90% 27.51% (4.66)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $459,302 $493,063 $511,471 $495,004 $430,226 Ratios to average net assets: Expenses ................................... 1.14% e 1.15% e 1.18% 1.23% 1.22% Net investment income ...................... 5.11% 5.04% 4.61% 6.13% 6.15% Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 79 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
----------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17 ----------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.13 0.13 0.11 0.13 0.13 Net realized and unrealized gains (losses) . 0.09 0.10 0.21 0.38 (0.21) ----------------------------------------------------------------------------- Total from investment operations ............ 0.22 0.23 0.32 0.51 (0.08) ----------------------------------------------------------------------------- Less distributions from: Net investment income ...................... (0.13) (0.14) (0.14) (0.15) (0.16) Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02) ----------------------------------------------------------------------------- Total distributions ......................... (0.14) (0.15) (0.15) (0.16) (0.18) ----------------------------------------------------------------------------- Redemption fees ............................. -- d -- d -- d -- -- ----------------------------------------------------------------------------- Net asset value, end of year ................ $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91 ============================================================================= Total return c .............................. 9.56% 9.84% 14.85% 27.37% (4.64)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $12,138,969 $10,113,365 $6,616,891 $3,764,372 $1,545,377 Ratios to average net assets: Expenses ................................... 1.14% e 1.15% e 1.18% 1.24% 1.21% Net investment income ...................... 5.11% 5.04% 4.61% 6.12% 6.21% Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 80 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
-------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2006 2005 2004 2003 2002 f -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 2.48 $ 2.40 $ 2.23 $ 1.89 $ 2.18 -------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.13 0.13 0.11 0.13 0.10 Net realized and unrealized gains (losses) . 0.09 0.10 0.22 0.37 (0.27) -------------------------------------------------------------------------- Total from investment operations ............ 0.22 0.23 0.33 0.50 (0.17) -------------------------------------------------------------------------- Less distributions from: Net investment income ....................... (0.14) (0.14) (0.15) (0.15) (0.12) Net realized gains .......................... (0.01) (0.01) (0.01) (0.01) -- -------------------------------------------------------------------------- Total distributions ......................... (0.15) (0.15) (0.16) (0.16) (0.12) -------------------------------------------------------------------------- Redemption fees ............................. -- d -- d -- d -- -- -------------------------------------------------------------------------- Net asset value, end of year ................ $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89 ========================================================================== Total return c .............................. 9.43% 10.15% 15.25% 27.31% (8.34)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $183,609 $122,222 $73,165 $36,417 $6,350 Ratios to average net assets: Expenses ................................... 0.99% e 1.00% e 1.03% 1.08% 1.07% g Net investment income ...................... 5.26% 5.19% 4.76% 6.28% 6.77% g Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. f For the period January 1, 2002 (effective date) to September 30, 2002. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 81 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
---------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......... $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.14 0.14 0.12 0.14 0.14 Net realized and unrealized gains (losses) . 0.09 0.11 0.22 0.38 (0.22) ---------------------------------------------------------------------------- Total from investment operations ............ 0.23 0.25 0.34 0.52 (0.08) ---------------------------------------------------------------------------- Less distributions from: Net investment income ...................... (0.15) (0.16) (0.16) (0.16) (0.17) Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02) ---------------------------------------------------------------------------- Total distributions ......................... (0.16) (0.17) (0.17) (0.17) (0.19) ---------------------------------------------------------------------------- Redemption fees ............................. -- c -- c -- c -- -- ---------------------------------------------------------------------------- Net asset value, end of year ................ $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89 ============================================================================ Total return ................................ 9.94% 10.65% 15.74% 28.47% (4.50)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............. $3,786,643 $2,280,318 $901,149 $95,009 $30,737 Ratios to average net assets: Expenses ................................... 0.49% d 0.50% d 0.53% 0.58% 0.57% Net investment income ...................... 5.76% 5.69% 5.26% 6.78% 6.85% Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Amount rounds to less than $0.01 per share. d Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 82 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES VALUE ------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 98.3% COMMON STOCKS 41.8% COMMUNICATIONS 3.3% AT&T Inc. ............................... United States 22,000,000 $ 716,320,000 BellSouth Corp. ......................... United States 10,000,000 427,500,000 Verizon Communications Inc. ............. United States 11,000,000 408,430,000 ------------- 1,552,250,000 ------------- ELECTRIC UTILITIES 17.4% Alliant Energy Corp. .................... United States 3,000,000 107,190,000 a Ameren Corp. ............................ United States 11,274,400 595,175,576 American Electric Power Co. Inc. ........ United States 8,633,800 314,011,306 CenterPoint Energy Inc. ................. United States 6,000,000 85,920,000 Consolidated Edison Inc. ................ United States 4,632,100 214,003,020 Constellation Energy Group .............. United States 3,000,000 177,600,000 Dominion Resources Inc. ................. United States 10,000,000 764,900,000 DTE Energy Co. .......................... United States 5,270,400 218,774,304 Duke Energy Corp. ....................... United States 20,884,000 630,696,800 Edison International .................... United States 1,887,100 78,578,844 Energy East Corp. ....................... United States 4,530,000 107,451,600 Entergy Corp. ........................... United States 4,500,000 352,035,000 Exelon Corp. ............................ United States 300,000 18,162,000 FirstEnergy Corp. ....................... United States 14,000,000 782,040,000 FPL Group Inc. .......................... United States 7,500,000 337,500,000 Hawaiian Electric Industries Inc. ....... United States 1,720,000 46,543,200 Pepco Holdings Inc. ..................... United States 1,800,000 43,506,000 PG&E Corp. .............................. United States 12,492,700 520,320,955 a Pinnacle West Capital Corp. ............. United States 5,500,000 247,775,000 PPL Corp. ............................... United States 4,000,000 131,600,000 Progress Energy Inc. .................... United States 9,000,000 408,420,000 a Public Service Enterprise Group Inc. .... United States 16,500,000 1,009,635,000 a Puget Energy Inc. ....................... United States 7,500,000 170,475,000 The Southern Co. ........................ United States 19,125,000 659,047,500 TECO Energy Inc. ........................ United States 9,500,000 148,675,000 Xcel Energy Inc. ........................ United States 1,000,000 20,650,000 ------------- 8,190,686,105 ------------- ENERGY MINERALS 3.6% BP PLC, ADR ............................. United Kingdom 3,750,000 245,925,000 a Canadian Oil Sands Trust ................ Canada 25,770,600 687,831,096 Chevron Corp. ........................... United States 7,500,000 486,450,000 Royal Dutch Shell PLC, A, ADR ........... United Kingdom 4,000,000 264,400,000 ------------- 1,684,606,096 ------------- FINANCE 5.4% Bank of America Corp. ................... United States 21,000,000 1,124,970,000 Citigroup Inc. .......................... United States 3,000,000 149,010,000 Fifth Third Bancorp ..................... United States 7,750,000 295,120,000 JPMorgan Chase & Co. .................... United States 10,000,000 469,600,000 North Fork Bancorp Inc. ................. United States 10,000,000 286,400,000 Wachovia Corp. .......................... United States 3,750,000 209,250,000 ------------- 2,534,350,000 -------------
Annual Report | 83 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES VALUE ------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) GAS DISTRIBUTORS 1.3% AGL Resources Inc. ................................................... United States 600,000 $ 21,900,000 Atmos Energy Corp. ................................................... United States 2,235,000 63,809,250 NiSource Inc. ........................................................ United States 5,000,000 108,700,000 ONEOK Inc. ........................................................... United States 3,800,000 143,602,000 Sempra Energy ........................................................ United States 5,923,600 297,660,900 --------------- 635,672,150 --------------- HEALTH TECHNOLOGY 7.3% Bristol-Myers Squibb Co. ............................................. United States 16,500,000 411,180,000 Eli Lilly and Co. .................................................... United States 1,000,000 57,000,000 Johnson & Johnson .................................................... United States 6,000,000 389,640,000 Merck & Co. Inc. ..................................................... United States 28,000,000 1,173,200,000 Pfizer Inc. .......................................................... United States 47,000,000 1,332,920,000 Wyeth ................................................................ United States 1,500,000 76,260,000 --------------- 3,440,200,000 --------------- INDUSTRIAL SERVICES 0.6% GlobalSantaFe Corp. .................................................. Cayman Islands 5,500,000 274,945,000 --------------- NON-ENERGY MINERALS 0.5% Alcoa Inc. ........................................................... United States 1,932,000 54,173,280 AngloGold Ashanti Ltd., ADR .......................................... South Africa 2,250,000 84,915,000 Barrick Gold Corp. ................................................... Canada 3,000,000 92,160,000 --------------- 231,248,280 --------------- PROCESS INDUSTRIES 0.7% The Dow Chemical Co. ................................................. United States 4,107,300 160,102,554 Lyondell Chemical Co. ................................................ United States 6,000,000 152,220,000 --------------- 312,322,554 --------------- PRODUCER MANUFACTURING 1.7% 3M Co. ............................................................... United States 6,000,000 446,520,000 General Electric Co. ................................................. United States 7,000,000 247,100,000 Tyco International Ltd. .............................................. United States 3,000,000 83,970,000 --------------- 777,590,000 --------------- TOTAL COMMON STOCKS (COST $15,813,782,352) ........................... 19,633,870,185 --------------- PREFERRED STOCK (COST $57,833,250) 0.0%b PROCESS INDUSTRIES 0.0% b c,d,e,f Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual .................. Indonesia 75,000,000 825,000 --------------- CONVERTIBLE PREFERRED STOCKS 7.8% ELECTRIC UTILITIES 0.2% CMS Energy Trust I, 7.75%, cvt. pfd. ................................. United States 1,508,000 74,305,041 --------------- ELECTRONIC TECHNOLOGY 2.0% g,h The Bear Stearns Cos. Inc. into Broadcom Corp., 10.00%, cvt. pfd., 144A ................................................................. United States 3,500,000 103,818,050 Citigroup Funding Inc. into Altera Corp., 7.00%, cvt. pfd ............ United States 5,000,000 93,601,500
84 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE ------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) CONVERTIBLE PREFERRED STOCKS (CONTINUED) ELECTRONIC TECHNOLOGY (CONTINUED) g Deutsche Bank AG into Apple Computer Inc., 9.50%, cvt. pfd., 144A ......... United States 750,000 $ 51,641,025 Goldman Sachs Group Inc. into KLAC-Tencor Corp., 8.00%, cvt. pfd .......... United States 2,100,000 96,314,401 h Lehman Brothers Holdings Inc. into Analog Devices Inc., 10.00%, cvt. pfd. . United States 6,450,000 189,952,500 h Lehman Brothers Holdings Inc. into Cisco Systems Inc., 8.50%, cvt. pfd. ... United States 10,000,000 197,082,500 g Morgan Stanley into Applied Materials Inc., 7.75%, cvt. pfd., 144A ........ United States 5,650,000 98,959,750 g Morgan Stanley into Intel Corp., 7.40%, cvt. pfd., 144A ................... United States 6,500,000 135,427,500 ------------ 966,797,226 ------------ ENERGY MINERALS 1.0% g Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A ........................... United States 900,000 92,957,400 Chesapeake Energy Corp., 6.25%, cvt. pfd. ................................. United States 700,000 175,606,200 g Deutsche Bank AG into ConocoPhillips, 8.50%, cvt. pfd., 144A .............. United States 2,500,000 150,125,000 g Morgan Stanley into Devon Energy Corp., 8.00%, cvt. pfd., 144A ............ United States 900,000 54,031,500 ------------ 472,720,100 ------------ FINANCE 1.2% E*TRADE Financial Corp., 6.125%, cvt. pfd. ................................ United States 2,500,000 77,800,000 Fannie Mae, 5.375%, cvt. pfd. ............................................. United States 3,250 313,698,125 MetLife Inc., 6.375%, cvt. pfd. ........................................... United States 2,000,000 60,000,000 Morgan Stanley into Freddie Mac, 8.20%, cvt. pfd. ......................... United States 1,510,000 100,603,750 ------------ 552,101,875 ------------ HEALTH TECHNOLOGY 1.2% Lehman Brothers Holdings Inc. into Boston Scientific, 7.50%, cvt. pfd. .... United States 4,000,000 63,953,800 g Morgan Stanley into Eli Lilly and Co., 7.00%, cvt. pfd., 144A ............. United States 1,810,000 101,369,052 Schering-Plough Corp., 6.00%, cvt. pfd. ................................... United States 7,450,000 414,145,500 ------------ 579,468,352 ------------ INDUSTRIAL SERVICES 0.8% El Paso Corp., 4.99%, cvt. pfd. ........................................... United States 130,000 158,090,982 g Morgan Stanley into Williams Cos. Inc., 8.50%, cvt. pfd., 144A ............ United States 4,000,000 96,259,998 g Wachovia Bank into El Paso Corp., 9.05%, cvt. pfd., 144A .................. United States 8,200,000 104,468,000 ------------ 358,818,980 ------------ NON-ENERGY MINERALS 0.4% g Deutsche Bank AG into Barrick Gold Corp., 8.50%, cvt. pfd., 144A .......... United States 2,550,000 78,365,835 h Lehman Brothers Holdings Inc. into Alcoa Inc., 7.00%, cvt. pfd. ........... United States 4,200,000 122,094,840 ------------ 200,460,675 ------------ REAL ESTATE INVESTMENT TRUSTS 0.4% Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ............................ United States 3,000,000 74,730,000 Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ........................ United States 1,333,594 33,686,584 Lexington Corporate Properties Trust, 6.50%, cvt. pfd. .................... United States 1,200,000 56,280,000 ------------ 164,696,584 ------------
Annual Report | 85 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
--------------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE --------------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) CONVERTIBLE PREFERRED STOCKS (CONTINUED) RETAIL TRADE 0.6% g,h Wachovia Bank into The Home Depot Inc., 7.25%, cvt. pfd., 144A ............... United States 3,800,000 $ 134,862,000 h Wachovia Bank into Target Corp., 6.40%, cvt. pfd. ............................ United States 3,000,000 153,000,000 -------------- 287,862,000 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,520,891,178) .................... 3,657,230,833 -------------- ------------------- PRINCIPAL AMOUNT i ------------------- CORPORATE BONDS 42.6% ALTERNATIVE POWER GENERATION 2.9% c,e Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 .................. Canada $350,000,000 232,750,000 c,e Calpine Corp., senior note, 7.875%, 4/01/08 ............................................. United States 101,818,000 75,345,320 senior note, 8.625%, 8/15/10 ............................................. United States 211,000,000 104,972,500 g senior secured note, 144A, 8.50%, 7/15/10 ................................ United States 200,000,000 202,250,000 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 .......................................................... United States 310,000,000 303,412,500 8.75%, 2/15/12 ........................................................... United States 225,500,000 234,801,875 8.375%, 5/01/16 .......................................................... United States 225,000,000 230,062,500 -------------- 1,383,594,695 -------------- COMMERCIAL SERVICES 1.4% Dex Media Inc., senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ................................................................ United States 60,000,000 50,850,000 zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ........................ United States 210,000,000 177,975,000 JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07, 10.67% thereafter, 5/15/13 ................................................. United States 156,000,000 135,720,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 .................. United States 125,000,000 126,250,000 R.H. Donnelley Corp., 6.875%, 1/15/13 .......................................................... United States 26,300,000 24,130,250 senior discount note, 6.875%, 1/15/13 .................................... United States 94,400,000 86,612,000 senior note, 8.875%, 1/15/16 ............................................. United States 55,000,000 55,412,500 -------------- 656,949,750 -------------- COMMUNICATIONS 2.0% Qwest Capital Funding Inc., 7.00%, 8/03/09 ........................................................... United States 300,000,000 303,000,000 7.25%, 2/15/11 ........................................................... United States 365,000,000 366,825,000 Qwest Communications International Inc., senior note, 7.50%, 2/15/14 ........................................................... United States 105,000,000 105,787,500 B, 7.50%, 2/15/14 ........................................................ United States 145,000,000 146,087,500 Qwest Corp., 6.875%, 9/15/33 ................................................ United States 30,000,000 27,525,000 -------------- 949,225,000 -------------- CONSUMER DURABLES 10.3% Beazer Homes USA Inc., senior note, 6.875%, 7/15/15 .......................................................... United States 20,000,000 18,200,000 8.125%, 6/15/16 .......................................................... United States 85,000,000 83,087,500
86 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE ------------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) CONSUMER DURABLES (CONTINUED) D.R. Horton Inc., 5.625%, 1/15/16 ...................................................... United States $ 35,000,000 $ 32,575,375 6.50%, 4/15/16 ....................................................... United States 35,000,000 34,403,215 Ford Motor Co., 7.45%, 7/16/31 ......................................... United States 600,000,000 466,500,000 Ford Motor Credit Co., 7.375%, 10/28/09 ..................................................... United States 550,000,000 534,850,800 7.875%, 6/15/10 ...................................................... United States 355,000,000 345,997,910 7.375%, 2/01/11 ...................................................... United States 450,000,000 432,313,650 7.00%, 10/01/13 ...................................................... United States 100,000,000 92,908,300 g 144A, 9.75%, 9/15/10 ................................................. United States 105,000,000 108,497,655 senior note, 9.875%, 8/10/11 ......................................... United States 75,000,000 77,685,000 senior note, 7.25%, 10/25/11 ......................................... United States 120,000,000 113,285,760 General Motors Acceptance Corp., 5.625%, 5/15/09 ...................................................... United States 125,000,000 121,969,125 7.75%, 1/19/10 ....................................................... United States 420,000,000 430,660,020 6.875%, 9/15/11 ...................................................... United States 800,000,000 796,584,000 6.875%, 8/28/12 ...................................................... United States 300,400,000 297,691,894 6.75%, 12/01/14 ...................................................... United States 125,000,000 122,220,125 General Motors Corp., senior deb., 8.375%, 7/15/33 ..................... United States 510,000,000 443,700,000 K Hovnanian Enterprises Inc., 6.25%, 1/15/16 ....................................................... United States 10,000,000 8,850,000 senior note, 7.50%, 5/15/16 .......................................... United States 60,000,000 56,325,000 KB Home, 6.375%, 8/15/11 ...................................................... United States 25,000,000 24,279,425 senior note, 5.75%, 2/01/14 .......................................... United States 35,000,000 31,889,235 senior note, 6.25%, 6/15/15 .......................................... United States 40,000,000 36,986,760 senior note, 7.25%, 6/15/18 .......................................... United States 70,500,000 67,937,255 g Visant Holding Corp., senior note, 144A, 8.75%, 12/01/13 ............... United States 50,000,000 50,562,500 -------------- 4,829,960,504 -------------- CONSUMER NON-DURABLES 0.2% g Reynolds American Inc., 144A, 7.25%, 6/01/13 ........................... United States 100,000,000 103,402,800 -------------- CONSUMER SERVICES 7.0% Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ............. United States 440,000,000 447,700,000 CCH I Holdings LLC, senior note, 13.50%, 1/15/14 ...................................................... United States 329,000,000 254,152,500 9.92%, 4/01/14 ....................................................... United States 117,380,000 80,845,475 11.75%, 5/15/14 ...................................................... United States 195,000,000 139,912,500 CCH I LLC, senior secured note, 11.00%, 10/01/15 ....................... United States 850,000,000 777,750,000 CCH II LLC, senior note, 10.25%, 9/15/10 ............................... United States 80,000,000 82,000,000 Clear Channel Communications Inc., 5.50%, 9/15/14 ....................................................... United States 150,000,000 139,582,200 senior note, 5.75%, 1/15/13 .......................................... United States 75,000,000 72,173,175 CSC Holdings Inc., senior deb., 7.625%, 7/15/18 ......................................... United States 27,000,000 27,776,250 senior note, B, 7.625%, 4/01/11 ...................................... United States 200,000,000 206,250,000 DIRECTV Holdings LLC, senior note, 6.375%, 6/15/15 ..................... United States 25,300,000 23,908,500
Annual Report | 87 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE ------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) CONSUMER SERVICES (CONTINUED) g EchoStar DBS Corp., senior note, 144A, 7.125%, 2/01/16 .... United States $360,000,000 $ 349,650,000 Harrah's Operating Co. Inc., 5.625%, 6/01/15 .............. United States 10,000,000 9,310,660 g Hertz Corp., senior note, 144A, 8.875%, 1/01/14 ...................... United States 102,950,000 108,354,875 senior sub. note, 144A, 10.50%, 1/01/16 ................. United States 25,000,000 27,625,000 Liberty Media Corp., senior note, 5.70%, 5/15/13 .......... United States 148,000,000 140,395,908 MGM MIRAGE Inc., senior note, 6.75%, 4/01/13 .......................................... United States 70,000,000 69,125,000 6.625%, 7/15/15 ......................................... United States 100,000,000 96,500,000 Six Flags Inc., senior note, 9.625%, 6/01/14 .............. United States 35,000,000 31,325,000 g Viacom Inc., senior note, 144A, 6.25%, 4/30/16 ............ United States 100,000,000 99,298,900 g XM Satellite Radio Inc., senior note, 144A, 9.75%, 5/01/14 United States 132,000,000 127,380,000 -------------- 3,311,015,943 -------------- ELECTRIC UTILITIES 2.5% Aquila Inc., senior note, 14.875%, 7/01/12 ................ United States 95,400,000 125,689,500 CMS Energy Corp., senior note, 7.75%, 8/01/10 ............. United States 30,000,000 31,650,000 NRG Energy Inc., senior note, 7.25%, 2/01/14 .......................................... United States 60,000,000 59,700,000 7.375%, 2/01/16 ......................................... United States 93,775,000 93,423,344 Reliant Resources Inc., senior note, 9.25%, 7/15/10 ....... United States 65,000,000 67,762,500 TXU Corp., senior note, P, 5.55%, 11/15/14 ...................................... United States 350,000,000 332,422,300 Q, 6.50%, 11/15/24 ...................................... United States 310,000,000 295,258,260 R, 6.55%, 11/15/34 ...................................... United States 200,000,000 189,374,800 -------------- 1,195,280,704 -------------- ELECTRONIC TECHNOLOGY 1.5% DRS Technologies Inc., senior note, 6.625%, 2/01/16 ....... United States 55,000,000 54,312,500 Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ................................................ Singapore 110,000,000 107,250,000 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 ......................................... United States 31,500,000 30,082,500 6.375%, 10/15/15 ........................................ United States 75,000,000 73,312,500 Lucent Technologies Inc., 6.45%, 3/15/29 .................. United States 180,000,000 161,100,000 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 .......................................... United States 135,000,000 127,912,500 8.125%, 3/01/16 ......................................... United States 85,000,000 83,725,000 Seagate Technology HDD Holdings, senior note, 6.375%, 10/01/11 ........................................ United States 20,000,000 20,000,000 6.80%, 10/01/16 ......................................... United States 40,000,000 40,000,000 -------------- 697,695,000 -------------- ENERGY MINERALS 1.9% Callon Petroleum Co., senior note, 9.75%, 12/08/10 ........ United States 105,000,000 108,675,000 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13 ......................................... United States 75,000,000 76,968,750 6.50%, 8/15/17 .......................................... United States 115,000,000 108,387,500 6.25%, 1/15/18 .......................................... United States 150,000,000 139,875,000 6.875%, 11/15/20 ........................................ United States 145,000,000 137,750,000
88 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
-------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE -------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) ENERGY MINERALS (CONTINUED) g Mariner Energy Inc., senior note, 144A, 7.50%, 4/15/13 ..... United States $ 40,000,000 $ 38,400,000 Massey Energy Co., senior note, 6.875%, 12/15/13 ........... United States 59,650,000 54,281,500 Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 United States 105,000,000 102,637,500 Pioneer Natural Resources Co., 6.875%, 5/01/18 ............. United States 55,000,000 55,236,170 g Pogo Producing Co., senior sub. note, 144A, 7.875%, 5/01/13 United States 78,175,000 80,031,656 -------------- 902,243,076 -------------- FINANCE 0.6% E*TRADE Financial Corp., senior note, 7.375%, 9/15/13 .......................................... United States 230,000,000 236,325,000 7.875%, 12/01/15 ......................................... United States 25,000,000 26,437,500 -------------- 262,762,500 -------------- HEALTH SERVICES 3.8% DaVita Inc., senior note, 6.625%, 3/15/13 ............................. United States 30,000,000 29,437,500 senior sub. note, 7.25%, 3/15/15 ......................... United States 49,400,000 48,782,500 HCA Inc., 6.375%, 1/15/15 .......................................... United States 185,000,000 149,850,000 senior bond, 6.50%, 2/15/16 .............................. United States 350,000,000 281,750,000 senior note, 6.95%, 5/01/12 .............................. United States 50,000,000 43,937,500 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ......................................... United States 515,000,000 455,131,250 6.50%, 6/01/12 ........................................... United States 250,000,000 219,687,500 7.375%, 2/01/13 .......................................... United States 350,000,000 317,187,500 j FRN, 9.25%, 2/01/15 ...................................... United States 240,000,000 232,200,000 -------------- 1,777,963,750 -------------- INDUSTRIAL SERVICES 3.7% Allied Waste North America Inc., senior note, 7.25%, 3/15/15 .............................. United States 130,000,000 129,675,000 senior note, 7.125%, 5/15/16 ............................. United States 169,000,000 167,521,250 senior note, B, 7.375%, 4/15/14 .......................... United States 190,000,000 188,100,000 senior secured note, 6.50%, 11/15/10 ..................... United States 120,000,000 118,800,000 senior secured note, 6.375%, 4/15/11 ..................... United States 35,000,000 34,300,000 senior secured note, 6.125%, 2/15/14 ..................... United States 207,000,000 194,062,500 Browning-Ferris Industries Inc., 7.40%, 9/15/35 ............ United States 70,000,000 63,000,000 El Paso Corp., senior note, 6.75%, 5/15/09 ........................................... United States 245,000,000 247,450,000 j FRN, 6.14%, 8/16/07 ...................................... United States 70,000,000 71,225,000 MTN, 7.75%, 1/15/32 ...................................... United States 280,000,000 288,400,000 El Paso Production Holding Co., 7.75%, 6/01/13 ............. United States 87,500,000 89,906,250 g Sesi LLC, senior note, 144A, 6.875%, 6/01/14 ............... United States 93,000,000 92,535,000 Sonat Inc., senior note, 7.625%, 7/15/11 ................... United States 35,000,000 36,050,000 -------------- 1,721,025,000 -------------- NON-ENERGY MINERALS 0.3% g Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ............ Canada 151,500,000 144,682,500 --------------
Annual Report | 89 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
---------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE ---------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) PROCESS INDUSTRIES 2.2% Abitibi-Consolidated Co. of Canada, senior note, 8.375%, 4/01/15 Canada $100,600,000 $ 92,049,000 Chemtura Corp., senior note, 6.875%, 6/01/16 ................... United States 24,000,000 23,790,000 Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 .......... United States 195,000,000 187,687,500 Lyondell Chemical Co., senior note, 8.00%, 9/15/14 .............................................. United States 55,000,000 55,962,500 8.25%, 9/15/16 .............................................. United States 33,100,000 33,762,000 Nalco Co., senior sub. note, 8.875%, 11/15/13 .................. United States 20,000,000 20,950,000 Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00% thereafter, 2/01/14 ..................................... United States 380,000,000 300,200,000 NewPage Corp., senior secured note, 10.00%, 5/01/12 ............ United States 57,000,000 59,137,500 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 ...................................................... United States 50,000,000 47,750,000 c,d,f Pindo Deli Finance Mauritius Ltd., 144A, j FRN, 4.675%, 4/29/15 ........................................ Indonesia 113,073 25,690 j FRN, 4.675%, 4/29/18 ........................................ Indonesia 294,012 66,799 zero cpn., 4/29/25 .......................................... Indonesia 607,466 138,016 Rhodia SA, senior note, 10.25%, 6/01/10 ........................ France 110,859,000 124,716,375 Stone Container Corp., senior note, 9.75%, 2/01/11 ............. United States 68,743,000 71,149,005 c,d,f Tjiwi Kimia Finance Mauritius, secured note, 144A, j FRN, 5.248%, 4/29/15 ........................................ Indonesia 12,883,549 3,839,298 j FRN, 4.675%, 4/29/18 ........................................ Indonesia 33,160,560 9,881,847 zero cpn., 4/29/25 .......................................... Indonesia 42,601,657 12,695,294 -------------- 1,043,800,824 -------------- PRODUCER MANUFACTURING 1.0% Case New Holland Inc., senior note, 6.00%, 6/01/09 .............................................. United States 225,000,000 223,031,250 7.125%, 3/01/14 ............................................. United States 81,900,000 82,616,625 g Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ............... United Kingdom 38,816,000 42,115,360 g RBS Global & Rexnord Corp., senior note, 144A, 9.50%, 8/01/14 ........................... United States 40,000,000 40,800,000 senior sub. note, 144A, 11.75%, 8/01/16 ..................... United States 73,000,000 75,555,000 -------------- 464,118,235 -------------- REAL ESTATE INVESTMENT TRUSTS 0.9% Host Marriott LP, senior note, K, 7.125%, 11/01/13 ......................................... United States 50,000,000 50,875,000 O, 6.375%, 3/15/15 .......................................... United States 215,000,000 209,625,000 Q, 6.75%, 6/01/16 ........................................... United States 145,000,000 143,731,251 -------------- 404,231,251 --------------
90 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE ------------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) TECHNOLOGY SERVICES 0.4% SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 ............................... United States $ 59,300,000 $ 61,672,000 senior sub note, 10.25%, 8/15/15 ........................... United States 100,000,000 103,500,000 --------------- 165,172,000 --------------- TOTAL CORPORATE BONDS (COST $19,849,401,614) .................. 20,013,123,532 --------------- CONVERTIBLE BONDS 2.4% ALTERNATIVE POWER GENERATION 0.5% c,e Calpine Corp., cvt., senior note, 6.00% to 9/30/06, zero cpn. to 9/30/09, 6.00% thereafter, 9/30/14 .................................. United States 137,000,000 54,971,250 sub. note, 7.75%, 6/01/15 .................................. United States 450,000,000 163,125,000 --------------- 218,096,250 --------------- CONSUMER SERVICES 0.0% b e Adelphia Communications Corp., cvt., junior sub. note, 6 00%, 2/15/06 ...................................................... United States 75,000,000 75,000 --------------- ELECTRONIC TECHNOLOGY 1.6% Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 ........ United States 240,000,000 238,200,000 Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 ...... Canada 512,500,000 490,495,300 --------------- 728,695,300 --------------- HEALTH TECHNOLOGY 0.1% g Enzon Pharmaceuticals Inc., cvt., 144A, 4.00% 6/01/13 ......... United States 54,500,000 58,860,000 --------------- INDUSTRIAL SERVICES 0.2% Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 United States 103,000,000 100,167,500 --------------- TOTAL CONVERTIBLE BONDS (COST $1,460,652,754) ................. 1,105,894,050 --------------- MORTGAGE-BACKED SECURITIES 3.7% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 2.3% FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ................................... United States 474,936,024 458,119,028 5.50%, 8/01/35 - 11/01/35 .................................. United States 330,050,758 325,755,262 6.00%, 8/01/35 - 6/01/36 ................................... United States 295,047,116 296,687,956 --------------- 1,080,562,246 --------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.6% .. FNMA 30 Year, 5.50%, 2/01/35 - 1/01/36 ........................ United States 284,304,196 280,324,316 --------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.8% GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ................... United States 386,517,501 376,113,265 --------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $1,747,032,608) ........ 1,736,999,827 --------------- TOTAL LONG TERM INVESTMENTS (COST $42,449,593,756) ............ 46,147,943,427 ---------------
Annual Report | 91 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
--------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES VALUE --------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS 0.8% MONEY MARKET FUND (COST $165,725,024) 0.3% k Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% .......................................................... United States 165,725,024 $ 165,725,024 --------------- ------------------- PRINCIPAL AMOUNT i ------------------- REPURCHASE AGREEMENT (COST $231,940,914) 0.5% l Joint Repurchase Agreement, 5.201%, 10/02/06 (Maturity Value $232,041,441) .................................. United States $231,940,914 231,940,914 ABN AMRO Bank, N.V., New York Branch (Maturity Value $22,647,245) Banc of America Securities LLC (Maturity Value $22,647,245) Barclays Capital Inc. (Maturity Value $22,647,245) Bear, Stearns & Co. Inc. (Maturity Value $22,647,245) BNP Paribas Securities Corp. (Maturity Value $22,647,245) Deutsche Bank Securities Inc. (Maturity Value $8,388,297) Dresdner Kleinwort Wasserstein Securities LLC (Maturity Value $11,743,616) Greenwich Capital Markets Inc. (Maturity Value $21,809,575) Lehman Brothers Inc. (Maturity Value $10,597,333) Merrill Lynch Government Securities Inc. (Maturity Value $21,809,575) Morgan Stanley & Co. Inc. (Maturity Value $21,809,575) UBS Securities LLC (Maturity Value $22,647,245) Collateralized by U.S. Government Agency Securities, 2.70% - 7.125%, 10/15/06 - 6/15/11; m U.S. Treasury Bills, 12/28/06 - 3/29/07; and U.S. Treasury Notes, 3.50% - 6.50%, 2/05/10 - 5/31/11 --------------- TOTAL INVESTMENTS (COST $42,847,259,694) 99.1% .................... 46,545,609,365 OTHER ASSETS, LESS LIABILITIES 0.9% ............................... 407,686,199 --------------- NET ASSETS 100.0% ................................................. $46,953,295,564 ===============
See Selected Portfolio Abbreviations on page 107. a See Note 10 regarding holdings of 5% voting securities. b Rounds to less than 0.1% of net assets. c See Note 11 regarding other considerations. d Security has been deemed illiquid because it may not be able to be sold within seven days. At September 30, 2006, the aggregate value of these securities was $27,471,944, representing 0.06% of net assets. e See Note 8 regarding defaulted securities. f See Note 9 regarding restricted securities. g Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At September 30, 2006, the aggregate value of these securities was $2,952,286,356, representing 6.29% of net assets. h Non-income producing for the twelve months ended September 30, 2006. i The principal amount is stated in U.S. dollars unless otherwise indicated. j The coupon rate shown represents the rate at period end. k See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. l See Note 1(c) regarding joint repurchase agreement. m A portion or all of the security is traded on a discount basis with no stated coupon rate. 92 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2006 2005 2004 2003 2002 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93 ----------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.30 0.28 0.27 0.28 0.38 Net realized and unrealized gains (losses) ... (0.09) (0.11) (0.04) (0.10) 0.09 ----------------------------------------------------------------------- Total from investment operations .............. 0.21 0.17 0.23 0.18 0.47 ----------------------------------------------------------------------- Less distributions from net investment income . (0.31) (0.32) (0.36) (0.36) (0.41) ----------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- ----------------------------------------------------------------------- Net asset value, end of year .................. $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 ======================================================================= Total return c ................................ 3.40% 2.67% 3.46% 2.66% 7.06% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $5,291,117 $5,901,449 $6,420,381 $7,286,317 $7,726,914 Ratios to average net assets: Expenses ..................................... 0.72% e 0.72% e 0.70% e 0.70% 0.69% Net investment income ........................ 4.64% 4.29% 4.09% 4.11% 5.48% Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
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 value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 93 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2006 2005 2004 2003 2002 --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93 --------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.26 0.25 0.24 0.25 0.34 Net realized and unrealized gains (losses) ... (0.08) (0.11) (0.05) (0.10) 0.09 --------------------------------------------------------------------- Total from investment operations .............. 0.18 0.14 0.19 0.15 0.43 --------------------------------------------------------------------- Less distributions from net investment income . (0.28) (0.29) (0.32) (0.33) (0.38) --------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- --------------------------------------------------------------------- Net asset value, end of year .................. $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98 ===================================================================== Total return c ................................ 2.87% 2.13% 2.92% 2.13% 6.37% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $388,807 $478,788 $568,276 $678,814 $559,966 Ratios to average net assets: Expenses ..................................... 1.24% e 1.25% e 1.23% e 1.23% 1.22% Net investment income ........................ 4.12% 3.76% 3.56% 3.58% 4.95% Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
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 value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. 94 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2006 2005 2004 2003 2002 --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91 --------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.26 0.25 0.24 0.25 0.34 Net realized and unrealized gains (losses) ... (0.08) (0.11) (0.05) (0.11) 0.10 --------------------------------------------------------------------- Total from investment operations .............. 0.18 0.14 0.19 0.14 0.44 --------------------------------------------------------------------- Less distributions from net investment income . (0.28) (0.29) (0.32) (0.33) (0.38) --------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- --------------------------------------------------------------------- Net asset value, end of year .................. $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97 ===================================================================== Total return c ................................ 2.88% 2.14% 2.91% 2.00% 6.53% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $424,462 $508,539 $597,451 $814,635 $803,049 Ratios to average net assets: Expenses ..................................... 1.23% e 1.25% e 1.23% e 1.23% 1.21% Net investment income ........................ 4.13% 3.76% 3.56% 3.58% 4.96% Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
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 value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 95 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2006 2005 2004 2003 2002 f -------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.81 -------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.27 0.26 0.25 0.25 0.25 Net realized and unrealized gains (losses) ... (0.08) (0.11) (0.05) (0.09) 0.22 -------------------------------------------------------------------- Total from investment operations .............. 0.19 0.15 0.20 0.16 0.47 -------------------------------------------------------------------- Less distributions from net investment income . (0.29) (0.30) (0.33) (0.34) (0.29) -------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- -------------------------------------------------------------------- Net asset value, end of year .................. $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 ==================================================================== Total return c ................................ 3.01% 2.29% 3.08% 2.29% 7.03% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $71,104 $65,790 $59,431 $54,042 $14,042 Ratios to average net assets: Expenses ..................................... 1.09% e 1.10% e 1.08% e 1.08% 1.07% g Net investment income ........................ 4.27% 3.91% 3.71% 3.73% 5.10% g Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
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 value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f For the period January 1, 2002 (effective date) to September 30, 2002. g Annualized. 96 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2006 2005 2004 2003 2002 --------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94 --------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.31 0.29 0.28 0.29 0.38 Net realized and unrealized gains (losses) ... (0.09) (0.10) (0.06) (0.10) 0.11 --------------------------------------------------------------------- Total from investment operations .............. 0.22 0.19 0.22 0.19 0.49 --------------------------------------------------------------------- Less distributions from net investment income . (0.32) (0.33) (0.36) (0.37) (0.42) --------------------------------------------------------------------- Redemption fees ............................... -- c -- c -- c -- -- --------------------------------------------------------------------- Net asset value, end of year .................. $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01 ===================================================================== Total return .................................. 3.53% 2.95% 3.42% 2.79% 7.33% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $387,239 $334,681 $340,279 $308,411 $198,437 Ratios to average net assets: Expenses ..................................... 0.59% d 0.60% d 0.58% d 0.58% 0.57% Net investment income ........................ 4.77% 4.41% 4.21% 4.23% 5.60% Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
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 value of the investments of the Fund. b Based on average daily shares outstanding. c Amount rounds to less than $0.01 per share. d Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 97 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
----------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 98.6% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 98.6% GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ..................... $ 232,910 $ 247,047 GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ..................... 414,483 445,469 GNMA GP 30 Year, 10.00%, 11/15/09 - 4/15/10 .................... 316,620 333,897 GNMA GP 30 Year, 10.25%, 6/15/18 - 5/15/20 ..................... 12,748 14,148 GNMA GP 30 Year, 11.00%, 12/15/09 - 12/15/10 ................... 604,412 648,142 GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ..................... 298,560 330,136 GNMA GP 30 Year, 11.50%, 2/15/13 - 6/15/13 ..................... 57,023 62,900 GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ..................... 41,059 45,775 GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 .................... 21,927 24,178 GNMA GP 30 Year, 12.50%, 4/15/10 - 7/15/10 ..................... 63,205 69,116 GNMA GP 30 Year, 12.75%, 5/15/14 ............................... 5,957 6,619 GNMA I SF 15 Year, 6.50%, 5/15/18 - 11/15/28 ................... 3,836,606 3,923,990 GNMA I SF 30 Year, 5.00%, 2/15/33 - 3/15/36 .................... 737,582,304 717,828,742 GNMA I SF 30 Year, 5.50%, 5/15/28 - 9/15/35 .................... 1,268,435,815 1,261,509,579 a GNMA I SF 30 Year, 5.50%, 10/01/33 ............................. 30,000,000 29,803,140 GNMA I SF 30 Year, 6.00%, 10/15/23 - 10/15/36 .................. 786,656,810 797,462,988 GNMA I SF 30 Year, 6.50%, 5/15/23 - 8/15/36 .................... 445,900,112 458,195,716 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................... 73,212 75,112 GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 ................... 262,802,161 271,414,566 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................... 769,974 797,337 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................... 71,501,716 74,403,237 GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 .................... 648,190 681,450 GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ................... 55,464,098 58,690,663 GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ................... 146,889 156,745 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................... 12,066,549 12,971,230 GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ................... 15,298,045 16,440,383 GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 .................... 9,648,689 10,475,444 GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ................... 11,941,566 13,292,577 GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ................. 8,936,831 9,978,526 GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 .................. 8,411,054 9,259,525 GNMA I SF 30 Year, 11.50%, 3/15/13 - 12/15/17 .................. 2,017,031 2,244,178 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................... 9,744,708 10,969,613 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................... 8,802,764 9,778,972 GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ................... 9,558,469 10,700,702 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................... 70,458 74,787 GNMA II GP 30 Year, 11.50%, 8/20/13 ............................ 16,919 18,598 GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 .................. 47,199,975 44,122,718 GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................... 301,535,559 292,017,358 GNMA II SF 30 Year, 5.00%, 9/20/33 ............................. 320,308,342 310,487,310 GNMA II SF 30 Year, 5.00%, 10/20/33 ............................ 67,044,066 64,992,860 GNMA II SF 30 Year, 5.50%, 6/20/34 ............................. 85,690,839 84,948,670 GNMA II SF 30 Year, 5.50%, 7/20/34 - 6/20/36 ................... 374,180,096 370,731,497 GNMA II SF 30 Year, 5.50%, 12/20/34 ............................ 261,563,980 259,298,572 GNMA II SF 30 Year, 5.50%, 1/20/35 ............................. 105,475,875 104,486,254 GNMA II SF 30 Year, 5.50%, 2/20/35 ............................. 132,433,195 131,190,649 GNMA II SF 30 Year, 5.50%, 6/20/35 ............................. 76,175,012 75,460,305 GNMA II SF 30 Year, 5.50%, 4/20/36 ............................. 70,124,171 69,458,796
98 | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
------------------------------------------------------------------------------------------------------------ FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED) GNMA II SF 30 Year, 6.00 %, 10/20/23 - 7/20/36 ....................... $ 425,034,135 $ 429,529,254 a GNMA II SF 30 Year, 6.00 %, 10/01/31 ................................. 80,000,000 80,975,040 GNMA II SF 30 Year, 6.00 %, 9/20/34 .................................. 84,772,411 85,757,102 GNMA II SF 30 Year, 6.00 %, 11/20/35 ................................. 76,641,720 77,438,934 GNMA II SF 30 Year, 6.50 %, 6/20/24 - 7/20/35 ........................ 93,849,829 96,218,160 a GNMA II SF 30 Year, 6.50 %, 10/01/30 ................................. 12,301,225 12,616,444 GNMA II SF 30 Year, 7.00 %, 2/20/28 - 7/20/33 ........................ 73,215,866 75,372,814 GNMA II SF 30 Year, 7.50 %, 10/20/22 - 4/20/32 ....................... 9,581,303 9,915,044 GNMA II SF 30 Year, 8.00 %, 8/20/16 - 6/20/30 ........................ 4,761,459 5,017,265 GNMA II SF 30 Year, 8.50 %, 4/20/16 - 6/20/25 ....................... 2,328,860 2,492,527 GNMA II SF 30 Year, 9.00 %, 7/20/16 - 11/20/21 ....................... 707,232 758,135 GNMA II SF 30 Year, 9.50 %, 10/20/17 - 4/20/25 ....................... 416,986 454,956 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ........................ 961,736 1,067,010 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ....................... 2,606,069 2,897,386 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ........................ 375,579 417,759 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ....................... 208,182 232,586 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ........................ 451,905 506,159 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ..................... 316,135 352,066 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ...................... 305,838 342,569 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $6,542,261,994) ............... 6,472,931,426 -------------- ----------------- SHARES ----------------- SHORT TERM INVESTMENTS 3.1% MONEY MARKET FUND (COST $165,722,265) 2.6% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% 165,722,265 165,722,265 -------------- ----------------- PRINCIPAL AMOUNT ----------------- REPURCHASE AGREEMENT (COST $34,460,000) 0.5% c Barclays Capital Inc., 4.95%, 10/02/06 (Maturity Value $34,474,215) Collateralized by U.S. Treasury Note, 2.75%, 8/15/07 ............... $ 34,460,000 34,460,000 -------------- TOTAL SHORT TERM INVESTMENTS (COST $200,182,265) ..................... 200,182,265 -------------- TOTAL INVESTMENTS (COST $6,742,444,259) 101.7% ....................... 6,673,113,691 OTHER ASSETS, LESS LIABILITIES (1.7)% ................................ (110,385,360) -------------- NET ASSETS 100.0% .................................................... $6,562,728,331 ==============
See Selected Portfolio Abbreviations on page 107. a See Note 1(d) regarding security purchased on a to-be-announced basis. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. c See Note 1(c) regarding repurchase agreement. Annual Report | The accompanying notes are an integral part of these financial statements. | 99 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
---------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.43 0.45 0.43 0.42 0.46 Net realized and unrealized gains (losses) ... 0.37 2.42 1.33 0.85 (1.60) ---------------------------------------------------------------------------- Total from investment operations .............. 0.80 2.87 1.76 1.27 (1.14) ---------------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.41) (0.44) (0.40) (0.43) (0.45) Net realized gains ........................... (0.09) -- -- -- (0.47) ---------------------------------------------------------------------------- Total distributions ........................... (0.50) (0.44) (0.40) (0.43) (0.92) ---------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- ---------------------------------------------------------------------------- Net asset value, end of year .................. $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96 ============================================================================ Total return c ................................ 6.69% 28.81% 20.40% 16.38% (12.49)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $1,926,732 $1,986,034 $1,450,832 $1,259,886 $1,090,216 Ratios to average net assets: Expenses ..................................... 0.76% e 0.78% e 0.80% 0.83% 0.80% Net investment income ........................ 3.54% 3.92% 4.49% 5.00% 4.87% Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. 100 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
---------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.37 0.39 0.38 0.37 0.41 Net realized and unrealized gains (losses) ... 0.38 2.42 1.33 0.85 (1.58) ---------------------------------------------------------------------------- Total from investment operations .............. 0.75 2.81 1.71 1.22 (1.17) ---------------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.35) (0.39) (0.36) (0.39) (0.41) Net realized gains ........................... (0.09) -- -- -- (0.47) ---------------------------------------------------------------------------- Total distributions ........................... (0.44) (0.39) (0.36) (0.39) (0.88) ---------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- ---------------------------------------------------------------------------- Net asset value, end of year .................. $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97 ============================================================================ Total return c ................................ 6.25% 28.11% 19.71% 15.88% (12.88)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $133,824 $154,277 $127,105 $95,321 $32,802 Ratios to average net assets: Expenses ..................................... 1.26% e 1.28% e 1.30% 1.34% 1.31% Net investment income ........................ 3.04% 3.42% 3.99% 4.49% 4.44% Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 101 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
---------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.37 0.39 0.38 0.36 0.41 Net realized and unrealized gains (losses) ... 0.37 2.42 1.33 0.86 (1.59) ---------------------------------------------------------------------------- Total from investment operations .............. 0.74 2.81 1.71 1.22 (1.18) ---------------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.35) (0.39) (0.36) (0.39) (0.41) Net realized gains ........................... (0.09) -- -- -- (0.47) ---------------------------------------------------------------------------- Total distributions ........................... (0.44) (0.39) (0.36) (0.39) (0.88) ---------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- ---------------------------------------------------------------------------- Net asset value, end of year .................. $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95 ============================================================================ Total return c ................................ 6.19% 28.16% 19.76% 15.77% (12.90)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $391,509 $435,714 $283,747 $222,030 $67,428 Ratios to average net assets: Expenses ..................................... 1.25% e 1.28% e 1.30% 1.34% 1.29% Net investment income ........................ 3.05% 3.42% 3.99% 4.49% 4.43% Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. 102 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
---------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2006 2005 2004 2003 2002 f ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 12.57 $ 10.15 $ 8.79 $ 7.96 $ 9.81 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.39 0.43 0.39 0.37 0.32 Net realized and unrealized gains (losses) ... 0.36 2.40 1.34 0.86 (1.85) ---------------------------------------------------------------------------- Total from investment operations .............. 0.75 2.83 1.73 1.23 (1.53) ---------------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.37) (0.41) (0.37) (0.40) (0.32) Net realized gains ........................... (0.09) -- -- -- -- ---------------------------------------------------------------------------- Total distributions ........................... (0.46) (0.41) (0.37) (0.40) (0.32) ---------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- -- ---------------------------------------------------------------------------- Net asset value, end of year .................. $ 12.86 $ 12.57 $10.15 $ 8.79 $ 7.96 ============================================================================ Total return c ................................ 6.29% 28.35% 20.02% 15.96% (16.01)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $27,736 $14,649 $1,590 $1,142 $ 142 Ratios to average net assets: Expenses ..................................... 1.11% e 1.13% e 1.15% 1.19% 1.16% g Net investment income ........................ 3.19% 3.57% 4.14% 4.64% 4.82% g Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f For the period January 1, 2002 (effective date) to September 30, 2002. g Annualized. Annual Report | The accompanying notes are an integral part of these financial statements. | 103 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
---------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............ $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05 ---------------------------------------------------------------------------- Income from investment operations a: Net investment income b ...................... 0.45 0.48 0.44 0.42 0.47 Net realized and unrealized gains (losses) ... 0.38 2.42 1.34 0.87 (1.60) ---------------------------------------------------------------------------- Total from investment operations .............. 0.83 2.90 1.78 1.29 (1.13) ---------------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.43) (0.46) (0.42) (0.44) (0.46) Net realized gains ........................... (0.09) -- -- -- (0.47) ---------------------------------------------------------------------------- Total distributions ........................... (0.52) (0.46) (0.42) (0.44) (0.93) ---------------------------------------------------------------------------- Redemption fees ............................... -- c -- c -- c -- -- ---------------------------------------------------------------------------- Net asset value, end of year .................. $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99 ============================================================================ Total return .................................. 6.88% 29.00% 20.48% 16.61% (12.32)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ............... $103,041 $110,249 $51,586 $47,167 $15,664 Ratios to average net assets: Expenses ..................................... 0.61% d 0.63% d 0.65% 0.69% 0.66% Net investment income ........................ 3.69% 4.07% 4.64% 5.14% 5.07% Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Amount rounds to less than $0.01 per share. d Benefit of expense reduction rounds to less than 0.01%. 104 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
--------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE --------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS 99.6% COMMON STOCKS 93.9% DIVERSIFIED TELECOMMUNICATION SERVICES 3.5% AT&T Inc. ................................... United States 1,400,000 $ 45,584,000 Verizon Communications Inc. ................. United States 1,200,000 44,556,000 -------------- 90,140,000 -------------- ELECTRIC UTILITIES 79.8% Alliant Energy Corp. ........................ United States 1,300,000 46,449,000 Ameren Corp. ................................ United States 1,229,441 64,902,190 American Electric Power Co. Inc. ............ United States 1,500,000 54,555,000 CenterPoint Energy Inc. ..................... United States 1,500,000 21,480,000 Cleco Corp. ................................. United States 1,000,000 25,240,000 Consolidated Edison Inc. .................... United States 700,000 32,340,000 Constellation Energy Group .................. United States 500,000 29,600,000 Dominion Resources Inc. ..................... United States 1,600,000 122,384,000 DTE Energy Co. .............................. United States 400,000 16,604,000 Duke Energy Corp. ........................... United States 4,391,400 132,620,280 Edison International ........................ United States 2,200,000 91,608,000 Energy East Corp. ........................... United States 800,000 18,976,000 Entergy Corp. ............................... United States 1,750,000 136,902,500 Exelon Corp. ................................ United States 2,200,000 133,188,000 FirstEnergy Corp. ........................... United States 2,100,000 117,306,000 FPL Group Inc. .............................. United States 2,300,000 103,500,000 Hawaiian Electric Industries Inc. ........... United States 500,000 13,530,000 ITC Holdings Corp. .......................... United States 581,000 18,127,200 National Grid PLC ........................... United Kingdom 4,987,755 62,386,665 Northeast Utilities ......................... United States 1,971,500 45,876,805 NSTAR ....................................... United States 500,000 16,680,000 Pepco Holdings Inc. ......................... United States 1,600,000 38,672,000 PG&E Corp. .................................. United States 1,900,000 79,135,000 Pinnacle West Capital Corp. ................. United States 800,000 36,040,000 PPL Corp. ................................... United States 2,400,000 78,960,000 Progress Energy Inc. ........................ United States 1,500,000 68,070,000 Public Service Enterprise Group Inc. ........ United States 1,300,000 79,547,000 Puget Energy Inc. ........................... United States 1,725,000 39,209,250 Scottish Power PLC .......................... United Kingdom 780,952 9,526,842 a Sierra Pacific Resources .................... United States 3,472,473 49,795,263 The Southern Co. ............................ United States 2,500,000 86,150,000 TXU Corp. ................................... United States 500,000 31,260,000 United Utilities PLC ........................ United Kingdom 4,000,000 52,840,534 Westar Energy Inc. .......................... United States 900,000 21,159,000 Wisconsin Energy Corp. ...................... United States 1,000,000 43,140,000 Xcel Energy Inc. ............................ United States 2,082,200 42,997,430 --------------- 2,060,757,959 --------------- GAS DISTRIBUTORS 8.8% AGL Resources Inc. .......................... United States 1,300,000 47,450,000 Atmos Energy Corp. .......................... United States 1,000,000 28,550,000 Gaz de France ............................... France 544,033 21,664,198 KeySpan Corp. ............................... United States 326,600 13,436,324
Annual Report | 105 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
---------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ---------------------------------------------------------------------------------------------------------------------- LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) GAS DISTRIBUTORS (CONTINUED) NiSource Inc. ....................................................... United States 2,000,000 $ 43,480,000 Sempra Energy ....................................................... United States 1,000,000 50,250,000 Vectren Corp. ....................................................... United States 800,000 21,480,000 -------------- 226,310,522 -------------- OIL, GAS & CONSUMABLE FUELS 1.8% Kinder Morgan Inc. .................................................. United States 200,000 20,970,000 The Williams Cos. Inc. .............................................. United States 1,100,000 26,257,000 -------------- 47,227,000 -------------- TOTAL COMMON STOCKS (COST $1,648,984,689) ........................... 2,424,435,481 -------------- CONVERTIBLE PREFERRED STOCKS 1.3% ELECTRIC UTILITIES 1.3% CMS Energy Trust I, 7.75%, cvt. pfd ................................. United States 260,000 12,811,214 PNM Resources Inc., 6.75%, cvt. pfd ................................. United States 400,000 20,100,000 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,519) ............... 32,911,214 -------------- ------------- PRINCIPAL AMOUNT c ------------- CORPORATE BONDS 4.4% ELECTRIC UTILITIES 4.4% Aquila Inc., senior note, 9.95%, 2/01/11 ................................................... United States $ 6,000,000 6,611,142 8.27%, 11/15/21 .................................................. United States 6,100,000 6,344,000 CMS Energy Corp., senior note, 9.875%, 10/15/07 ..................... United States 8,500,000 8,871,875 MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ........ United States 25,000,000 31,888,350 Northeast Generation Co., senior note, 8.812%, 10/15/26 ............. United States 7,500,000 7,720,837 PP&L Capital Funding, 8.375%, 6/15/07 ............................... United States 15,000,000 15,295,245 TXU Corp., senior note, 6.55%, 11/15/34 ............................. United States 40,000,000 37,874,960 -------------- TOTAL CORPORATE BONDS (COST $107,970,682) ........................... 114,606,409 -------------- TOTAL LONG TERM INVESTMENTS (COST $1,790,395,890) ................... 2,571,953,104 -------------- ------------- SHARES ------------- SHORT TERM INVESTMENT (COST $5,327,376) 0.2% MONEY MARKET FUND 0.2% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% United States 5,327,376 5,327,376 -------------- TOTAL INVESTMENTS (COST $1,795,723,266) 99.8% ....................... 2,577,280,480 OTHER ASSETS, LESS LIABILITIES 0.2% ................................. 5,560,782 -------------- NET ASSETS 100.0% ................................................... $2,582,841,262 ==============
See Selected Portfolio Abbreviations on page 107. a Non-income producing for the twelve months ended September 30, 2006. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. c The principal amount is stated in U.S. dollars unless otherwise indicated. 106 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association FRN - Floating Rate Note GNMA - Government National Mortgage Association GP - Graduated Payment MTN - Medium Term Note SF - Single Family Annual Report | The accompanying notes are an integral part of these financial statements. | 107 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES September 30, 2006
-------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND -------------------------------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers .................................. $ 417,723,494 $ 904,689,198 $ 40,625,655,897 Cost - Non-controlled affiliated issuers (Note 10) ........... -- -- 1,823,937,859 Cost - Sweep Money Fund (Note 7) ............................. 4,719,412 20,082,694 165,725,024 Cost - Repurchase agreements ................................. -- -- 231,940,914 -------------------------------------------------------- Total cost of investments .................................... $ 422,442,906 $ 924,771,892 $ 42,847,259,694 ======================================================== Value - Unaffiliated issuers ................................. $ 677,070,200 $ 2,386,506,164 $ 43,437,051,755 Value - Non-controlled affiliated issuers (Note 10) .......... -- -- 2,710,891,672 Value - Sweep Money Fund (Note 7) ............................ 4,719,412 20,082,694 165,725,024 Value - Repurchase agreements ................................ -- -- 231,940,914 -------------------------------------------------------- Total value of investments ................................... 681,789,612 2,406,588,858 46,545,609,365 Cash .......................................................... -- -- 890 Receivables: Investment securities sold ................................... -- 594,482 657,450 Capital shares sold .......................................... 520,413 2,792,079 191,287,879 Dividends and interest ....................................... 206,974 1,512,720 458,382,246 -------------------------------------------------------- Total assets ........................................... 682,516,999 2,411,488,139 47,195,937,830 -------------------------------------------------------- Liabilities: Payables: Investment securities purchased .............................. 600,000 -- 106,793,309 Capital shares redeemed ...................................... 2,573,338 4,091,859 69,383,230 Affiliates ................................................... 725,779 2,373,239 40,089,179 Deferred sales proceeds (Note 11) ............................ -- -- 20,940,385 Accrued expenses and other liabilities ........................ 198,445 430,383 5,436,163 -------------------------------------------------------- Total liabilities ...................................... 4,097,562 6,895,481 242,642,266 -------------------------------------------------------- Net assets, at value ................................. $ 678,419,437 $ 2,404,592,658 $ 46,953,295,564 ======================================================== Net assets consist of: Paid-in capital ............................................... $ 475,198,630 $ 1,036,919,160 $ 42,678,257,176 Undistributed net investment income (distributions in excess of net investment income) ....................................... -- 3,691,950 (48,475,302) Net unrealized appreciation (depreciation) .................... 259,346,706 1,481,816,966 3,698,349,671 Accumulated net realized gain (loss) .......................... (56,125,899) (117,835,418) 625,164,019 -------------------------------------------------------- Net assets, at value ................................. $ 678,419,437 $ 2,404,592,658 $ 46,953,295,564 ========================================================
108 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2006
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------ CLASS A: Net assets, at value ................................................ $590,632,982 $1,695,802,411 $26,641,398,160 ================================================ Shares outstanding .................................................. 22,888,859 43,370,162 10,363,193,013 ================================================ Net asset value per share a ......................................... $ 25.80 $ 39.10 $ 2.57 ================================================ Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ................................... $ 27.37 $ 41.49 $ 2.68 ================================================ CLASS B: Net assets, at value ................................................ $ 18,717,799 $ 122,871,429 $ 3,743,374,468 ================================================ Shares outstanding .................................................. 756,135 3,263,788 1,461,427,024 ================================================ Net asset value and maximum offering price per share a .............. $ 24.75 $ 37.65 $ 2.56 ================================================ CLASS B1: Net assets, at value ................................................ -- -- $ 459,302,056 ================================================ Shares outstanding .................................................. -- -- 178,607,444 ================================================ Net asset value and maximum offering price per share a .............. -- -- $ 2.57 ================================================ CLASS C: Net assets, at value ................................................ $ 69,068,656 $ 273,511,690 $12,138,969,290 ================================================ Shares outstanding .................................................. 2,819,209 7,328,598 4,694,167,183 ================================================ Net asset value and maximum offering price per share a .............. $ 24.50 $ 37.32 $ 2.59 ================================================ CLASS R: Net assets, at value ................................................ -- $ 37,803,704 $ 183,609,076 ================================================ Shares outstanding .................................................. -- 974,340 72,082,679 ================================================ Net asset value and maximum offering price per share a .............. -- $ 38.80 $ 2.55 ================================================ ADVISOR CLASS: Net assets, at value ................................................ -- $ 274,603,424 $ 3,786,642,514 ================================================ Shares outstanding .................................................. -- 7,010,272 1,479,710,390 ================================================ Net asset value and maximum offering price per share a .............. -- $ 39.17 $ 2.56 ================================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | The accompanying notes are an integral part of these financial statements. | 109 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2006
---------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........................................ $6,542,261,994 $1,790,395,890 Cost - Sweep Money Fund (Note 7) ................................... 165,722,265 5,327,376 Cost - Repurchase agreements ....................................... 34,460,000 -- -------------------------------- Total cost of investments .......................................... $6,742,444,259 $1,795,723,266 ================================ Value - Unaffiliated issuers ....................................... $6,472,931,426 $2,571,953,104 Value - Sweep Money Fund (Note 7) .................................. 165,722,265 5,327,376 Value - Repurchase agreements ...................................... 34,460,000 -- -------------------------------- Total value of investments ......................................... 6,673,113,691 2,577,280,480 Receivables: Investment securities sold ......................................... -- 5,020,446 Capital shares sold ................................................ 4,721,546 1,870,632 Dividends and interest ............................................. 29,603,916 6,164,048 -------------------------------- Total assets ................................................. 6,707,439,153 2,590,335,606 -------------------------------- Liabilities: Payables: Investment securities purchased .................................... 123,460,993 -- Capital shares redeemed ............................................ 14,986,435 4,958,292 Affiliates ......................................................... 4,801,182 2,091,764 Accrued expenses and other liabilities .............................. 1,462,212 444,288 -------------------------------- Total liabilities ............................................ 144,710,822 7,494,344 -------------------------------- Net assets, at value ....................................... $6,562,728,331 $2,582,841,262 ================================ Net assets consist of: Paid-in capital ..................................................... $7,029,692,037 $1,724,048,885 Undistributed net investment income ................................. 11,480,909 10,368,034 Net unrealized appreciation (depreciation) .......................... (69,330,568) 781,557,214 Accumulated net realized gain (loss) ................................ (409,114,047) 66,867,129 -------------------------------- Net assets, at value ....................................... $6,562,728,331 $2,582,841,262 ================================ CLASS A: Net assets, at value ................................................ $5,291,116,657 $1,926,731,549 ================================ Shares outstanding .................................................. 822,760,091 149,477,642 ================================ Net asset value per share a ......................................... $ 6.43 $ 12.89 ================================ Maximum offering price per share (net asset value per share / 95.75%) $ 6.72 $ 13.46 ================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 110 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2006
--------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- CLASS B: Net assets, at value ................................. $388,806,605 $133,823,854 ================================= Shares outstanding ................................... 60,543,242 10,391,516 ================================= Net asset value and maximum offering price per share a $ 6.42 $ 12.88 ================================= CLASS C: Net assets, at value ................................. $424,462,410 $391,508,607 ================================= Shares outstanding ................................... 66,306,863 30,461,416 ================================= Net asset value and maximum offering price per share a $ 6.40 $ 12.85 ================================= CLASS R: Net assets, at value ................................. $71,103,697 $27,735,777 ================================= Shares outstanding ................................... 11,063,853 2,156,364 ================================= Net asset value and maximum offering price per share a $ 6.43 $ 12.86 ================================= ADVISOR CLASS: Net assets, at value ................................. $387,238,962 $103,041,475 ================================= Shares outstanding ................................... 60,082,925 7,959,343 ================================= Net asset value and maximum offering price per share a $ 6.45 $ 12.95 =================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | The accompanying notes are an integral part of these financial statements. | 111 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended September 30, 2006
------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------- Investment income: Dividends: Unaffiliated issuers ............................................. $ 4,845,900 $ 27,604,449 $ 835,905,726 Non-controlled affiliated issuers (Note 10) ...................... -- -- 77,276,184 Sweep Money Fund (Note 7) ........................................ 290,807 1,347,534 7,463,149 Interest: Unaffiliated issuers ............................................. -- -- 1,664,224,522 Non-controlled affiliated issuers (Note 10) ...................... -- -- 14,190,750 Income from securities loaned - net ............................... 399,477 -- -- Other income (Note 13) ............................................ 32,970 70,883 966,502 ------------------------------------------------- Total investment income .................................... 5,569,154 29,022,866 2,600,026,833 ------------------------------------------------- Expenses: Management fees (Note 3a) ......................................... 3,488,806 10,676,078 164,786,276 Distribution fees: (Note 3c) Class A .......................................................... 1,576,807 4,023,953 35,542,454 Class B .......................................................... 200,950 1,244,622 37,113,496 Class B1 ......................................................... -- -- 2,999,117 Class C .......................................................... 738,631 2,728,200 69,221,252 Class R .......................................................... -- 179,624 745,673 Transfer agent fees (Note 3e) ..................................... 1,458,706 4,342,709 30,818,017 Custodian fees (Note 4) ........................................... 18,963 47,999 869,166 Reports to shareholders ........................................... 120,886 279,182 3,630,787 Registration and filing fees ...................................... 63,392 149,069 2,021,251 Professional fees (Note 3g) ....................................... 36,101 66,345 318,662 Directors' fees and expenses ...................................... 3,397 10,527 182,669 Other ............................................................. 12,681 40,156 1,006,179 ------------------------------------------------- Total expenses ............................................. 7,719,320 23,788,464 349,254,999 Expense reductions (Note 4) ................................ (30) (661) (233,075) Expenses waived/paid by affiliates (Note 3f) ............... -- -- (123,828) ------------------------------------------------- Net expenses ............................................. 7,719,290 23,787,803 348,898,096 ------------------------------------------------- Net investment income (loss) ............................ (2,150,136) 5,235,063 2,251,128,737 ------------------------------------------------- Realized and unrealized gains (losses) Net realized gain (loss) from: Investments Unaffiliated Issuers ........................................... 37,234,265 94,184,639 633,469,369 Non-controlled affiliated issuers (Note 10) .................... -- -- 75,114,093 Foreign currency transactions .................................... (142) (14,711) (79,265) ------------------------------------------------- Net realized gain (loss) ................................ 37,234,123 94,169,928 708,504,197 ------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments (13,111,219) 169,320,275 1,064,942,294 ------------------------------------------------- Net realized and unrealized gain (loss) ............................ 24,122,904 263,490,203 1,773,446,491 ------------------------------------------------- Net increase (decrease) in net assets resulting from operations .... $ 21,972,768 $ 268,725,266 $ 4,024,575,228 =================================================
112 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the year ended September 30, 2006
---------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND ---------------------------------- Investment income: Dividends: Unaffiliated issuers ............................................. $ -- $ 98,624,439 Sweep Money Fund (Note 7) ........................................ 7,317,791 449,603 Interest .......................................................... 360,046,038 8,583,582 Income from securities loaned - net ............................... -- 8,430 Other income (Note 13) ............................................ -- 52,619 --------------------------------- Total investment income .................................... 367,363,829 107,718,673 --------------------------------- Expenses: Management fees (Note 3a) ......................................... 30,413,885 11,524,045 Distribution fees: (Note 3c) Class A .......................................................... 7,067,091 2,771,437 Class B .......................................................... 2,782,016 894,912 Class C .......................................................... 2,946,048 2,475,762 Class R .......................................................... 334,169 90,403 Transfer agent fees (Note 3e) ..................................... 8,619,714 3,094,345 Custodian fees (Note 4) ........................................... 131,458 89,713 Reports to shareholders ........................................... 692,437 275,722 Registration and filing fees ...................................... 197,093 131,137 Professional fees (Note 3g) ....................................... 96,244 66,675 Directors' fees and expenses ...................................... 32,608 11,925 Other ............................................................. 343,568 97,746 --------------------------------- Total expenses ............................................. 53,656,331 21,523,822 Expense reductions (Note 4) ................................ (11,326) (5,333) --------------------------------- Net expenses ............................................. 53,645,005 21,518,489 --------------------------------- Net investment income ................................... 313,718,824 86,200,184 --------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ...................................................... (1,705,377) 79,107,847 Foreign currency transactions .................................... -- 361,230 --------------------------------- Net realized gain (loss) ................................ (1,705,377) 79,469,077 --------------------------------- Net change in unrealized appreciation (depreciation) on investments (93,987,541) (14,294,348) --------------------------------- Net realized and unrealized gain (loss) ............................ (95,692,918) 65,174,729 --------------------------------- Net increase (decrease) in net assets resulting from operations .... $ 218,025,906 $ 151,374,913 =================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 113 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, 2006 2005 2006 2005 ----------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) .................. $ (2,150,136) $ (860,145) $ 5,235,063 $ 6,147,997 Net realized gain (loss) from investments and foreign currency transactions ............... 37,234,123 (905,096) 94,169,928 33,738,259 Net change in unrealized appreciation (depreciation) on investments ............... (13,111,21) 93,542,036 169,320,275 244,117,335 ----------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............................. 21,972,768 91,776,795 268,725,266 284,003,591 ----------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ..................................... -- -- (2,878,816) (3,882,872) Class R ..................................... -- -- (1,109) (10,415) Advisor Class ............................... -- -- (964,032) (732,270) ----------------------------------------------------------------------- Total distributions to shareholders ............ -- -- (3,843,957) (4,625,557) ----------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ..................................... (58,206,95) (91,991,179) (61,066,872) (168,604,093) Class B ..................................... (1,156,433) (1,613,902) (14,734,540) (13,722,938) Class C ..................................... (6,007,946) (10,942,390) (27,044,966) (33,781,675) Class R ..................................... -- -- 6,380,501 4,768,742 Advisor Class ............................... -- -- 24,459,918 66,279,985 ----------------------------------------------------------------------- Total capital share transactions ............... (65,371,33) (104,547,471) (72,005,959) (145,059,979) ----------------------------------------------------------------------- Redemption fees ................................ 2,037 1,039 8,229 11,358 ----------------------------------------------------------------------- Net increase (decrease) in net assets ..... (43,396,53) (12,769,637) 192,883,579 134,329,413 Net assets: Beginning of year .............................. 721,815,967 734,585,604 2,211,709,079 2,077,379,666 ----------------------------------------------------------------------- End of year .................................... $ 678,419,437 $ 721,815,967 $ 2,404,592,658 $ 2,211,709,079 ======================================================================= Undistributed net investment income included in net assets: End of year ................................... $ -- $ -- $ 3,691,950 $ 2,307,104 -----------------------------------------------------------------------
114 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
------------------------------------------------------------------------------ FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND ------------------------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, 2006 2005 2006 2005 ------------------------------------------------------------------------------ Increase (decrease) in net assets: Operations: Net investment income ................... $ 2,251,128,737 $ 1,736,884,708 $ 313,718,824 $ 320,563,601 Net realized gain (loss) from investments and foreign currency transactions ..... 708,504,197 408,724,204 (1,705,377) 3,270,275 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ..... 1,064,942,294 893,534,036 (93,987,541) (126,557,362) ------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations ............. 4,024,575,228 3,039,142,948 218,025,906 197,276,514 ------------------------------------------------------------------------------ Distributions to shareholders from: Net investment income: Class A ............................... (1,378,791,711) (1,104,437,012) (270,849,710) (302,745,166) Class B ............................... (189,035,634) (206,484,397) (18,899,716) (23,185,787) Class B1 .............................. (25,054,794) (28,826,258) -- -- Class C ............................... (571,320,771) (461,493,148) (20,148,370) (24,272,966) Class R ............................... (8,167,468) (5,706,119) (2,989,468) (2,810,550) Advisor Class ......................... (175,243,446) (95,145,372) (18,476,100) (15,327,999) Net realized gains: Class A ............................... (140,038,105) (84,143,096) -- -- Class B ............................... (23,629,261) (19,751,225) -- -- Class B1 .............................. (2,953,524) (2,705,174) -- -- Class C ............................... (63,765,145) (37,975,944) -- -- Class R ............................... (827,485) (432,526) -- -- Advisor Class ......................... (15,806,072) (5,808,100) -- -- ------------------------------------------------------------------------------ Total distributions to shareholders ...... (2,594,633,416) (2,052,908,371) (331,363,364) (368,342,468) ------------------------------------------------------------------------------ Capital share transactions: (Note 2) Class A ............................... 3,892,312,218 6,640,381,449 (518,339,020) (380,358,442) Class B ............................... (281,240,958) 317,307,812 (82,378,909) (77,684,862) Class B1 .............................. (46,251,019) (34,777,479) -- -- Class C ............................... 1,657,633,123 3,242,801,825 (76,075,166) (76,479,175) Class R ............................... 55,454,673 46,237,588 6,209,239 7,779,886 Advisor Class ......................... 1,379,240,071 1,334,835,525 57,275,425 1,208,804 ------------------------------------------------------------------------------ Total capital share transactions ......... 6,657,148,108 11,546,786,720 (613,308,431) (525,533,789) ------------------------------------------------------------------------------ Redemption fees .......................... 265,535 173,429 125,755 31,088 ------------------------------------------------------------------------------ Net increase (decrease) in net assets .......................... 8,087,355,455 12,533,194,726 (726,520,134) (696,568,655) Net assets: Beginning of year ........................ 38,865,940,109 26,332,745,383 7,289,248,465 7,985,817,120 ------------------------------------------------------------------------------ End of year .............................. $ 46,953,295,564 $ 38,865,940,109 $ 6,562,728,331 $ 7,289,248,465 ============================================================================== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year ............................. $ (48,475,302) $ 145,660,727 $ 11,480,909 $ 949,733 ==============================================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 115 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
----------------------------------- FRANKLIN UTILITIES FUND ----------------------------------- YEAR ENDED SEPTEMBER 30, 2006 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income ..................................................... $ 86,200,184 $ 87,329,712 Net realized gain (loss) from investments and foreign currency transactions 79,469,077 86,597,164 Net change in unrealized appreciation (depreciation) on investments ....... (14,294,348) 395,798,703 ----------------------------------- Net increase (decrease) in net assets resulting from operations ........ 151,374,913 569,725,579 ----------------------------------- Distributions to shareholders from: Net investment income: Class A .................................................................. (63,192,877) (65,898,832) Class B .................................................................. (3,961,723) (4,861,315) Class C .................................................................. (11,209,132) (12,160,417) Class R .................................................................. (562,410) (210,458) Advisor Class ............................................................ (3,148,388) (3,309,596) Net realized gains: Class A .................................................................. (14,345,312) -- Class B .................................................................. (1,090,928) -- Class C .................................................................. (3,070,998) -- Class R .................................................................. (117,357) -- Advisor Class ............................................................ (696,993) -- ----------------------------------- Total distributions to shareholders ......................................... (101,396,118) (86,440,618) ----------------------------------- Capital share transactions: (Note 2) Class A .................................................................. (98,910,206) 175,567,341 Class B .................................................................. (22,687,061) (3,086,774) Class C .................................................................. (50,418,336) 76,710,176 Class R .................................................................. 12,337,719 11,865,292 Advisor Class ............................................................ (8,392,780) 41,716,286 ----------------------------------- Total capital share transactions ............................................ (168,070,664) 302,772,321 ----------------------------------- Redemption fees ............................................................. 10,894 4,687 ----------------------------------- Net increase (decrease) in net assets .................................. (118,080,975) 786,061,969 Net assets: Beginning of year ........................................................... 2,700,922,237 1,914,860,268 ----------------------------------- End of year ................................................................. $ 2,582,841,262 $ 2,700,922,237 =================================== Undistributed net investment income included in net assets: End of year ................................................................. $ 10,368,034 $ 6,871,929 ===================================
116 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the Investment Company Act of 1940 (1940 Act) as a diversified, open-end investment company, consisting of five funds (the 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 A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1, & CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS -------------------------------------------------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The funds may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions to assist in determining a current market value for each security. The fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Funds have procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of Annual Report | 117 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Custodian Funds' Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Funds' Board of Directors. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statements of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS The Funds may enter into repurchase agreements. Repurchase agreements are accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying 118 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. REPURCHASE AGREEMENTS (CONTINUED) securities marked to market daily to maintain coverage of at least 100%. The Funds may also enter into joint repurchase agreements whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. Repurchase agreements are valued at cost. At September 30, 2006, all repurchase agreements held by the funds had been entered into on September 29, 2006. D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS The Funds may purchase securities on a when-issued, delayed delivery, or to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statements of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statements of Assets and Liabilities. F. SECURITIES LENDING Certain funds may loan securities to certain brokers through a securities lending agent for which they receive cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. The collateral is invested in short-term instruments as noted in the Statement of Investments. The fund receives interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The fund bears the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. At September 30, 2006, the funds had no securities on loan. Annual Report | 119 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. INCOME TAXES No provision has been made for U.S. income taxes because each fund intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Custodian Funds are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Custodian Funds. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in class-level expenses may result in payment of different per share distributions by class. I. 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. J. 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. 120 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) K. GUARANTEES AND INDEMNIFICATIONS Under the Custodian Funds' organizational documents, their officers and directors are indemnified by the Custodian Funds against certain liabilities arising out of the performance of their duties to the Custodian Funds. Additionally, in the normal course of business, the Custodian Funds enter into contracts with service providers that contain general indemnification clauses. The Custodian Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Custodian Funds that have not yet occurred. However, based on experience, the Custodian Funds expect the risk of loss to be remote. 2. CAPITAL STOCK At September 30, 2006, there were 44.2 billion shares of Custodian Funds authorized ($0.01 par value) and allocated to the Funds as follows (in millions):
------------------------------------------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND ------------------------------------------------------------------------------------------------ 1,000 3,250 28,400 8,000 3,550
Transactions in the Funds' shares were as follows:
-------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND -------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------- CLASS A SHARES: Year ended September 30, 2006 Shares sold ................. 7,549,106 $ 196,574,987 5,839,020 $ 216,936,848 Shares issued in reinvestment of distributions ........... -- -- 72,200 2,651,898 Shares redeemed ............. (9,824,846) (254,781,943) (7,553,843) (280,655,618) -------------------------------------------------------------- Net increase (decrease) ..... (2,275,740) $ (58,206,956) (1,642,623) $ (61,066,872) ============================================================== Year ended September 30, 2005 Shares sold ................. 5,939,499 $ 140,943,371 4,972,706 $ 165,487,177 Shares issued in reinvestment of distributions ........... -- -- 106,686 3,548,371 Shares redeemed ............. (9,857,258) (232,934,550) (10,153,867) (337,639,641) -------------------------------------------------------------- Net increase (decrease) ..... (3,917,759) $ (91,991,179) (5,074,475) $(168,604,093) ============================================================== CLASS B SHARES: Year ended September 30, 2006 Shares sold ................. 130,112 $ 3,277,620 131,693 $ 4,727,781 Shares redeemed ............. (181,335) (4,434,053) (542,288) (19,462,321) -------------------------------------------------------------- Net increase (decrease) ..... (51,223) $ (1,156,433) (410,595) $ (14,734,540) ============================================================== Year ended September 30, 2005 Shares sold ................. 133,963 $ 3,049,030 242,741 $ 7,743,683 Shares redeemed ............. (204,804) (4,662,932) (666,084) (21,466,621) -------------------------------------------------------------- Net increase (decrease) ..... (70,841) $ (1,613,902) (423,343) $ (13,722,938) ==============================================================
Annual Report | 121 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
---------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ---------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------- CLASS C SHARES: Year ended September 30, 2006 Shares sold ...................................... 544,669 $ 13,596,186 805,722 $ 28,644,387 Shares redeemed .................................. (804,572) (19,604,132) (1,568,706) (55,689,353) ----------------------------------------------------------- Net increase (decrease) .......................... (259,903) $ (6,007,946) (762,984) $(27,044,966) =========================================================== Year ended September 30, 2005 Shares sold ...................................... 482,114 $ 10,909,830 886,979 $ 28,487,942 Shares redeemed .................................. (969,317) (21,852,220) (1,948,771) (62,269,617) ----------------------------------------------------------- Net increase (decrease) .......................... (487,203) $(10,942,390) (1,061,792) $(33,781,675) =========================================================== CLASS R SHARES: Year ended September 30, 2006 Shares sold ...................................... 761,379 $ 28,236,014 Shares issued in reinvestment of distributions ................................ 30 1,108 Shares redeemed .................................. (591,370) (21,856,621) --------------------------- Net increase (decrease) .......................... 170,039 $ 6,380,501 =========================== Year ended September 30, 2005 Shares sold ...................................... 301,713 $ 9,964,493 Shares issued in reinvestment of distributions ................................ 313 10,387 Shares redeemed .................................. (157,760) (5,206,138) --------------------------- Net increase (decrease) .......................... 144,266 $ 4,768,742 =========================== ADVISOR CLASS SHARES: Year ended September 30, 2006 Shares sold ...................................... 1,865,004 $ 68,842,317 Shares issued in reinvestment of distributions ................................ 23,979 880,512 Shares redeemed .................................. (1,234,780) (45,262,911) --------------------------- Net increase (decrease) .......................... 654,203 $ 24,459,918 =========================== Year ended September 30, 2005 Shares sold ...................................... 2,738,052 $ 91,354,618 Shares issued in reinvestment of distributions ................................ 21,696 721,407 Shares redeemed .................................. (756,109) (25,796,040) --------------------------- Net increase (decrease) .......................... 2,003,639 $ 66,279,985 ===========================
122 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ----------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------- CLASS A SHARES: Year ended September 30, 2006 Shares sold .................................. 2,696,366,641 $ 6,638,171,639 74,108,689 $ 475,165,349 Shares issued in reinvestment of distributions ............................ 419,071,279 1,027,948,938 27,302,160 174,712,964 Shares redeemed .............................. (1,536,463,921) (3,773,808,359) (182,139,799) (1,168,217,333) ----------------------------------------------------------------------- Net increase (decrease) ...................... 1,578,973,999 $ 3,892,312,218 (80,728,950) $ (518,339,020) ======================================================================= Year ended September 30, 2005 Shares sold .................................. 3,233,548,786 $ 7,991,126,134 80,655,804 $ 532,927,988 Shares issued on merger (Note 12) ............ 22,580,678 57,129,115 -- -- Shares issued in reinvestment of distributions ............................ 310,204,492 763,747,314 29,003,758 191,550,552 Shares redeemed .............................. (879,645,185) (2,171,621,114) (167,123,344) (1,104,836,982) ----------------------------------------------------------------------- Net increase (decrease) ...................... 2,686,688,771 $ 6,640,381,449 (57,463,782) $ (380,358,442) ======================================================================= CLASS B SHARES: Year ended September 30, 2006 Shares sold .................................. 26,637,625 $ 65,369,671 1,981,038 $ 12,637,018 Shares issued in reinvestment of distributions ............................ 55,871,397 136,411,780 2,075,139 13,272,404 Shares redeemed .............................. (197,429,792) (483,022,409) (16,913,499) (108,288,331) ----------------------------------------------------------------------- Net increase (decrease) ...................... (114,920,770) $ (281,240,958) (12,857,322) $ (82,378,909) ======================================================================= Year ended September 30, 2005 Shares sold .................................. 216,067,791 $ 530,027,930 2,734,327 $ 18,126,694 Shares issued in reinvestment of distributions ............................ 58,417,660 143,410,552 2,446,399 16,142,982 Shares redeemed .............................. (144,791,444) (356,130,670) (16,950,873) (111,954,538) ------------------------------------------------------------------------ Net increase (decrease) ...................... 129,694,007 $ 317,307,812 (11,770,147) $ (77,684,862) ======================================================================== CLASS B1 SHARES: Year ended September 30, 2006 Shares sold .................................. 1,061,971 $ 2,609,506 Shares issued in reinvestment of distributions ............................ 6,529,196 15,992,703 Shares redeemed .............................. (26,407,031) (64,853,228) ---------------------------------- Net increase (decrease) ...................... (18,815,864) $ (46,251,019) ================================== Year ended September 30, 2005 Shares sold .................................. 2,378,752 $ 5,860,213 Shares issued in reinvestment of distributions ............................ 7,165,232 17,644,463 Shares redeemed .............................. (23,606,754) (58,282,155) ---------------------------------- Net increase (decrease) ...................... (14,062,770) $ (34,777,479) ==================================
Annual Report | 123 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------- CLASS C SHARES: Year ended September 30, 2006 Shares sold ................. 1,197,637,346 $ 2,970,142,401 9,638,095 $ 61,502,139 Shares issued in reinvestment of distributions ........... 166,806,121 411,488,472 2,119,611 13,512,599 Shares redeemed ............. (698,120,168) (1,723,997,750) (23,652,039) (151,089,904) -------------------------------------------------------------------- Net increase (decrease) ..... 666,323,299 $ 1,657,633,123 (11,894,333) $ (76,075,166) ==================================================================== Year ended September 30, 2005 Shares sold ................. 1,587,994,257 $ 3,945,015,780 11,343,153 $ 74,643,597 Shares issued in reinvestment of distributions ........... 128,622,410 318,755,436 2,413,285 15,876,049 Shares redeemed ............. (411,346,115) (1,020,969,391) (25,359,338) (166,998,821) -------------------------------------------------------------------- Net increase (decrease) ..... 1,305,270,552 $ 3,242,801,825 (11,602,900) $ (76,479,175) ==================================================================== CLASS R SHARES: Year ended September 30, 2006 Shares sold ................. 35,951,956 $ 87,751,074 3,883,199 $ 24,836,010 Shares issued in reinvestment of distributions ........... 3,434,439 8,359,852 460,538 2,944,655 Shares redeemed ............. (16,667,648) (40,656,253) (3,359,689) (21,571,426) -------------------------------------------------------------------- Net increase (decrease) ..... 22,718,747 $ 55,454,673 984,048 $ 6,209,239 ==================================================================== Year ended September 30, 2005 Shares sold ................. 26,352,002 $ 64,518,265 4,180,818 $ 27,602,806 Shares issued in reinvestment of distributions ........... 2,379,605 5,812,421 421,527 2,782,416 Shares redeemed ............. (9,872,431) (24,093,098) (3,423,452) (22,605,336) -------------------------------------------------------------------- Net increase (decrease) ..... 18,859,176 $ 46,237,588 1,178,893 $ 7,779,886 ==================================================================== ADVISOR CLASS SHARES: Year ended September 30, 2006 Shares sold ................. 536,707,405 $ 1,314,899,137 20,893,833 $ 134,424,816 Shares issued in reinvestment of distributions ........... 75,142,358 183,808,062 2,672,825 17,119,867 Shares redeemed ............. (49,253,364) (119,467,128) (14,613,605) (94,269,258) -------------------------------------------------------------------- Net increase (decrease) ..... 562,596,399 $ 1,379,240,071 8,953,053 $ 57,275,425 ==================================================================== Year ended September 30, 2005 Shares sold ................. 525,718,339 $ 1,292,792,031 13,517,268 $ 89,567,508 Shares issued in reinvestment of distributions ........... 38,816,130 95,287,128 1,992,298 13,178,931 Shares redeemed ............. (21,661,227) (53,243,634) (15,208,235) (101,537,635) -------------------------------------------------------------------- Net increase (decrease) ..... 542,873,242 $ 1,334,835,525 301,331 $ 1,208,804 ====================================================================
124 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
------------------------------ FRANKLIN UTILITIES FUND ------------------------------ SHARES AMOUNT ------------------------------ CLASS A SHARES: Year ended September 30, 2006 Shares sold .................................. 21,710,054 $ 263,631,372 Shares issued in reinvestment of distributions 4,863,147 59,003,083 Shares redeemed .............................. (34,893,525) (421,544,661) ------------------------------ Net increase (decrease) ...................... (8,320,324) $ (98,910,206) ============================== Year ended September 30, 2005 Shares sold .................................. 34,569,804 $ 400,170,506 Shares issued in reinvestment of distributions 4,305,025 49,165,990 Shares redeemed .............................. (23,851,552) (273,769,155) ------------------------------ Net increase (decrease) ...................... 15,023,277 $ 175,567,341 ============================== CLASS B SHARES: Year ended September 30, 2006 Shares sold .................................. 520,507 $ 6,326,393 Shares issued in reinvestment of distributions 231,269 2,799,228 Shares redeemed .............................. (2,628,864) (31,812,682) ------------------------------ Net increase (decrease) ...................... (1,877,088) $ (22,687,061) ============================== Year ended September 30, 2005 Shares sold .................................. 1,759,896 $ 19,743,236 Shares issued in reinvestment of distributions 224,565 2,562,564 Shares redeemed .............................. (2,233,960) (25,392,574) ------------------------------ Net increase (decrease) ...................... (249,499) $ (3,086,774) ============================== CLASS C SHARES: Year ended September 30, 2006 Shares sold .................................. 4,480,664 $ 54,267,851 Shares issued in reinvestment of distributions 576,307 6,963,061 Shares redeemed .............................. (9,312,099) (111,649,248) ------------------------------ Net increase (decrease) ...................... (4,255,128) $ (50,418,336) ============================== Year ended September 30, 2005 Shares sold .................................. 12,226,563 $ 139,657,945 Shares issued in reinvestment of distributions 495,205 5,658,566 Shares redeemed .............................. (6,002,579) (68,606,335) ------------------------------ Net increase (decrease) ...................... 6,719,189 $ 76,710,176 ============================== CLASS R SHARES: Year ended September 30, 2006 Shares sold .................................. 1,759,282 $ 21,583,826 Shares issued in reinvestment of distributions 54,640 665,605 Shares redeemed .............................. (823,343) (9,911,712) ------------------------------ Net increase (decrease) ...................... 990,579 $ 12,337,719 ============================== Year ended September 30, 2005 Shares sold .................................. 1,167,612 $ 13,713,510 Shares issued in reinvestment of distributions 17,357 204,087 Shares redeemed .............................. (175,789) (2,052,305) ------------------------------ Net increase (decrease) ...................... 1,009,180 $ 11,865,292 ==============================
Annual Report | 125 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
---------------------------- FRANKLIN UTILITIES FUND ---------------------------- SHARES AMOUNT ---------------------------- ADVISOR CLASS SHARES: Year ended September 30, 2006 Shares sold .................................................... 2,685,330 $ 33,289,067 Shares issued in reinvestment of distributions ................. 269,026 3,282,823 Shares redeemed ................................................ (3,720,560) (44,964,670) ---------------------------- Net increase (decrease) ........................................ (766,204) $ (8,392,780) ============================ Year ended September 30, 2005 Shares sold .................................................... 5,741,424 $ 65,649,487 Shares issued in reinvestment of distributions ................. 243,650 2,814,290 Shares redeemed ................................................ (2,316,860) (26,747,491) ---------------------------- Net increase (decrease) ........................................ 3,668,214 $ 41,716,286 ============================
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 directors of the Custodian Funds are also officers and/or directors of the following subsidiaries: ------------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION ------------------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Investment Advisory Services, LLC (Investment Advisory) 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. MANAGEMENT FEES Effective March 15, 2006, the Funds, except Franklin Growth Fund, pay an investment management fee to Advisers, whereas the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the month-end net assets of each of the Funds as follows: -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS -------------------------------------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion Prior to March 15, 2006, the Funds paid an annualized fee rate of 0.36% on net assets in excess of $20 billion. 126 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES Under agreements with Advisers and Investment Advisory, FT Services provides administrative services to the Funds. The fee is paid by Advisers and Investment Advisory based on average daily net assets, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Custodian Funds 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' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the sale and distribution of each fund's shares up to a certain percentage per year of its average daily net assets as follows:
--------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND --------------------------------------------------------------------- Class A .................. 0.25% 0.25% 0.15% 0.15% 0.15%
Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. Under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the 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 FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ------------------------------------------------------------------- Class B ...... 1.00% 1.00% 1.00% 0.65% 0.65% Class B1 ..... -- -- 0.65% -- -- Class C ...... 1.00% 1.00% 0.65% 0.65% 0.65% Class R ...... -- 0.50% 0.50% 0.50% 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------------------ Sales charges retained net of commissions paid to unaffiliated broker/dealers ..................................................... $133,316 $651,670 $20,808,243 Contingent deferred sales charges retained .......................... $ 42,270 $195,508 $ 8,991,494
Annual Report | 127 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) D. SALES CHARGES/UNDERWRITING AGREEMENTS (CONTINUED)
--------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------------------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ........................................................ $ 557,165 $329,830 Contingent deferred sales charges retained ............................. $1,131,306 $274,156
E. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services: --------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND --------------------------------------- Transfer agent fees ..... $1,095,438 $3,328,015 $17,760,223 --------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------------------------------- Transfer agent fees ....... $5,954,309 $2,002,943 F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS Advisers agreed in advance to voluntarily waive a portion of management fees for the Franklin Income Fund, in the form of additional breakpoints based on month-end net assets of the fund as follows: -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS -------------------------------------------------------------------------------- 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion Effective March 15, 2006, the waiver was discontinued for the Franklin Income Fund. G. OTHER AFFILIATED TRANSACTIONS Included in professional fees are legal fees of $191,237 that were paid to a law firm in which a partner is an officer of the Funds. 128 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the year ended September 30, 2006, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES At September 30, 2006, the Franklin Income Fund had tax basis capital losses of $2,516,775 from the merged Franklin Multi-Income Trust which may be carried over to offset future capital gains, subject to certain limitations. At September 30, 2006, the funds had tax basis capital losses which may be carried over to offset future capital gains, if any. During the year ended September 30, 2006, the Franklin Dynatech Fund, Franklin Growth Fund and Franklin Income Fund utilized $37,234,265, $94,184,639, and $6,834,626, respectively, of capital loss carryforwards. At September 30, 2006, the capital loss carryforwards were as follows:
-------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT DYNATECH GROWTH INCOME SECURITIES FUND FUND FUND FUND -------------------------------------------------------------- Capital loss carryforwards expiring in: 2007 ................................ $ -- $ -- $ -- $ 18,954,412 2008 ................................ -- -- -- 21,105,846 2009 ................................ -- -- -- 46,256,951 2010 ................................ -- -- -- 11,768,551 2011 ................................ 19,032,674 78,768,578 2,020,605 33,556,845 2012 ................................ 21,838,085 39,052,129 496,170 129,102,166 2013 ................................ 14,781,620 -- -- 74,283,298 2014 ................................ -- -- -- 47,763,112 -------------------------------------------------------------- $ 55,652,379 $117,820,707 $ 2,516,775 $382,791,181 ==============================================================
On September 30, 2006, the Franklin U.S. Government Securities Fund had expired capital loss carryforwards of $28,279,472, which were reclassified to paid-in capital. For tax purposes, realized capital losses and realized currency losses, occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At September 30, 2006, the Franklin U.S. Government Securities Fund had deferred realized capital losses of $26,322,866. At September 30, 2006, the Franklin Dynatech Fund, Franklin Growth Fund and Franklin Income Fund had deferred realized currency losses of $142, $14,711 and $79,262, respectively. Annual Report | 129 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) The tax character of distributions paid during the years ended September 30, 2006 and 2005, was as follows:
------------------------------------------------------------------ FRANKLIN GROWTH FUND FRANKLIN INCOME FUND ------------------------------------------------------------------ 2006 2005 2006 2005 ------------------------------------------------------------------ Distributions paid from: Ordinary income ..... $ 3,843,957 $ 4,625,557 $2,449,083,601 $1,902,092,306 Long term capital gain -- -- 145,549,815 150,816,065 ------------------------------------------------------------------ $ 3,843,957 $ 4,625,557 $2,594,633,416 $2,052,908,371 ================================================================== ------------------------------------------------------------------ FRANKLIN U.S. GOVERNMENT SECURITIES FUND FRANKLIN UTILITIES FUND ------------------------------------------------------------------ 2006 2005 2006 2005 ------------------------------------------------------------------ Distributions paid from: Ordinary income ..... $331,363,364 $ 368,342,468 $ 82,074,530 $ 86,440,618 Long term capital gain -- -- 19,321,588 -- ------------------------------------------------------------------ $331,363,364 $ 368,342,468 $ 101,396,118 $ 86,440,618 ==================================================================
At September 30, 2006, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
-------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------------------------------------------------------- Cost of investments ...................... $ 422,916,284 $ 924,771,892 $ 42,861,682,225 ======================================================== Unrealized appreciation .................. $ 274,489,080 $ 1,487,902,900 $ 4,787,258,252 Unrealized depreciation .................. (15,615,752) (6,085,934) (1,103,331,112) -------------------------------------------------------- Net unrealized appreciation (depreciation) $ 258,873,328 $ 1,481,816,966 $ 3,683,927,140 ======================================================== Undistributed ordinary income ............ $ -- $ 3,691,950 $ 365,085,875 Undistributed long term capital gains .... -- -- 276,169,203 -------------------------------------------------------- Distributable earnings ................... $ -- $ 3,691,950 $ 641,255,078 ======================================================== ----------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------------- Cost of investments ...................... $ 6,742,444,259 $ 1,798,882,936 =================================== Unrealized appreciation .................. $ 33,166,751 $ 783,009,191 Unrealized depreciation .................. (102,497,319) (4,611,647) ----------------------------------- Net unrealized appreciation (depreciation) $ (69,330,568) $ 778,397,544 =================================== Undistributed ordinary income ............ $ 11,480,909 $ 19,901,478 Undistributed long term capital gains .... -- 60,862,667 ----------------------------------- Distributable earnings ................... $ 11,480,909 $ 80,764,145 ===================================
130 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales (excluding short term securities) for the year ended September 30, 2006, were as follows: --------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND --------------------------------------------------------- Purchases ......... $133,726,079 $ 50,892,709 $18,821,712,854 Sales ............. $199,771,606 $146,805,409 $11,518,856,149 ---------------------------------- FRANKLIN FRANKLIN U.S. GOVERNMENT UTILITIES SECURITIES FUND FUND ---------------------------------- Purchases ......... $1,362,412,104 $199,998,791 Sales ............. $1,750,549,814 $384,354,115 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds 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. 8. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 39.04% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. Annual Report | 131 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CREDIT RISK AND DEFAULTED SECURITIES (CONTINUED) The Franklin Income Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At September 30, 2006, the aggregate value of these securities was $834,314,070, representing 1.78% of the fund's net assets. The fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 9. RESTRICTED SECURITIES Certain Funds may invest in securities that are restricted under the Securities Act of 1933 (the 1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The fund has registration rights for certain restricted securities held at period end. The issuer generally incurs all registration costs. At September 30, 2006, the Franklin Income Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the fund's Board of Directors as reflecting fair value, as follows:
----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT/ ACQUISITION SHARES ISSUER DATE COST VALUE ----------------------------------------------------------------------------------------------------------------------------------- 75,000,000 Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual 2/14/97 - 7/18/00 $57,833,250 $ 825,000 113,073 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%, 4/29/15 ..................................................... 4/30/05 26,274 25,690 294,012 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%, 4/29/18 ..................................................... 4/30/05 68,317 66,799 607,466 Pindo Deli Finance Mauritius Ltd., 144A, zero cpn., 4/29/25 ..................................................... 4/30/05 141,151 138,016 12,883,549 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN, 5.248%, 4/29/15 ............................................. 4/30/05 3,926,906 3,839,298 33,160,560 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN, 4.675%, 4/29/18 ............................................. 4/30/05 10,107,339 9,881,847 42,601,657 Tjiwi Kimia Finance Mauritius, secured note, 144A, zero cpn., 4/29/25 ..................................................... 4/30/05 12,984,985 12,695,294 ----------- TOTAL RESTRICTED SECURITIES (0.06% of Net Assets) .......................................... $27,471,944 ===========
132 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund for the year ended September 30, 2006 were as shown below.
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF NUMBER OF SHARES/ SHARES/ PRINCIPAL PRINCIPAL REALIZED HELD AT HELD AT VALUE CAPITAL BEGINNING GROSS GROSS END AT END INVESTMENT GAIN NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME (LOSS) ------------------------------------------------------------------------------------------------------------------------------------ NON-CONTROLLED AFFILIATES Ameren Corp. ................... 8,770,000 2,504,400 -- 11,274,400 $ 595,175,576 $ 24,428,450 $ -- Aquila Inc. .................... 25,000,000 -- 25,000,000 -- b -- 12,617,854 Aquila Inc., senior note, 14.875%, 7/01/12 ............. 95,400,000 -- -- 95,400,000 b 14,190,750 -- Canadian Oil Sands Trust a ..... 28,000,000 -- 2,229,400 25,770,600 687,831,096 20,293,439 52,690,560 Pinnacle West Capital Corp. .... 4,024,000 1,476,000 -- 5,500,000 247,775,000 10,000,000 -- Public Service Enterprise Group Inc. ................... 6,023,560 11,000,000 523,560 16,500,000 1,009,635,000 15,895,045 9,805,679 Puget Energy Inc. .............. 4,137,000 3,363,000 -- 7,500,000 170,475,000 6,659,250 -- -------------------------------------------- TOTAL AFFILIATED SECURITIES (5.77% of Net Assets) ........... $2,710,891,672 $91,466,934 $75,114,093 ============================================
a Reflects a 5:1 stock split during the current period. Balance as of September 30, 2005 was 5,600,000. b As of September 30, 2006, no longer an affiliate. 11. OTHER CONSIDERATIONS Subject to certain terms and conditions, the Franklin Income Fund has agreed to sell its holdings in Asia Pulp & Paper Co. Ltd., Pindo Deli Finance Mauritius Ltd., and Tjiwi Kimia Finance Mauritius in November 2006. Until the completion of sale, the transaction is being accounted for as a secured borrowing with a pledge of collateral and any preliminary sales proceeds or other interest and cash distributions received are deferred until the completion of the transaction. Directors or employees of Advisers, as the Franklin Income Fund's Investment Manager, may serve as members of various bondholders' steering committees, on credit committees, or may represent the funds in certain corporate restructuring negotiations. At September 30, 2006, such individuals serve in one or more of these capacities for Calpine Canada Energy Finance and Calpine Corp. As a result of this involvement, such individuals may be in possession of certain material non-public information. If the fund's Investment Manager, while in possession of such information, seeks to buy or sell any of these securities, it will comply with all applicable federal securities laws. Annual Report | 133 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. MERGER On August 4, 2005, the Franklin Income Fund acquired the net assets of the Franklin Multi-Income Trust pursuant to a plan of reorganization approved by the Franklin Multi-Income Trust's shareholders. The merger was accomplished by a tax-free exchange of 22,580,678 Class A shares of the Fund (valued at $2.53) for the net assets of the Franklin Multi-Income Trust which aggregated $57,129,115, including $13,521,127 of unrealized appreciation (depreciation). The combined net assets of the fund immediately after the merger were $37,481,139,819. 13. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, 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, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop separate plans for the distribution of the respective settlement monies. The CAGO approved the distribution plan pertaining to the distribution of the monies owed under the CAGO settlement agreement, and in March 2005, the disbursement of monies to the relevant funds in accordance with the terms and conditions of that settlement was completed. On June 23, 2006, the SEC approved the IDC's proposed plan of distribution arising from the December 13, 2004 SEC Order. The relevant funds recorded the settlement as other income and disbursement of the settlement monies to the designated funds in accordance with the terms and conditions of the SEC's order and the plan was completed in September 2006. The IDC has also completed a proposed Plan of Distribution under the August 2, 2004 SEC Order resolving the SEC's market timing investigation and has submitted that plan to the SEC staff, where it is under review. The SEC has announced the following expected schedule with respect to the market timing Plan of Distribution. The SEC anticipates that Notice of the Plan will be published on or after November 15, 2006. After publication and comment, the proposed Distribution Plan will be submitted to the SEC for approval. When the SEC approves the proposed Distribution Plan, with modifications as appropriate, distributions will begin pursuant to that Plan. 134 | Annual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. REGULATORY MATTERS (CONTINUED) In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or 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.) relating to the industry practices referenced above, as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. The Company and fund management strongly 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 Custodian Funds, it is committed to making the Custodian Funds or their shareholders whole, as appropriate. 14. NEW ACCOUNTING PRONOUNCEMENT In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. The Funds are currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Custodian Funds believes the adoption of SFAS 157 will have no material impact on its financial statements. Annual Report | 135 Franklin Custodian Funds, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FRANKLIN CUSTODIAN FUNDS, INC. 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 Dynatech Fund, Franklin Growth Fund, Franklin Income Fund, Franklin U.S. Government Securities Fund and Franklin Utilities Fund, separate portfolios of Franklin Custodian Funds, Inc. (hereafter referred to as the "Funds") at September 30, 2006, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California November 15, 2006 136 | Annual Report Franklin Custodian Funds, Inc. TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Franklin Income Fund and Franklin Utilities Fund designates the maximum amount allowable but no less than $332,434,361 and $67,154,589, respectively, as a long term capital gain dividend for the fiscal year ended September 30, 2006. Under Section 871(k)(2)(C) of the Code, the Franklin Income Fund and Franklin Utilities Fund designate the maximum amount allowable but no less than $377,685,477 and $12,523,322, respectively, as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended September 30, 2006. Under Section 854(b)(2) of the Code, the Franklin Growth Fund, Franklin Income Fund and Franklin Utilities Fund designates 100%, 28.60% and 100%, respectively, of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended September 30, 2006. Under Section 854(b)(2) of the Code, the Franklin Growth Fund, Franklin Income Fund and Franklin Utilities Fund designates the maximum amount allowable but no less than $28,160,824, $737,976,112, and $89,822,144, respectively, as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended September 30, 2006. In January 2007, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2006. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Franklin Income Fund, Franklin U.S. Government Securities Fund and Franklin Utilities Fund designate the maximum amount allowable but no less than $1,559,328,566, $338,887,475 and $9,423,748, respectively, as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended September 30, 2006. Annual Report | 137 Franklin Custodian Funds, Inc. 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 Fund, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1976 141 Director, Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1998 142 Director, Hess Corporation (formerly, One Franklin Parkway Amerada Hess Corporation) (exploration San Mateo, CA 94403-1906 and refining of oil and gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2005 102 Director, Hess Corporation (formerly, One Franklin Parkway Amerada Hess Corporation) (exploration San Mateo, CA 94403-1906 and refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly, Foundation Health) (integrated managed care), The Hertz Corporation, Pacific Southwest Airlines, the RCA Corporation, Unicom (formerly, Commonwealth Edison), UAL Corporation (airlines) and White Mountains Insurance Group, Ltd. (holding company). 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). ------------------------------------------------------------------------------------------------------------------------------------
138 | Annual Report 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) Director, Director since 141 None One Franklin Parkway President and 1969, President San Mateo, CA 94403-1906 Chief since 1984 and Executive Chief Executive Officer Officer - - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments. --------------------------------------------------------------------------------------------------------------------------------- **RUPERT H. JOHNSON, JR. (1940) Director and Since 1983 126 None One Franklin Parkway Vice San Mateo, CA 94403-1906 President PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, 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. --------------------------------------------------------------------------------------------------------------------------------- HARMON E. BURNS (1945) Vice Since 1987 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, 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 44 of the investment companies in Franklin Templeton Investments. --------------------------------------------------------------------------------------------------------------------------------- JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President - AML President Compliance since - AML February 2006 Compliance PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). ---------------------------------------------------------------------------------------------------------------------------------
Annual Report | 139
--------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD --------------------------------------------------------------------------------------------------------------------------------- LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 30 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). --------------------------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President 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 46 of the investment companies in Franklin Templeton Investments. --------------------------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. --------------------------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (1947) Vice Since 2000 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). --------------------------------------------------------------------------------------------------------------------------------- KAREN L. SKIDMORE (1952) Vice Vice President Not Applicable Not Applicable One Franklin Parkway President since March 2006 San Mateo, CA 94403-1906 and and Secretary Secretary since April 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company; and officer of 30 of the investment companies in Franklin Templeton Investments. ---------------------------------------------------------------------------------------------------------------------------------
140 | 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 --------------------------------------------------------------------------------------------------------------------------------- CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). --------------------------------------------------------------------------------------------------------------------------------- GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Fort Lauderdale, FL Officer and 33394-3091 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). ---------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Prior to September 30, 2006, Mr. S. Joseph Fortunato and Mr. Gordon S. Macklin each ceased to be a director of the Funds. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF EDITH E. HOLIDAY AND HARRIS J. ASHTON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. HOLIDAY AND MR. ASHTON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR BUSINESS BACKGROUND AND EXPERIENCE. MS. HOLIDAY, WHO CURRENTLY SERVES AS A DIRECTOR AND TRUSTEE OF VARIOUS COMPANIES AND TRUSTS, INCLUDING H.J. HEINZ COMPANY WHERE SHE IS AUDIT COMMITTEE CHAIRPERSON, IS CHAIRPERSON OF THE FUND'S AUDIT COMMITTEE, AND FORMERLY SERVED AS ASSISTANT TO THE PRESIDENT OF THE UNITED STATES AND SECRETARY OF THE CABINET (1990-1993); GENERAL COUNSEL TO THE UNITED STATES TREASURY DEPARTMENT (1989-1999); AND ASSISTANT SECRETARY FOR PUBLIC AFFAIRS AND PUBLIC LIAISON-UNITED STATES TREASURY DEPARTMENT (1988-1989). MR. ASHTON, WHO IS CURRENTLY A DIRECTOR OF BUSINESS AND NON-PROFIT ORGANIZATIONS, SERVED AS CHIEF EXECUTIVE OFFICER OF GENERAL HOST CORPORATION, A NEW YORK STOCK EXCHANGE LISTED COMPANY FROM 1967 TO 1998, AND WAS A DIRECTOR OF RBC HOLDINGS, INC., A BANK HOLDING COMPANY UNTIL 2002. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MS. HOLIDAY AND MR. ASHTON HAVE EACH 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. MS. HOLIDAY AND MR. ASHTON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE 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 | 141 Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund 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 Fund'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 Fund 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. 142 | Annual Report This page intentionally left blank. This page intentionally left blank. LITERATURE REQUEST LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund RETIREMENT TARGET FUNDS Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 4 Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 4 Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 4 Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME 5 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 6 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Michigan 6 Arizona Minnesota 6 California 7 Missouri Colorado New Jersey Connecticut New York 7 Florida 7 North Carolina Georgia Ohio 6 Kentucky Oregon Louisiana Pennsylvania Maryland Tennessee Massachusetts 6 Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 8 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 6. Portfolio of insured municipal securities. 7. 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). 8. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. [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. 07/06 ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS, INC. 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. FCF A2006 11/06 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 experts are Edith E. Holiday and Harris J. Ashton and they are "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 $339,046 for the fiscal year ended September 30, 2006 and $241,951 for the fiscal year ended September 30, 2005. (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. There were no 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. (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 $30,073 for the fiscal year ended September 30, 2006 and $0 for the fiscal year ended September 30, 2005. 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 not reported in paragraphs (a)-(c) of Item 4 were $145,788 for the fiscal year ended September 30, 2006 and $4,500 for the fiscal year ended September 30, 2005. 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 and the review of the ICI transfer agent survey. (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 $175,861 for the fiscal year ended September 30, 2006 and $4,500 for the fiscal year ended September 30, 2005. (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 Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a) (1) Code of Ethics (a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS, INC. By /S/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date November 27, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date November 27, 2006 By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Financial Officer Date November 27, 2006